CHAPTER 2
The Promotion Industry
PPT 2-1 here
KEY TERMS
blog
marketer
client
trade reseller
advertising agency
full-service agency
creative boutique
interactive agency
in-house agency
media specialists
promotion agencies
direct-marketing agency
direct-response agency
database agency
fulfillment center
infomercial
e-commerce agency
consumer sales promotion
trade-market sales
promotion
event-planning agency
designer
logo
public relations firm
account services
account planner
creative services
production services
media planning and buying
services
commission system
markup charge
fee system
pay-for-results
external facilitator
consultant
production facilitator
Chapter 2: The Structure of the Advertising Industry ❖ 2
SUMMARY
PPT 2-2 here
LO1 Discuss important trends transforming the promotion industry.
Recent years have seen dramatic changes in the promotion industry. The late-1990s trend
toward agency consolidation has reversed as numerous industry acquisitions and mergers
failed to impress clients or produce greater profitability. The proliferation of media from
cable television to the Internet has created new advertising options, and giant media
LO2 Describe the promotion industry’s size, structure, and participants.
Spending on promotional efforts exceeds a trillion dollars a year. The industry serves
marketers, which are organizations that have a message they wish to communicate to a
target audience. Typically, a marketer hires advertising and promotion agencies to launch
LO3 Summarize what advertising and promotion agencies do and how they are
compensated.
Advertising and promotion agencies offer diverse services with respect to planning,
preparing, and executing advertising and IMC campaigns. These services include market
research and marketing planning, the creation and production of ad materials, the buying
commissions, markups, fee systems, and pay-for-results programs.
LO4 Identify experts who help plan and execute integrated marketing
communication campaigns.
Marketing and advertising research firms help advertisers and their agencies understand
Chapter 2: The Structure of the Advertising Industry ❖ 3
planning, or retail display. Perhaps the most widely used facilitators specialize in
LO5 Discuss the role played by media organizations in IMC campaigns.
Media organizations are the essential link in delivering advertising and IMC messages to
target audiences. Traditional media organizations include television, radio, newspaper,
CHAPTER OUTLINE
This chapter contains key information about the new era for brand promotion (and its role
in integrated marketing communication, or IMC). While the industry has undergone rapid
change for the past two decades—primarily driven by technological change, as
introduced in Chapter 1—the current era of change is highly significant. The reason?
More than ever before, advertising agencies are being challenged by both marketers and
consumers. Marketers are demanding more effective communications and measurable
results. Consumers have more alternatives for acquiring information—PDAs, cell phones,
the Internet, and digital video recorders—and more control over those alternatives.
Throughout this chapter and carrying over into Chapter 3, the issue of control will be
highlighted. Marketers’ response and the even greater importance of the brand are
considered.
INTRODUCTORY SCENARIO: Welcome to the Power Struggle
Advertising agencies have historically struggled to satisfy clients. During the late 1990s,
innovative dot-com agencies challenged the traditional power base. Then came the dot-
bomb, and it appeared big multinational agencies would reassert themselves. They did for
a short time with big mergers. First, because of more media options and more control of
those options, consumers became harder and harder to reach. With devices like the PC,
iPod, and TiVo, consumers can pick when and how they want information, no longer
merely subject to the commercial breaks of traditional media. So the big power struggle
now is how to reach these more elusive consumers who are turning to Facebook,
YouTube, and blogs to control their communication environments. In response, firms like
Coca-Cola are trying to find ways to insert the brand into consumers’ routine life
experiences. (Ask students what Coke is doing in this regard; they should cite the
American Idol Coke cup strategy.)
In addition to the big firms trying to adapt, big media agencies are adapting as well. “Old
media” companies like NBC Universal are wooing advertisers with more digital-media
options. MTV, now considered an “old” media company, is offering new media
Chapter 2: The Structure of the Advertising Industry ❖ 4
distribution through broadband. Finally, the ascent of new media is dramatically
characterized by Internet advertising exceeding $20 billion annually (not counting peer-
to-peer communication vehicles.) But highlight for students that all Internet advertising is
still less than 10 percent of dollars spent on media.
At the outset, it is important to have students understand that the brand promotion
industry is highly complex, due to its great breadth and the fact that communication is a
complex process. You might get some lively discussion of the future of “old” media
versus “controlled” media—it is worth letting the discussion rage! The role of this
chapter is to lay out the challenges coming from consumers and how that has created
change in the industry. The chapter then fulfills the important task of laying out the
current structure and players in the industry and showing how trends are affecting
change.
