ASSOCIATION BETWEEN ADVERTISING EXPENDITURE AND SALES VOLUME: A CASE STUDY OF BAJAJ AUTO LIMITED

Transcription

1 BANGLADESH RESEARCH PUBLICATIONS JOURNAL ISSN: Volume: 9 Issue: 3 Page: January - February 014 Review Paper ASSOCIATION BETWEEN ADVERTISING EXPENDITURE AND SALES VOLUME: A CASE STUDY OF BAJAJ AUTO LIMITED Md. Farijul Islam 1 Shahnaz Parvin and Rony Kumar Datta * Md.Farijul Islam Shahnaz Parvin and Rony Kumar Datta (014). Association between Advertising Expenditure and Sales Volume: A Case Study of Bajaj Auto Limited. Bangladesh Res. Pub. J. 9(3): Retrieve from Abstract Advertising is any paid form of non personal presentation and promotion of ideas goods and services by an identified sponsor. Most of the managers believe that the advertisement directly affects the sales volume and hence they evaluate the effectiveness of the advertising campaign by the increase in the sales volume. This research work is an attempt to show the relationship of advertising on sales volume with particular reference to Bajaj Auto Limited. It s another objects is to seek the nature between advertising and sales. The statistical analytical techniques used for this study include coefficient of correlation r along with analysis of spearman s rank correlation coefficient R and for testing hypothesis t test. The secondary data were collected from the company s annual financial reports and account for 1 (twelve) years covering From the analysis of co efficient of correlation we get the calculated value of r = 0.94 which indicates positive linear relationship between advertising expenditure and sales. The major result showed that there is a significant relationship between advertising and the sales of the company. The result also showed that there is a significant improvement in the sales of the company as a result of advertising. It was recommended that organizations should educate the general public through advertising on the uses functions and benefits of their products to achieve the ultimate target sales volume. Key words: Advertisement Sales Volume Promotional Mix. Introduction In terms of digitalization the move to advertising as a proportion of media spend seems inexorable: the European Interactive Advertising Association (EIAA) annual member survey predicts minimum 15% year on year increases in online advertising spend by their clients for the foreseeable future. This shift has actually been led by UK advertisers; with the UK s share of domestic online advertising spend reaching 18.9% of all advertising spending in 009 and rising fast compared to 13% in the US. The advertising industry spent 5.3 billion for 008 on purchasing other goods and services. Traditional media forms such as television newspapers and radio command majority of the Indian advertising pie. Increasing penetration of Internet has the potential to appreciably alter this landscape. While it is likely that television will continue to dominate the bulk of Indian advertising revenues in the near future the Internet will make its presence felt and increase its overall share in the currently Rupee crore (USD ~$10 Billion) valued Indian advertising industry. Advertising is frequently used as an independent variable in explaining changes in sales. Organizations embrace advertising to achieve sales goodwill and high market share. Advertising is aimed at improving the sales volume of a concern so its effectiveness can be evaluated by its impact on sales. Advertising is the dissemination of information by non-personal means through paid media where the source is the sponsoring organization. It is a form of communication intended to convince an audience (viewers readers or listeners) to purchase or take some action upon products information or services etc. It is only one element of the promotion mix but it often considered prominent in the overall marketing mix design. Its high visibility and pervasiveness made it as an important social and encomia topic in Indian society. *Corresponding Author: rony.datta@yahoo.com 1 Department of Marketing Hajee Mohammad Danesh Science and Technology University Dinajpur Bangladesh. Department of Finance and Banking Hajee Mohammad Danesh Science and Technology University Dinajpur Bangladesh.

