Paul Terry Cherington.

Advertising as a business force; a compilation of experience records online

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In the last decade or two, therefore — ever since the begin-
ning of big markets and big enterprises — selling cost has
been rising steadily and become a problem with manufacturers.
Some have agreeably deluded themselves about the true state

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of affairs by figuring loosely that reduction of cost of production
was "helping" to lessen selling cost. But inquisitive modem
cost accounting turns the light on such delusions for those
manufacturers (none too many) who are modem enough to
have thoroughgoing cost systems.

The one significant thing about selling costs is still blindly
overlooked by many manufacturers, while, meantime, those
keener ones who do understand it, and have applied it long
ago, are the big gainers. Selling cost goes dovm in proportion
to the reputation of the goods, and the favorable conviction in
the mind of the buyer. You don't have to work nearly so hard
to sell me Baker's chocolate as you do to sell me Jones's choco-
late. Neither do you have to work so hard to sell dealers and
jobbers. In fact, in such exceptional cases, like Baker's and
a few others, you could shut down on aU selling expense for
a time and make a lot of money nevertheless.

The very best proof in the land that advertising decreases

selling cost is contained in the situation of Hart, Schaffner

Effects of ^ Marx, the famous clothing house, as compared

AdveHis- with other clothing houses. Hart, Schaffner & Marx

ing on are authoritatively reputed to do an annual volume

^C^ of business of about $15,000,000. . . .

Good advertising has been their keynote all this
time; and to-day their salesmen (who are on salary, not commis-
sion) talk little else but advertising to dealers. It is related how
one dealer who listened to a long and interesting delineation
of what the house of Hart, SchaflFner & Marx had done, was
doing and would do in the way of advertising, suddenly said,
"Yes, that's fine, but what about the clothes ?^*

The salesman dismissed this subject with few words. "Ask
those who know, or demand any test you choose — the clothes
are right. What concerns you most is how those clothes are
advertised.** And Hart, Schaffner & Marx are so beautifully
intrenched in their position that they can demand that the
dealer who holds the line must increase sales every year or make
way for some one who will. In magazine advertising alone
this spring and last fall Hart, Schaffner & Marx spent $85,000 —
about twice what its nearest competitor spent. This figure
is not a guess, it is checked up from the magazines. One
hundred and twenty-five thousand dollars would probably
cover the total advertising expenditure, newspaper adver-
tising and all.

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Now let us measure up selling costs. For the sales depart-
ment expense (everything but advertising), I learn from inside
sources. Hart, SchaflPner & Marx spend ordy 2\ to S 'per cent.
See how this measures up beside other clothing houses:

Magazine Selling

Advertising Cost

Hart, Schaffner & Marx $85,000 2i~3%

B. Kuppenheimer & Co 49,000 4%

Samuel W. Peck & Co 29,000 6%

Alfred Benjamin 24,000 7%

Here is one of the most powerful object lessons ever tabulated

regarding the relation of advertising to sales policies. In

almost perfect proportion to the expenditure for ad-

Cost Comr vertising, the selling cost has decreased and volume

^^^j^qI^ of sales increased. Those clothing manufacturers

Pifj^ named above are all advertisers — there is an end-
less number of other clothing manufacturers whose
names are little known to consumers, and whose selling
cost ranges all the way from 6 to 9 per cent. They are
getting neither the reduced cost of manufacture which comes
with larger volume of sales nor the decreased selling cost which
comes with trade-marking and consumer advertising.

As the selling cost named above is that of sales department
alone, it will be well to examine how much advertising adds to it.
An advertising appropriation of $125,000 is but .83 per cent,
of a volume of business of fifteen million. Even supposing
that the advertising is underestimated and the volume of
business overestimated, the diflEerence could not be larger
than 1 per cent. The total Hart, SchaflPner & Marx selling
cost would then stand at 3 J to 4 per cent. — which is unques-
tionably tremendously low. There still remains a large gap
between the low selUng cost achieved by the two clothing
firms advertising most extensively and the higher cost
necessary now to non-advertising firms.