I. Promotion Industry Trends
PPT 2-3, 2-4 here
The basic changes in the industry stem from:
A. Limits of Consolidation
• During the period 1999–2002, the advertising industry experienced a period of
extreme consolidation and globalization, primarily through multibillion-dollar
B. Narrower Media Control. It seems contradictory, but media proliferation and
consolidation are taking place simultaneously. Big media companies are merging,
but with new technologies (podcasting and Web options), new media
organizations are proliferating as well. Some legal changes (such as the FCC
C. Media Clutter. With so many options available in the media, it is hard for
marketers to break through the clutter. In addition, with proliferation comes
D. Consumer Control. Consumers are discovering and desiring more ways to
control the flow of information they receive. Blogs and TiVo devices are two
E. Web 2.0. Web 2.0 is an extension of consumer control. The appeal of online
Chapter 2: The Structure of the Advertising Industry ❖ 5
YouTube is carrying over to information acquisition. The idea is that consumers
II. Industry Scope and Structure
PPT 2-5, 2-6 here
Spending on advertising is approaching $300 billion annually in the United States with
worldwide advertising exceeding $600 billion. However, it is important to put the gross
The remainder of the chapter clearly and efficiently describes for students the structure of
the advertising industry. Exhibit 2.1 can be the guiding framework for the discussion.
A. Marketers
1. Manufacturers and Service Firms. Large national manufacturers of
consumer and business products and services are the most prominent users of
• Procter & Gamble, MCI, Chrysler, Colgate-Palmolive, Xerox, and
General Electric are examples. These firms can operate in global, national,
• Be sure to alert students that this category also includes small companies
2. Trade Resellers. The term trade reseller is simply a term for all organizations
• Resellers can be retailers, wholesalers, or distributors. Retailers can sell in
• Wholesalers and distributors, like American Lock & Supply (which
supplies contractors with door locks and hardware), are a completely
3. Federal, State, and Local Governments. Although it may seem odd to
Chapter 2: The Structure of the Advertising Industry ❖ 6
students to list the government as a marketer, the U.S. government was the
• The most visible government campaigns are U.S. government advertising
• The U.S. government also used integrated marketing communication when
4. Social and Not-for-Profit Organizations. Advertising by social and not-for-
profit organizations at the national, state, and local level is common; examples
B. The Marketer’s Role in IMC
Before considering the types of agencies advertisers can rely on and the services
they provide, it is critical for students to understand that the marketer must come
to the agency partnership fully prepared to provide the foundation of information
with which an agency needs to work. Too many marketers (often but not always
small firms) turn to the agency for both their strategy and communications needs.
This is a big mistake—only the marketer can provide and should provide the
strategic direction for the firm.
So marketers should come to the planning meeting with agencies prepared to:
• Describe the value that the firm’s brand provides to users.
• Describe the brand’s position in the market relative to competitive brands.
• Describe the firm’s objectives for the brand in the near term and long term
(e.g., brand extensions, international market launches).
• Identify the target market(s) that are most likely to respond favorably to
the brand.
• Identify and manage the supply chain/distribution system that will most
effectively reach the target markets.
• Be committed to using advertising and other promotional tools as part of
the organization’s overall marketing strategy to grow the brand.
III. Advertising and Promotion Agencies
PPT 2-7, 2-8, 2-9, 2-10, 2-11, 2-12, 2-13, 2-14, 2-15 here
Chapter 2: The Structure of the Advertising Industry ❖ 7
1. Advertising Agencies.
Advertising agencies provide expertise to help advertisers prepare advertising
programs. An advertising agency is an independent organization of
professionals who provide creative and business services to clients related to
Account planners
Account executives
Art directors
Creative directors
Copywriters
Graphic designers
Radio and television producers
a. Full-Service Agencies. A full-service agency includes an array of
advertising professionals to meet all the promotional needs of clients.