2 Association between Advertising Expenditure and Sales Volume 163 Table 1. Top 10 Country and their Amount of Advertising spending Scenario. Serial. No. Name of the Country US$ billions % of global Ad. Spend 1. USA China Japan Germany United Kingdom Brazil France Italy Canada Australia Source: Adapted from Nayaradou M. 01. Significance of Advertisement: Improvement of Living Standard: Many things that make life easier and more pleasant like radio television fan video computer and motor cars and so on are not necessities but comforts. The comparative inexpensiveness of these products are made feasible through mass demand a by- product of mass awareness created by advertising. This evidently shows the link between advertising and standard of living in a society. Provision of Entertainment and Relaxation: Many advertising companies especially broadcast media advertisement present their messages with humor and thus provide entertainment and relaxation for the audience. The presence of some characters in advertorial prints is geared towards providing entertainment and relaxation for the audience without the message being lost or submerged. Provision of Employment Opportunities: The advertising business is such a lucrative one that very many people are employed in the sector as specialists and non-specialists. Creation of Standards through Competition: Advertising message often extol the good qualities of products or service. For consumers to continue to buy these product or service manufactures or organization are compelled to adhere to the advertised qualities for if they allow the qualities to drop consumers will buy less. Advertising s role in the economy: In addition to its position in the value chain of the creative industries the advertising industry also plays a role in the wider economy. The effects of this role are a source of much debate among economists as well as policy makers and regulators. This section has reviewed employment in the UK advertising industry for 010.It found that core advertising employment within agencies stood at just over However taking into account a broader measure including self employed and those doing advertising roles in other industries employment stood at between and Advertising is the 3 rd largest UK creative industry in terms of employment. Advertising employment does not seem to have been significantly affected by the recent recession. (Assmus et al. 1984) attempted to explain short-term & long-term advertising response as replication analyze for 18 econometric models linking the impact on sales. (Weiss & Tellis 1995) suggested that advertisement has a major and positive impact on sales in certain period of time when demand is more. Long term and short term response of advertisement can be different according to product and occasion. Some insights into the effectiveness of past advertising may be obtained by measuring the relationship between the advertising expenditure and the total sales of the product. A multiple regression analysis of advertising expenditure and sales over several time periods may be calculated. It would show how the changes in advertising expenditure have corresponding changes in sales volume. This technique estimates the contribution that advertising has made to explaining in a co relational manner rather than a casual sales the variation in sales over the time periods covered in the study. The other measure of advertising effectiveness is the method of experimental control where a casual relationship between advertising and sales is established. This method is quite expensive when related to other advertising effectiveness measures yet it is possible to isolate advertising contribution to sales. As it is very difficult to measure the direct effect of advertising on company s profits or sales most firms rely heavily on indirect measures. These measures do not evaluate the effects of advertisements directing on sales or profits but all other factors such as customer awareness or attitude or customer recall of advertising message affect the sales or profits or goals of the business indirectly. We will get the value of Coefficient of correlation and on the basis of the result we will show the relationship between advertising spending and sales volume. It is borrowed advertising literature and analyze firm data to achieve main objectives of the study. The main objective of the study is to show the relationship between advertising expenditures and

3 Islam et al. sales of Bajaj auto limited and followings are the specific objectives those are followed by the main objective. The general objective of the research is 1. To investigate the relationship between the expenditure on advertisement and sales revenue.. To measure the co-relation between advertising expenditure and sales of Bajaj auto limited. Methodology of the Study The nature of research design was exploratory in the form of secondary data analysis qualitatively. Case study method was used to show the relationship between advertising expenditures and sales volume of Bajaj auto limited. The data were collected from secondary sources namely published annual reports books journals periodicals and other materials. Statistical tools namely coefficient of correlation and Analysis of Spearman s Rank. Correlation Coefficient R and for testing hypothesis student s t test at 5% level of significance was used. Where Y denotes sales as dependent variable and X denotes advertising expenditures as independent variable. The data used for the analysis were relating to Bajaj auto limited account for 1 (twelve) years covering Research Question: Is there a relationship between the amounts a firm spends on advertisement and sales revenue? Research Hypothesis: Null hypothesis (H0): There is no statistically significant relationship between the amount a firm spends on advertisement and sales revenue. Alternative hypothesis (H1): There is a s statistically significant relationship between the amount a firm spends on advertisement and sales revenue. Result and Discussion Here data of sales and advertising expenditure of Bajaj auto limited is in crore Rupee assuming sales Y as dependent variable and advertising expenditure X as independent variable. Table : Data of sales and advertising expenditure and its coefficient correlation (r) of Bajaj auto limited in twelve years Name of Year Sales Y (in crore Rupee) Advertising Expenditure X (in crore Rupee) N=1 y=1393 = x=1633 =31888 xy= Source: Annual Reports Bajaj Auto Limited from xy The formula of coefficient of Correlation: = = = 0.94 The result confirmed that a positive and significant relationship existed between advertising and sales. The positive relationship showed that an increase in advertising can lead to an increase in sales. Based on the result however it is clear that advertisement was significant. This shows that advertisement is significant in explaining sales. From the analysis of co efficient of correlation the calculated value of r = 0.94 from table which indicates positive linear relationship between advertising expenditure and sales because the calculated value is near to1 for that the volume of sales goes up as the advertising expense also goes up. So it can be said there exists high positive relationship between advertising expenditure and sale.. Elliot (001) revealed that advertising has a significant positive effect on food industry sales and this relationship between advertising expenditure and sales appears to be stable. Pagan et al (001) studied the effectiveness of advertising on sales using bivariate Vector Auto Regression model and showed that one time increase in advertising expenditure leads to increase in the sales Akanbi P(011) showed that sales