A most interesting thing about this relation of advertising
to selling cost is that it is cumulative in its eflPect. The table
of figures quoted shows how the selling costs of clothing firms
varied in proportion to the double ratio of amount spent and
length of time since first consumer advertising began.

When you get right down to it, the division of selling cost

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into a separate advertising classification is pretty di£Scult.
The average accountant in manufacturing concerns is more
or less at sea, and there has not yet been worked out much
uniformity of cost accounting on this subject. live sales
forces have men who travel with the purely secondary object
of taking orders. They are out on the road to suggest a new
sign, a rearrangement of a dealer's store, or anything to clinch
the dealer's good-wiU and advertise the house. Now, is this
selling or is it advertising?

Likewise, when a special catalogue or folder, enclosing order
blanks, etc., is sent from the advertising department, and
orders come in as a result, is that advertising or selling? How
can the two possibly be separated? They canH — the produc-
tive result of the two working together must be measured
in contrast with a similar concern where one works alone.
And that contrast is strikingly afforded in the clothing figures

As a matter of fact, the entire "selling expense" for any
specialty or novelty is advertising expense. It must be adver-
tised in some way before it can be sold at all, for it
Selling must educate its prospective buyers and create a
/^^^ demand which has not before existed. Any trade-
Novelty marked staple which sells on individual merit has
the same road before it. If it would rise above the
dead level distinctions of quantity and common name, it has
to turn its selling expense into advertising channels. It must
sell not to buyers of a generic commodity but to buyers of
a marked quality. And the selling expense of doing liis has
a "come-back" action like insurance renewal commissions —
it compounds itself without effort as time goes on — making
the cost of selling per unit less and less. The seUing cost per
unit of Ivory soap must be pretty nearly infinitesimal by this
time, else the size of the cake and the retail price would have
been changed to conform to the increased cost of raw materials,
labor, advertising, salesmen, etc. — which is making it practi-
cally impossible for any other soap concern to give consumers
as much per cake for their money as Ivory.

The serious problem now before the large company of manu-
facturers who comprehend the economies of advertising is to
so study advertising methods as to decrease selling costs still
further, and achieve in the shortest time and for the smallest
sum, the largest volume of business. Without the slightest

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doubt, there is a greater waste of wealth and " natural resources'*
through unduly high selling costs than all the Pinchots and
Garfields and Brandeis ever painted on their imaginations.
From a careful average of selling costs in many lines of manu-
facture, I think it would be conservative to say that selling
cost averages in general twice the cost of manufacture, staples
included; which means that America spends annually at present
forty billion dollars on selling^ based on census estimates of
$21,000,000,000 now expended for wages, salaries, raw mate-
rials, etc.

Clean-cut, well-considered, and closely-adapted advertising
is bound in the future to cut this enormous selling expense
very materially, and put manufacturing on a more stable
and eflFective plane.

From these discussions of the costs and profits in the distri-
bution of merchandise there stands out clearly one point.
It is that the definition of the word "pays" in the question
"Who pays for advertising?" depends very largely on the
effects of the advertising. A statement made concerning
advertising outlay which produces absolutely no results would
not hold at all for advertising expense which brought in mod-
erate returns, nor would a statement made for advertising
outlay which brought in moderate returns hold for a similar
outlay which resulted in the creation of a wide, permanent
market for a new product.


The term "advertising" in the sense in which it is used in
the larger question, "Who pays for advertising?" requires
analysis just as does the term "pays." Here, again, we find
that our definition depends almost entirely on the character
of that which passes under the name. If the advertising takes
the form of publicity which yields neither actual or future
increase in market, then we are talking about one thing, but
if it takes the form of an intelligent outlay for securing definite.

