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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. By so doing, the magazines are subsidizing their advertising revenues with their own product revenues. For example, most, if not all, alternative weeklies in the United States are given to readers free of charge. As do broadcast radio and television, these publications operate entirely within an advertising revenue model, the authors note, which wasn't the case six years ago, when most charged consumers about a dollar an issue. The alternative weeklies fell victim, in part, to the allure of free content available on the Internet.
Fiercer competition warrants different tactics, say the authors. “When you're an advertising business, you need to sell products to people, and you need to sell to advertisers,” says Godes. “When competition intensifies, you risk getting hurt in both markets.” As more competitors enter a product market, the clout of any single company is inevitably diluted both as a product source and as an advertising vehicle. “When an industry becomes hypercompetitive and the barriers to entry are really low,” says Ofek, “you need to shift more toward product revenues.” Internet companies like Yahoo! Inc. and Salon.com have found that “selling eyeballs” to advertisers doesn't bring in enough revenue, and many are making painful transitions to attract paid subscriptions, with mixed success.
Regardless of the competitive milieu, the authors advise against oversaturating customers with advertisements. Because generally advertising annoys customers, there is “disutility” associated with it. The authors factored this into their analysis and found that even low levels of disutility cause the loss of some customers.
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