When competition intensifies, how does a company strike the right balance between selling its product and selling the attention of its customers to advertisers? The tradeoffs common to such scenarios are analyzed in a Harvard Business School marketing research paper titled “Products vs. Advertising: Media Competition and the Relative Source of Firm Profits.” Authors David B. Godes and Elie Ofek, both assistant professors of business administration at the Harvard Business School, and Miklos Sarvary, associate professor of marketing at INSEAD, suggest the specific conditions in which an advertising model makes the most sense.A model that relies strongly on advertising revenue works best, say the authors, when the product itself does not have a high inherent value to the customer, making the customers themselves the more saleable commodity. In addition, an advertising revenue model is particularly apt when the level of competition in the product market is neither too low nor too high — that is, when only a few competitors have entered a market, prices begin to drop slightly and the advertising business becomes attractive.Publications, for example, might consider dropping prices or offering free copies to increase circulation, thereby becoming more attractive to advertisers.