4 Association between Advertising Expenditure and Sales Volume 165 in the company is explained by about 5% of advertising and it was confirmed by the adjusted R- square of about 46%. Table 3: Analysis of Spearman s Rank Correlation Coefficient R No. of Year Sales(y)in Rank1 Ad.Exp.(x in Rank Difference d = (R1-R) crore Rupee crore Rupee) d= R1-R N=1 d =7 The formula of Spearman s Rank Correlation Coefficient R 6* R 1 n 3 d n 43 R R R 1.5 R.75 The result also confirmed that a positive and statistically significant relationship existed between advertising and sales. The positive relationship showed that an increase in advertising can lead to an increase in sales. Based on the result however it is clear that advertisement was significant. This shows that advertisement is statistically significant in explaining sales. From the analysis of co efficient of correlation the calculated value of r = 0.75 from table3 which indicates positive linear relationship between advertising expenditure and sales because the calculated value is near to1 for that the volume of sales goes up as the advertising expense also goes up. So it can be said there exists moderate positive relationship between advertising expenditure and sales that is supported by Ismail K (01) who showed that there is significant relationship (r = 0.94) between marketing communication and sales performance of P&G Company that there is positive relationship between the promotional expenses and sales of P&G Company and correlation coefficient is Sharma S (010) Showed that there is a strong and positive relationship between sales revenue and advertisement expenses. The advertising elasticity coefficient that explains that 1 per cent increase in advertising expenditure leads to per cent increase in sales. Figure1: Sales growth trends of Bajaj Auto limited Figure : Advertising Expense trends of Bajaj Auto limited From Figure 1 it is clear that with the increase of time the volume of sales increases for the company. From Figure it is clear that with the increase of time company s advertisement expenditure is increasing year by year.

5 Islam et al. 166 Figure 3: Positive growth trends of sales and advertisement expenditure of Bajaj Auto limited From Figure3 it is also clear that with the increase of time the volume of sales increases for the company and the company s advertisement expenditure is increasing year by year that shows that there is positive trend between Sales and advertisement Expenditure. Analysis of t test: Two tailed test is performed in order to look for any change in the parameter where r= n t.94 t.94 t.94 t.9 4 t r 1 (.94) 1 r t.94*9.6 t 8.71 Two tailed test of 0.05 is used. The degree of freedom = 1- (where n=1 representing the Number of variables) = 1-=10. Where Calculated value is t= 8.71 and table value is.8 implies that calculated value is greater than table value (8.71>.8).The value of 10 is checked under 0.05=.8.Based on the above analysis the null hypothesis H0 is rejected and the alternative hypothesis H1 is accepted as it explains the positive relationship between advertisement expenses and sales of Bajaj Auto Limited. The data on sales and advertising expenditure was used in testing this hypothesis by computing the t-value. Based on the result from the analysis examined the result from the table showed that the t-value in the upper limit shows a value of approximately This result showed that the value of t-tabulated was less than the calculated value of t-falls in the rejection area at 95% level of significance and then the null hypothesis that there is no statistically significant relationship between sales advertising is rejected. Hence H1 is accepted which states that there is statistically significant relationship between sales and advertising. The result confirmed that a positive and statistically significant relationship existed between advertising and sales. The positive relationship showed that an increase in advertising can lead to an increase in sales. Based on the result however it is clear that advertisement was statistically significant. This also shows that advertisement is statistically significant in explaining sales. Again where r=.75 then we get t t r n * r t t (.7 5) 10 t.75 t Two tailed test of 0.05 is used. The degree of freedom = 1- (where n=1 representing the number of variables) = 1-=10.The value of 10 is checked under 0.05=.8. Where Calculated value is t= 3.35 and table value is =.8 implies that calculated value is greater than table value (3.35>.8). Based on the above analysis the null hypothesis H0 is rejected and the alternative hypothesis H1 is accepted as it explains the positive relationship between advertisement expenses and sales of Bajaj Auto Limited. The data on sales and advertising expenditure was used in testing this hypothesis by computing the t-value. Based on the hypothesis set which was to examine the improvement in sales as a result of advertising. Based on the result from the analysis examined the result from the table showed that the t-value in the upper limit shows a value of approximately This result showed that the value of t-tabulated was less than the calculated value of t-falls in the rejection area at 95% level of significance then the null hypothesis that there is no statistically significant relationship between sales and advertising is rejected. Hence H1 is accepted which states that there is statistically significant relationship between sales advertising. The result confirmed that a positive and statistically significant relationship existed between advertising and sales. The positive relationship showed that an increase in advertising can lead to an increase in sales. Based on the

