marginal cost in tv ads

Understanding the Role Marginal Cost Plays in Television Advertising

Besides wanting to watch the actual game, Super Bowl viewers sit glued to their televisions every year, waiting in anticipation to see what creative advertisements companies came up with to boast about their products.

These companies spend millions of dollars for a thirty-second advertising slot during the biggest football event of the year. While the marginal cost of reaching millions of viewers is exponentially higher because of the ad’s airing locale, companies experience a great return on investment.

Types of Television Advertising

The brightest and most successful marketers know how to squeeze every dollar out of their advertising budget, using the range of tools available in the TV industry. There are several avenues a company can choose from to advertise their products or services, including:

Television Commercials

From new food products to everyday household necessities, tv commercials have become an integral part of life. Television shows, movies, and news outlets take commercial breaks every several minutes, allowing companies to vie for an advertising slot. The average TV advertisement lasts between 15 and 60 seconds, and pricing varies depending on the station and the time it’s aired.

Brand Integration

Brand integration is when companies pay to have their company name placed directly within the script of a show or movie. It can involve the brand sponsoring a show or offering a grand prize on a game show, such as a brand-new Ford truck or a Carnival cruise. It’s an ingenious way to incorporate a business into entertainment and increase brand knowledge simultaneously.

Infomercials

We’ve all seen them: late-night ads for a new blender, workout equipment, rice bags you put in the microwave—you name it. Infomercials are long TV ads that air late at night into the early morning hours or on weekends. These ads last anywhere from 10 minutes to an hour, although most last around 30 minutes.

The purpose of an infomercial is to sell a product, with some featuring celebrities or well-known personalities, to increase sales and brand loyalty. In addition, you’ll likely see calls to action during the infomercial, like phone numbers or website URLs.

Overlay

Overlays are brief, 10-second advertisements that appear on the bottom of the TV screen during a show. They help promote products, services, and programs. Most take up no more than 20% of the screen to not obstruct the user’s view of the show. They can contain images, text, phone numbers, show times, etc.

Product Placement

With product placement, brands arrange to have their product as a prominent feature in a show or movie. Sometimes, it’s organically part of the story; at other times, it’s by explicit placement. For example, a character in a show that drinks Pepsi would be an organic placement, while using a Lexus in a major car chase scene with the camera zooming in on the car’s logo is an explicit placement.

Benefits of Television Advertisements

Besides the most obvious benefit of boosting brand awareness, advertising on TV provides a host of other benefits that can foster a brand’s growth and success. These benefits include:

Consistent Viewers

If you are one of those who can’t wait for the new episode of your favorite show every week, you know that popular TV shows can attract a fiercely loyal legion of fans. These fans are consistent viewers who spread the knowledge even further on social media. Popular TV entertainment like sitcoms or dramas provides an excellent opportunity for brands to advertise their products or services and convert more viewers.

Besides entertainment TV shows, the news is another valuable advertising space. With people’s need to keep up on local and international stories, companies have the opportunity to show their products when during high-volume watch times.

TV and Online Work Together

Television advertisements are crucial for increasing online awareness, too. Featuring your brand on TV plus online lends credibility among audiences, including your loyal consumer base and potential customers.

While TV ads capture more visual engagement, create more positive emotions, and more strongly impact long-term memory than YouTube ads, advertising on both (or online in general) creates cohesion and fosters trust.

Also, TV advertisers consistently push users to engage with content online, as with social media contests, digital raffles, and other means to improve brand loyalty. Ultimately, TV and online advertisements work better and produce more substantial results together rather than separately.

Affordability

Several variables affect the affordability and cost of running a TV advertisement, including:

  • The day of the week
  • Where the ad airs (which region)
  • The time of day
  • The duration of the commercial
  • Number of expected viewers
  • Frequency of the ad

Of course, some ad spots are far more expensive than others. After all, not every brand can afford to advertise during Super Bowl Sunday, but television ads have a wide price range.

Networks make money by selling air time to companies. Once a television show airs, the spaces the network failed to sell won’t be able to be filled, even in future run times. To prevent time slots from being completely cut out, networks will sell ad space at a deep discount, like at a fire sale.

It’s a win-win for both the network and the brand: The brand gets to increase consumer awareness, and the network makes money from ad spaces that, if unsold, would not have earned them any profit.

Large Audiences

The world is watching the news more than ever because of current events, like the pandemic, the war in Ukraine, and inflation. As a result, television is the most popular leisure activity in the United States, with only sleeping taking up more time in the average person’s life.

