The curve (orange), which again represents the equation y = x/(1+x), is not interpreted now as “the decrease in unit profit (per sale, y) associated with an increase in sales (x)”, but rather as a boundary that represents the maximum fall in profit per sale (y) that can be assumed without decreasing the total profit, when sales increase a certain amount (x) or, equivalently, the minimum increase in sales (x) that is necessary to offset a certain drop (y) in profit per sale.
If, for example, by increasing advertising investment, keeping the retail price constant, the profits per sale drop by 10%, but sales are increased by 50%, the investment will have been profitable, and the total benefits will increase, as we are in the green zone (point A). However, if that increase in advertising investment implies a fall in profit per sale of 50%, while the increase in sales is also 50%, the total benefits will be reduced (we are at point B, in the red zone). If, with that increase in advertising investment, the profits per sale were to drop by 50% while sales increase by 100%, the total profits would not vary, and we would be precisely on the orange curve (point C). The farther from the curve in the green zone, the greater the profits; the farther from the curve in the red zone, the greater the losses.
If we keep the advertising investment per unit sold constant, Figure 2 can also help us to see the relationship between a variation in the selling price and the necessary impact on sales for the change to be worthwhile.
In summary, the impact of variations in investment in digital (and analog) advertising on sales and prices depends on many factors. Generally, increasing advertising investment usually results in an increase in the reach and visibility of the ads, which in turn can generate more clicks and conversions. To maintain total costs, it is necessary for the increase in sales to be at least equal to the increase in advertising expenditure; this is what is represented, in a particular case (Figure 1) and another general (Figure 2) in the graphs of the article.
It is worth noting that, although one objective may be to maintain total costs and/or increase profits, any increase in advertising investment can present other additional benefits to the company, such as increased visibility, larger market share, and a revaluation of the company.In the end, investments in advertising have to go hand in hand with a strategic plan where the primary objective of the company is clear: to grow or to earn more money. Since both options do not always go together, and/or in the short term, priority has to be given to one of the two.
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