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valuable results, then we are talking about something entirely
diflFerent. In either case, the question as to the source of the
payment must depend on the desirability of the results aimed
at and the effectiveness with which the advertising secures them.

It is a recognition of the distinction between the reasoning

which can be applied to effective advertising compared with

that which will hold in the case of unsuccessful adver-

Isj^er- t^"^S ^^^ ^^ under much of the discussion of the

tising an question: "When is advertising an investment and

^^^ when is it an expense?'* This question, of course,
is merely a corollary of the major problem, "Who
pays for advertising?"

It is this question of how advertising ought to be treated
on the books of a company that lies back of any attempt to
reach conclusions as to what constitutes good-will. If good-
will depends largely on the earning capacity of a company, and
if the earning capacity depends upon the attitude of the market
toward the concern's product, and if this attitude, in turn, is
largely influenced by the character of advertising appeal, it at
once becomes clear that the question of " How much to spend for
advertising?" is very closely associated with the question, "How
much to spend for securing good-will?"


The law of diminishing returns works as plainly through the
problems of the manufacturer as in any field of production.
And in no place is the operation of this law more clearly defined
than it is in the matter of advertising outlay. Nearly every
manufacturer recognizes that there is a point up to which
increased advertising expense will yield, and beyond which it
will not yield, adequate returns. This may not be merely the
point at which the immediately resulting sales will yield a profit
greater than the advertising outlay. It may be that point
far beyond this, where all of the elements which go to make

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good-will cease adding value. This point may be far beyond
the present limits of the business and it may be even a movable
point. That depends on individual conditions. But every
manufacturer realizes that since all of his return from adver-
tising must come either out of increased volume or increased
profitability of sales there is a point in his advertising outlay
beyond which he cannot go with any reasonable expectation
of success.

This feature of the interrelation between advertising outlay

^^^ and the possibilities of return is brought out in the

Much following discussion of the question, "How much

BeSverd ^^ ^^ spend for advertising?" This question is

for Good- discussed in the light of the problems it presents

^ * to a new concern, which depends in a large part

for its answer on the ability of the advertising to secure


In this article it is taken for granted that the immediate
eflPect on sales cannot yield the amount of the outlay and that»
consequently, the return from the advertising must come in
the form of "good-will," or, in other words, the possibilities
of future earnings for the concern.

*An advertising man who had been reared in the close-
paring, department store school where the advertising expen-
diture was fixed at 3 per cent, of the total sales, was called
into a newly established manufacturing business. Upon being
given access to the books, he was appalled to find that, whereas,
the total sales for the previous year — the fourth of the com-
pany's existence — were not quite a quarter of a milUon
dollars, the advertising appropriation for the current year was
$50,000 — just 21 per cent, of the sales. His first thought
was that he had been called to assist at an autopsy, for these
figures would spell ruin with a capital "R" to the depart-
ment store, and he made remarks to that eflFect at his first
conference with the president.

The latter reassured him with a smile. "We are in

*Pnntfrs' Inh July 18, 1912, p. 8,

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our money," he said. "Remember, this is a comparatively-
new concern and among other things it must have to succeed
is good-will. It must buy that just the same as if it were
buying bonds — to return not to-day or to-morrow, but years
hence. Good- will to us is even more important than machinery
and raw material, for it would profit us nothing to make goods

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which we could not sell. So just as we invest a part of our
capital in machinery, tools and material with which to make
a product, we put part of it into good- will to help sell the

"You woidd not exclaim if we put the fifty thousand into
salesmen. Yet they might pay a very small return in good-
will, comparatively speaking, because they might force the sale
of the goods upon many an unwilling purchaser, md we might

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have to spend more in proportion to the sales as time went on.
In this case, however, you will see the ratio gradually decline.
With reasonable efficiency in our general management, in
five years I expect to see the advertising appropriation re-
duced to 10 per cent, or possibly a little lower. In this line
of business it can hardly be expected to fall be low 8 or 10 per

The view expressed above is the new view — a way of looking
at things which would have caused apoplexy some twenty years
ago. Even to-day it is heresy in some places.

