Impact of TV ads on consumer purchase intent and price elasticity of demand

No matter the size of the business and whether it is run online or offline, finding an appropriate way to advertise your products or services increase your business’s potential for profitability.

As research showed, television advertising increases the willingness to pay, in direct and indirect manner. In addition, ads positively affect the customer engagement with the brand as it is considered as the most credible and relevant means of advertising according to the consumers [1].

Advertising serves a critical purpose in the business world since it increases sales, draws buyers' attention, and makes the audience aware of products or services' existence, releases, and improvements. Nowadays, contemporary technology lays the foundation for the environment where advertising can be easily applied to any kind of platform. No matter the size of the business and whether it is run online or offline, finding an appropriate way to advertise your products or services increase your business’s potential for profitability.

Despite the diversity in media advertising, big companies still prefer TV promotion [2]. This is mainly due to the fact that “television is the world’s most favourite video” [3]; its consumption remains constant around the globe and is still an excellent way to generate large numbers of ad viewers in terms of reach. In addition, recent literature which compared television advertisements with those on other platforms stressed out that marketing in TV is more credible and relevant to consumers' perceptions, leading to higher purchase intent than YouTube ads [4].

Who spends more time watching television?

Television has become an integral part of our lives, being one of the key modes of entertainment and information. Additionally, the COVID-19 pandemic has extended the average time spent watching TV by roughly 2 hours [5]. According to prior literature findings, despite the growing trend for TV consumption, various demographic characteristics and situations can either enhance or exacerbate existing TV viewing habits. More precisely:

  • The older you get, the more time you spend watching TV during the day. This phenomenon seems to have an exponential increase for people over 65 years of age.
  • The lower the household income is, the higher the consumption of television watching.
  • The lower the education in the household, the greater the time you spend watching TV.
  • Couples tend to watch significantly more TV than when they were single.
  • Unemployed people tend to watch significantly more TV than employed people.

Who spends more time watching television ads?

  • People who spend more time watching TV, therefore, spend more time watching TV ads.
  • Households with more people and TV sets in the household tend to watch and like more TV ads.

What is the effect of TV Advertising on WTP and PED?

  • Past research has shown that exposure to television commercials positively impacts consumers from a business perspective. According to Becker and Murphy (1993) [6], TV advertising increases directly and indirectly [7] consumers' marginal willingness to pay for a brand. This effect is associated with the impact of advertisement on the flattening of the demand curve as it reduces the elasticity of demand for the advertised good. The direct effect automatically leads to an increased willingness to pay for the particular advertised goods or services. In contrast, the indirect impact derives from the advertising influence on the perception of product quality which grows exponentially as the advertisement continues to be projected on consumers' TV devices [8].
  • Although the relationship between advertising and willingness to pay has been proven to be positive, there is a significant difference in the size of the influence depending on the type of product being advertised. Tsui (2012) stressed that for low-quality products, the effect is much higher than for high-quality products. Additionally, TV advertising positively influences customer engagement with the brand and increase conversion rates [9].

How is WTP measured?

Becker-DeGroot-Marschak mechanism (BDM)

As the Becker-DeGroot-Marschak mechanism (BDM) creates a real-life trade-off situation, this pricing technique enables market researchers to credibly measure price perception and willingness to pay [10]. Under purchasing simulations, it is possible to observe and calculate the willingness to pay for particular products and services. BDM belongs to the category of incentive-aligned price techniques since participants are compelled to buy a product or service depending on the price they are willing to bid and a price drawn from a lottery. This kind of direct pricing technique is suitable for new products as it is easy to collect and it does not require prior product knowledge from the respondents [11].

BDM (marginal) willingness to pay approach is structured in the following way [12]. Initially, BDM method samples target customers to whom explicitly describes the experimental design. The prospective respondents are told that they have a chance to buy a particular product at price they desire. They are also informed that the final buying price for the product is not yet set and that it will be determined entirely randomly. Subsequently, respondents are asked to provide a price for the tested product or service. Respondents' desire to obtain the tested product or service pushes them to declare the maximum price they are willing to pay, which is the objective of the entire price technique. A confirmation question in which the respondents can change the maximum value that they are willing to pay follows to eliminate the possibility of incorrect value assignment. The randomly determined buying price is drawn from a prespecified distribution of prices that is unknown to respondents and reflects the average price boundary of that particular product on the market. If the product or service constitutes an NPD, the price boundary is set by the experimenter. Consumers draw a number that indicates the corresponding buying price to increase their confidence in the randomness of the price-setting mechanism. As a result of the draw, if the declared buying price is higher than the actual random buying price, then the respondents are obligated to purchase the product at the random buying price. In contrast, there is no buying opportunity if the declared buying price is less than the actual random buying price. More concisely, the experimental procedure is demonstrated in the following Figure 1 designed by Wertenbroch and Skiera (2002) [13].