The pandemic increased the time people spend watching TV by half an hour, from 5 hours in 2019 to 5.5 hours. With so many people spending time in front of the TV, it should be no surprise that television has remained the dominant medium for advertising in this country.

What Are Marginal Costs?

Marginal costs in advertising refer to how much it costs to gain one more viewer in terms of your advertising reach. As you acquire more customers throughout your marketing and advertising campaigns, the cost of capturing those customers will increase.

Marginal costs can help your brand determine if you should spend less or more on your advertising channels to promote growth and success. Finding that delicate balance can be tricky, and the ability to acquire more customers without rapidly increasing your marginal costs is known as scale. The goal is to find advertising channels that perform well and offer scale, also known as stable marginal costs.

Difference Between Marginal and Average Costs

Many brands automatically think of customer acquisition costs (CAC) when considering the price of advertising campaigns and marketing budgets.

To determine CAC for your business, or the average cost, just divide your ad budget’s total cost by the number of customers you’ve acquired.

For example, if you spend $50,000 on a marketing campaign that results in 25,000 customers, the CAC would be $2. Then, you’ll need to determine the marginal cost or how much it would cost to land just one more customer.

If you’re trying to reach a specific number in your target audience, the cost will increase as you attain each goal. Ultimately, it costs less to gain the first 10% of your target audience than to reach 50%, which will cost exponentially more.

How Do Marginal Costs Affect Television Advertising?

Advertising isn’t all about catchy graphics and comical jingles; there’s a whole world behind the visual display that determines how well that ad could perform. When advertising teams plan their strategies and campaigns, they look at several factors that make up marginal costs to determine their course of action.

Incrementality

In marketing terms, incrementality refers to the incremental benefit that a unit of action generates. For example, let’s say that a company advertises a new health-craze soda alternative. Incrementality is the increase in the desired outcome, or in this case, an increase in profit margins.

Cannibalization

Cannibalization, also known as retargeting cannibalization, is essential in digital and online marketing. It refers to a brand targeting groups of people who have already shown interest or purchased products in the past.

For example, if you’re watching a streaming television service and click on an ad instead of skipping it, you would be added to the company’s cannibalization group. Through your streaming service, that company would know you’re interested in one of their products or services, and you would be targeted with more ads to convince you to purchase.

How Do These Factors Impact Television Ads?

Incrementality and cannibalization have a direct impact on marginal costs and television ads. Generally, when cannibalization is high, incrementality is low, and a brand spends money advertising to customers who would have purchased its products without that specific retargeting campaign.

Conversely, when cannibalization is low, incrementality is high, and a brand spends money on customers who wouldn’t have purchased anything without being retargeted.

A TV campaign has an extensive reach. However, by adjusting for marginal costs and cannibalization (if you’re retargeting consumers online), advertising on TV can provide growth for your company with lower CAC and marginal costs.

Main TV Commercial Costs

Television advertising has a wide price variation, and the addition of creating an entire advertisement is a sizeable marginal cost. No matter what kind of product or service the ad is promoting, advertising agencies need first to figure out these commercial aspects:

  • The TV network it’s being aired on.
  • Is it being aired during a TV show?
  • Is it being aired on Broadcast or Cable TV?
  • The time of year it’s airing.
  • The time of day it’s airing.
  • How long is the ad?
  • Area the ad is being aired – urban, suburban, rural.
  • Is it a local, regional, or nationwide ad?

Once advertisers determine the marginal cost of creating the television ad, they need to calculate if the consumer profit margin will outweigh that price.

How to Optimize Your Advertising Campaigns

So, what’s the final step? How do you use marginal costs to optimize your advertising campaigns? The first place to start is by analyzing both expenses compared to your spending budget on television and digital platforms.

For example, let’s say that at your current advertising budget, your marginal costs for advertising on digital channels are higher than on television. As the two cost levels aren’t equal, you can optimize your campaigns by balancing the total budget across both platforms. By doing so, you can maximize your profit once the two marginal costs are comparable.

Ultimately, your objective should be to continue gaining customers until you can’t make any more profit—in other words, when your marginal revenue equals your marginal costs.

Final Thoughts on Marginal Costs in TV Advertising and Marketing

Although many people feel that the world of television advertising is too expensive, when you compare costs to profit, the benefits you gain are worth it.

Television advertising provides you with consistent viewers, large audiences, and an inexpensive way to maximize the efficiency of your ad budget.

For more information about how our advertising agency can increase brand awareness and boost efficiency for your brand, contact us today and schedule a free consultation.  We have the skills to keep your brand expanding in today’s highly competitive marketing space.

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