A writer in one of the current magazines — supposed to
be a high authority on financial subjects — strongly advises
intending investors against buying the securities of any indus-
trial "greatly dependent upon patents in its manufacturing
end, or advertising in its selling end.'' The assumption is,
of course, that just as patents may be rendered obsolete by
new inventions and will go out of existence anyway in seven-
teen years or less, the effect of advertising may be overcome by
rival advertising, and the advertising of yesterday is as dead
as an expired patent. That it is very much aUve, a glance
at the good- will columns in the footnote at the bottom of
this page will show.

A goodly portion of those vast amounts* set down

Some there under the head of good-will are the results of the

raZMoT advertising which has been done — the mill still

Placed on grinding with the water that is past. Thirteen mil-

Ooodrwill lion dollars of Woolworth's money invested in the

highest office building in the world is a stupendous

advertisement of his good-will account. The B. F. Goodrich

Company, recently consolidated with the Diamond Rubber

♦the beiation op the capital, assets and good-will of some leading
industrial corpobations as reported bt boston news bureau

Name Capital Assets Good-will Assets

Per Cent

Goodrich $90,000,000 $100,877,604 ♦$57,000,000 56 . 5

Woolworth 65,000,000 65,157,155 50,075,000 76.8

Sears-Roebuck 48,500,000 60,768,949 30,000,000 49 . 8

Studebaker 43,500,000 56,476,143 19,807,277 35 .

MayDept 20,000,000 21,377,229 14,343,957 67.0

Underwood 13,500,000 15,476,785 7,995,720 52 . 2

Loose- Wiles 13,000,000 15,247,152 7,970,543 51 . 6


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Company, capitalizes a cool $57,000,000 of good- will ! What does
that represent? Patents are of mighty little importance in the
rubber business, secret processes of manufacture are practically
common property, location cuts very little figure, proprietorship
has changed a dozen times, the Goodrich who founded the busi-
ness having been dead for many years, and no one bearing the
name figures in the management. That " good-will " represents
advertising, practically entirely. It is the residt — or rather
one of the residts — from the constant repetition of "Best
in the Long Run.'* It is summed up in the attitude of
the young lady whom the writer asked to name the make
of tires her father used on his car. She didn't know, it
happened, but she said "Goodrich, I suppose, the same as
they all do." That's good-will, and that is what it pays to
spend a mighty substantial proportion of the first few years'
sales to get.

With the object of ascertaining whether this new attitude

toward good-will (which includes, of course, the recognition

of advertising as an investment) had been assumed

r^Ji^m ^^ ^^^ ^^ ^^ more conservative financial institutions,

jj^^ ^ Printers* Ink sent a letter to 250 banks, members of

the Bank the American Bankers' Association, asking whether
there is in financial circles, "a growing disposition to
regard with favor an aggressive advertising policy when linked
up with a successfully conducted business." The case of the
Royal Baking Powder Company was cited, which began with
a small capital and "invested" the profits in advertising for
a number of years. Eventually this business, which was almost
wholly a good- will proposition, was capitalized for $20,000,000,
and the common stock has paid for some years 12-per-cent.
dividends. The list of bankers addressed were asked if they
would consider that sound financing, and were requested
to state how a man could determine what proportion of money
spent for advertising could be considered a legitimate invest-

Of those bankers who answered, 33 per cent, state that
money spent for advertising should be charged to "expense"
in totOy and, by inference if not by direct statement, that there
is no tendency to regard an advertising policy as anything
but running expense. The residting good-will, they affirm, is
not to be considered in conservative financing, and has on
place on a statement of assets.

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Twenty-eight per cent, of the bankers who answered the
letter say that good-will secured through an aggressive adver-
tising policy should be given "due consideration" when it came
to lending money or financing an enterprise. None of these
bankers would go so far as to say that good-will has any place
in a financial statement, or that it can be charged to anything
except expense, but they all asserted what the 33 per cent,
denied — namely, that the good-will of a concern has to be
considered very frequently.