Experiment methodology

Contingent valuation method (CV)

In the vast majority of cases, the relationship between advertising and willingness to pay (WTP) is captured by structural equation modelling (SEM) or regression analysis which are pretty complex and require very careful construction and control of the assumptions of their models. Unlike these methods, the contingent valuation method (CV method) is simple, flexible, and easy to understand. It is based on the completion of pricing questions in experimental surveys[14].

More particularly, the CV approach offers the respondents an opportunity to make an economic decision on a good. Initially, respondents are exposed to a price that derives from a price range predetermined by the researcher before the start of the experiment, and they are asked to declare if they are willing to purchase a particular product or service at that specific price. Depending on the answer they will give to the first question, the next one is structured correspondingly. If the respondents answer that they are willing to pay at the first price shown to them, then the next question will have a double price or the other multiple of it depending on the composition of the experiment. Conversely, if they are not willing to pay for the first price given, then the next question will bring half the price or the other aliquot part of it, depending on the composition of the experiment. This can be repeated with number of questions, depending on the research intentions. After completing the round of questions, depending on the answers given by the respondents, ranges of acceptance prices are created, which indicate consumers' willingness to pay for the test product or service. More concisely, the CV design with two sequential pricing questions is demonstrated in the following Figure 2.

Contingent valuation

Gabor-Granger

Using Gabor-Granger is simple and is based upon asking people the likelihood of their purchasing a product or service at a different price. Each respondent is given a series of almost identical questions such as “Would you buy product X at price Y?”. In each of the several questions, the price shown to a respondent is different and adapted based on the respondent’s previous answers. After the initial question, if people are willing to pay that price, they are offered a higher (randomly chosen) price. Otherwise, they are offered a lower (randomly chosen) price. The algorithm repeats until it finds the highest price each respondent is willing to pay.

How is Conjoint.ly’s output structured?

Initially, Conjoint.ly identifies the population that has been exposed to a particular advertisement and not. In both experimental groups, the same manipulation is applied. At the end of the data collection, differences in consumer behaviours, perceptions or any other variable set by our prospective client are investigated.

By considering the results of previous research on the effectiveness of advertising over time, Conjoint.ly records the changes in price elasticity of demand and willingness to pay that resulted from exposure to TV commercials in 3-time intervals. In this way you can have the opportunity to see at what specific time period their advertising campaign was most effective and if there is any significant upward or downward trend after the launching of TV advertisement. A screenshot of Conjoint.ly’s output is demonstrated in the following figure.

Conjoint.ly output examples

References

[1] Delauro, D. (2020, November 18). Why TV remains the world’s most effective advertising. Thinkbox. https://www.thinkbox.tv/news-and-opinion/newsroom/why-tv-remains-the-worlds-most-effective-advertising/

[2] Shanet, L. (2019, March 1). Why Do Big Companies Still Advertise On TV Instead Of Social Media?. Forbes. https://www.forbes.com/sites/quora/2019/03/01/why-do-big-companies-still-advertise-on-tv-instead-of-social-media/?sh=3d315f59dd41

[3] Lebbon, J. (2016, June 6). New figures show TV is the world’s favourite video. V-net. https://www.v-net.tv/2016/06/06/new-figures-show-tv-is-the-worlds-favourite-video/

[4] Kempers, R. T. (2020). How does YouTube and TV ads relevance, credibility and irritation influence consumers’ purchasing intention? (Bachelor's thesis, University of Twente).

[5] Wakefield, J. (2021, August 5). Nearly a third of waking hours spent on TV and streaming, Ofcom says. BBC. https://www.bbc.com/news/technology-58086629

[6] Becker, G. S., & Murphy, K. M. (1993). A simple theory of advertising as a good or bad. The Quarterly Journal of Economics, 108(4), 941-964.

[7] Tsui, H. C. (2012). Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory. Journal of Economic Psychology, 33(6), 1193-1203.

[8] ibid

[9] Liaukonyte, J., Teixeira, T., & Wilbur, K. C. (2015). Television advertising and online shopping. Marketing Science, 34(3), 311-330.

[10] Noussair, C., Robin, S., & Ruffieux, B. (2004). Revealing consumers' willingness-to-pay: A comparison of the BDM mechanism and the Vickrey auction. Journal of economic psychology, 25(6), 725-741.

[11] Lipovetsky, S., Magnan, S., & Zanetti-Polzi, A. (2011). Pricing models in marketing research.

[12] Becker, G., DeGroot, M., & Marschak, J. (1964). Measuring utility by a single-response sequential method*. Behavioral Science, 9,* 226–232.

[13] Wertenbroch, K., & Skiera, B. (2002). Measuring consumers' willingness to pay at the point of purchase. Journal of marketing research, 39(2), 228-241.

[14] Tsui, H. C. (2012). Advertising, quality, and willingness-to-pay: Experimental examination of signaling theory. Journal of Economic Psychology, 33(6), 1193-1203.

Feel free to get in touch with us if you would like to test out your advertisement campaigns or pricing for your product or services.


Written on 17 October 2021 by:
Athanasios Kontos image
Athanasios Kontos
Market Researcher
Maria Bomba image
Maria Bomba
Market Researcher

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