Tag Archives: Entrepreneur

The Economics of Advertising Warfare

Picture the scene. Acme Corp’s toothpaste business AcmeDent is a profitable enterprise; and so is that of their biggest rival Ace.

One day, however, they hire a new marketing and sales manager, let’s call him Bob. He is ambitious and full of ideas – ready to shatter preconceptions, break the mold, think outside of the box, etc, etc.

After a few days in the office he realises that the market is saturated. People are just not going to start brushing at lunchtime. The only thing for it is to increase market share. He calls a team meeting.

“We either have to increase sales or increase our margins. We have already cut ourselves to the bone cost-wise, and increasing price will lose market share. If we cut prices, we lose market share – so it looks like stale-mate.” But Bob, being new, felt this was old fashioned reasoning. Surely we could do something to get market share? “Any ideas?”, he asks.

The room is quiet. No one wants to say anything risky in front of the new boss. Looking around at his team, his eyes settle on Sheila, the head of brand management. “What are you doing to get market share?”

Now Sheila wanted Bob’s job. She’s not is a good mood, but knows to be cautious. “Well Bob, as you will know from the report I prepared for you, our advertising budget is tight; your predecessor seemed to think we just needed to match Ace’s spend.”

“What? Why?!” Bob sits up. He can smell an opportunity.

“Don’t ask me, I asked for more. He was very conservative.” There’s a murmur around the table. They all know Sheila is being polite. Before being headhunted, Bob’s predecessor had a reputation for being tighter than duck’s arse.

A few weeks later, the new ad campaign cranks into life. Bob is surprised by how much it cost, but he knows 10% more market share will make it more than worth while. He starts to study his sales figures with care. Will it work?

The end of the quarter looms. What will the results show? Bob reads the business news – Ace’s chairman has made some comments. They are very critical and accuse Acme of “destroying the market”.

“Ha!” Bob exclaims out loud. Excellent, they are hurting.

The results roll in. They are good. 12% additional market share, mostly taken from Ace. No wonder they’re moaning.

That night, he sees the new TV ad from Ace. He has to admit it’s good.

“Why didn’t we think of that?” he booms to Sheila the next morning. “It’s a great idea.”

Sheila is unruffled. “We did think of it; we just thought it would be too expensive.”

“Hell!”, Bob is on a roll with the benefit of hindsight, “we’ve seen that advertising can gain us market share – of course it’s worth it. What you can do if I double your budget?”


Ace’s campaign works and Acme loses most of their new-found market share. The next month brings Acme’s bigger and better campaign – tying together TV, print, competitions, star endorsements, the whole shebang. Again is works like a charm. Market share is back up.

Freshly sun-tanned from two weeks on the Keys, Bob is feeling pretty pleased with himself at the AGM. The CEO will surely make a point of congratulating him on a job well done. He is getting on too, and will surely be eyeing up replacements.

The meeting starts well and soon enough they came to the the financial performance of AcmeDent toothpaste.

“Bob,” the CEO starts, “what the hell is going on here?”

Bob is taken aback by the look of displeasure on the CEO’s face. Oh, well he has a reputation for being grumpy, maybe this is him having a joke. “Well, you see, we have increased market share by 10% this year, our revenues are at an all time high…”. He searched the CEO’s still stony face.

“But what about profits? What are they?”

“Well, you see, this year we made significant investments, so it doesn’t look great, but rest assured, next year…”


“Yes, we invested in major advertising campaigns…”

The CEO is shaking his head slowly.

Bob is suddenly feeling a nervous. “Well, we had to spend money to get the market share, but now we’ve got it, we will see a profit next year.” That should calm him down.

“But what about Ace’s latest trick? While you were away, they’ve started a new fad amongst teenagers for luminous teeth or something.”

“Well sir, it is a bit of an arms race…”

“A race to where exactly?”, the CEO looks very serious now.


“Bob, can’t you see, they have to match our advertising spend to protect their business. All you’ve done is pissed both company’s profits down the plughole.”

The CEO leans over to his assistant, “How much to get the other guy back?” he whispers.