Fourteen per cent, of the whole number came out flat-footedly
with the assertion that there undoubtedly is a tendency in
conservative financial circles to regard advertising as an invest-
ment. With one exception they agree that it would be poor
bookkeeping to list advertising as an "investment," but they
admit that it should be given full consideration in extending
credit. The one exception states that a certain portion of the
advertising expenditure should be shown on the books as
investment, the portion to be determined by a comparison of
the results which had been obtained witii the reasonable
expectation of results to come in the future.

The other 25 per cent, of replies were absolutely non-
committal, some stating that they did not care to discuss
the question, and others taking refuge in generalities such as
"advertising is a necessity to most concerns," etc.

That showing is to be considered nothing short of remarkable,
when it is remembered that ten years ago the average banker
would have scoflPed at the idea of advertising at all.
^'''^^^ He didn't believe in it so far as his own business was
^f^Credit concerned, and he was rather inclined to look upon
it with suspicion when it was indulged in by oUier
people. When 42 per cent, of a list of bankers can be per-
suaded to say that good-will secured by advertising should
be given at least "due consideration" when determining a
line of credit, it shows that the status of advertising in the
financial world is rapidly changing. And the wording of the
replies shows pretty conclusively that the bankers regard
advertising as the chief promoter of good-will. Those who
do not side-step the question entirely meet the issue squarely
upon that basis. It is not the money spent for patents or for
trade-mark rights that they are talking about, but the money
spent for advertising the goods.

Thus the man who is facing the question, "How much shall

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I spend for advertising?" has better and higher authority
than ever before for regarding the appropriation as an invest-
ment, paying dividends in good- will. It is true that it figures
in the books as "advertising expense," but it goes to make up
"demonstrated earning power" whenever it is necessary to
re-finance or extend the credit of the business. It is reported
on the best authority that the National Biscuit Company had
been advertising Uneeda Biscuit for three years before the
sales of that commodity paid a profit, yet no one in his senses
would maintain that it was "merely an expense." Of course
the company was seUing other crackers at a profit big enough
to more than offset the deficit, but even if that were not the
case the advertising of Uneeda would have been an investment
just the same, and future events have shown that the company
could have afforded to pay for that advertising out of the
capital of the concern if no other source were avaUable. Since
1905 the dividends paid on the common stock have risen form
4 to 9 per cent, while the physical assets have increased
only from sixty-two to sixty-six million dollars. While there
are only four million dollars more physical assets than there
were in 1905, nobody would be likely to accuse the National
Biscuit Company of frenzied finance if it should increase its
capitalization ten to fifteen millions. Yet the greater part
of the increased capital would be represented by nothing
tangible. It is simply the demonstrated earning power, much
of which is the result of the advertising expense of last year
and the year before.

It is evident, then, that it is not wise to limit the advertising
appropriation to an amount which seems likely to "come
back" the first year. In other words the money spent for
advertising cannot be expected to return at once with a profit
in its hand. But it is not wise to plunge so heavily as to
endanger the credit of the business, for be it understood, good-
will is a fine thing is connection with a going business, while
the good- will of a bankrupt concern isn't worth a cent.

In a sense good-will is a sort of business momentum. As
long as the concern keeps going, last year's advertising helps
keep up the speed just as the momentum of the last
Mcmeraum *^"^ ^^ ^ locomotive's drive wheels helps send them
around the next time: but after the concern has once
stopped, the good-will it used to have will not help start it
again any more than the locomotive's momentum on its last

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run will help overcome its inertia as it stands in the round-

That fact, by the way, makes the new attitude of the bankers
all the more striking, since the banker always looks at a financial

Online LibraryPaul Terry CheringtonAdvertising as a business force; a compilation of experience records → online text (page 55 of 67)