6 Association between Advertising Expenditure and Sales Volume 167 result however it is clear that advertisement was statistically significant. This also shows that advertisement is statistically significant in explaining sales. Conclusion The study reveals that the calculated value of coefficient of correlation permits positive relationship between sales and advertisement expenditure of Bajaj Auto limited over the increase of time. From the literature and analysis of this study it is concluded that there is a significant relationship between and sales performance and advertisement expenditure of the company. The result confirmed that a positive and significant relationship existed between advertising and sales. The positive relationship showed that an increase in advertising can lead to an increase in sales. Based on the result however it is clear that advertisement was significant. This study also shows that advertisement is significant in explaining sales. We can draw a conclusion that the present study indicates the existence of complex relationship between advertisement expenses and sales revenue of the companies. From the analysis and the findings it is crystal clear that there is improvement in the sales of the company as a result of advertising. There is no doubt that as the products is sold the overall organization s performance and/or productivity also increases. Advertisement expenses are one of the various factors though crucial which determine sales of any company through increasing popularity of products/services among customers. We hereby make the following recommendations to the company management about the advertising expenses of their product. Advertising has a long term benefits on the economy. Company s ultimate aim is to maximize profit by increasing sales volume; here advertising may play a vital role for the company to increase sales. Company should create awareness and increase the level of consciousness about the advertisement benefit and uses of the product. The company should embark on companywide awareness of advertising through seminar and workshops to educate and intimate all categories of the employees on the strategy. Top management should be involved in the continuous evaluation and monitoring of advertising to ensure that the goals and objectives set are achieved and appropriate corrective actions are taken in the event of deficiencies. The company should also harmonize all departments so as to realize the goals and objectives of advertising. So the organizations need to take care of this factor while formulating their strategies relating to the spending of advertisement expenses. Besides advertisement expenditure the company also may use other promotional tools such as sales promotion public relation in order to achieve its long cherished sales. References Akanbi P.A The association between advertising and sales volume: A Case Study of Nigerian Bottling Company. Journal of Emerging Trends in Economics and Management Sciences.Vol.() pp Arch G.W Measuring advertising effectiveness in destination marketing strategy. Journal of Travel Research. pp. 03. Assmus G. Farley J. U. and Lehmann D. R How advertising affects sales: Meta analysis of econometric results. Journal of Marketing Research. pp Elliot C A Cointegration Analysis of Advertisement and Sales Data. Review of Industrial Organization. Vol. 18 pp Gupta S.P. and M.P. Gupta Business Statistics. Sultan Chand and Sons pp auto limited/ annual report/ Ismail K. 01. Effect of Marketing Communication on Sales Performance of Multinational Companies: A Case Study of Proctor and Gamble Company. Research Journal of Recent Sciences. Vol. 1(1) pp Nayaradou M. 01. Advertising and economic growth World Federation of Advertisers. Pagan J. Sethi S. and Soydemir G.A. 001.The Impact of Promotion/Advertising Expenditures on Citrus Sales. Applied Economic Letters Vol.8 (10) pp Sharma S Sales and Advertisement Relationship for Selected Companies Operating in India: A Panel Data Analysis. European Union Journal vol.1 () pp.6. Weiss D.and Tellis G Does TV advertising really affect sales? The role of measures models and data aggregation. Journal of Advertising Research. Vol. 4(3) pp.1-1.