Often, such an agency will also offer a global reach to the client. Young &
b. Creative Boutiques. A creative boutique emphasizes copywriting and
c. Interactive Agencies. Interactive agencies help marketers prepare
communications for new media like the Internet, interactive kiosks, CDs,
d. In-House Agencies. An in-house agency is often referred to as the
Chapter 2: The Structure of the Advertising Industry ❖ 8
advertising department of a firm. This option has the advantage of greater
coordination and control in all phases of the advertising process. Another
e. Media Specialists. These are independent organizations that specialize in
buying media time and space and offer media planning advice. The
2. Promotion Agencies. Focus on promotion efforts that full-service advertising
a. Direct-Marketing (or Direct-Response) and Database Agencies. These
agencies provide a variety of direct-marketing services. They design
direct-marketing campaigns, assist in constructing customer databases,
b. E-commerce Agencies. These agencies handle a wide variety of planning
and execution related to promotions using electronic commerce. They
c. Sales Promotion Agencies. These specialists design ads and operate
contests, sweepstakes, special displays, or coupon campaigns for
d. Event-Planning Agencies. Event-planning agencies and organizers are
experts in finding locations, securing dates, and putting together a team of
e. Design Firms. Designers and graphics specialists help to create logos and
other visual representations for the brand. They also design the supportive
f. Public Relations Firms. Public relations firms manage an organization’s
A. Agency Services
Although not every full-service agency offers every service, the services that
1. Account Services. Account services entail identifying the benefits a
Chapter 2: The Structure of the Advertising Industry ❖ 9
competitive positioning, and then developing a complete advertising plan.
In some cases, an agency will also provide basic marketing and consumer
2. Marketing Research Services. The research services usually entail the
agency locating studies that have a bearing on the client’s brand
3. Creative and Production Services. In simple terms, creative services
prepare the client’s message and promotional materials. Production
4. Media Planning and Buying Services. These services involve placement
of the advertisements. The central challenge is to determine how a client’s
5. Administrative Services. Agencies have personnel departments,
B. Agency Compensation
1. Commission. The commission system is the traditional method of agency
compensation and is based on the amount of money the marketer spends
on media.
• Under this method, typically 15 percent of the total amount billed is
2. Markup Charges. Markup charges add a percentage to a variety of
services the agency purchases from outside suppliers. In many cases, an
Chapter 2: The Structure of the Advertising Industry ❖ 10
agency will turn to outside contractors for art, illustration, photography,
printing, research, and production. The agency then, in agreement with the
client, adds a markup charge to these services.
• Traditional markup has been 17.65 percent to 20 percent.
3. Fee Systems. A fee system is much like that used by consultants or
4. Pay-for-Results. In this type of program, the agency’s fee is based on the
achievement of agreed-upon results. Many large companies, including
IV. External Facilitators
PPT 2-16, 2-17, 2-18 here
External facilitators are organizations or individuals that provide specialized services to
advertisers and agencies.
A. Marketing and Advertising Research Firms. Research firms like Burke
International perform original research for advertisers. Other research firms
• Database consultants work with marketers and advertising agencies in
C. Production Facilitators. Production is an area where marketers and their
agencies rely most on external facilitators.
• For broadcast production, directors, production managers, songwriters,
camera operators, audio and lighting technicians, and performers are all
essential. Production houses can provide the physical facilities, including
sets, stages, equipment, and crews, needed for broadcast production.
Chapter 2: The Structure of the Advertising Industry ❖ 11
Similarly, in preparing print advertising, graphic artists, photographers,
models, directors, and producers may be hired from outside the advertising
agency or firm to provide the specialized skills and facilities needed in
preparing advertisements.
• In postproduction, further expertise is needed before the ad is placed in a
medium. Postproduction processes in broadcast advertising include film
developing and transferring, editing, special effects, sound mixing, and
color matching.
• In print advertising, film developing and photo enhancement are typically
carried out by external organizations.
D. Software Firms. In an era when technology continues to evolve, a new
category of facilitators has emerged. Software firms help companies with
diverse activities, such as tracking Web-surfing behavior and managing
relationships with trade partners.
V. Media Organizations
Media represent the next level in the industry structure shown in Exhibit 2.5. The
media available for placing advertising, such as broadcast and print media are
well known to students simply because students are exposed to them daily.
• Major television networks like NBC, ABC, and Fox, as well as national
magazines like U.S. News & World Report and People, provide advertisers
with time and space at considerable expense.
mail pieces, and a well-designed outdoor campaign may be better ways to
reach a specific audience.
• Note the inclusion in this list of “media conglomerates.” This category is
A. Target Audiences
The last element of the structure of the industry is the target audience. Target
audiences were covered in Chapter 1. As a recap for students, the main target
Chapter 2: The Structure of the Advertising Industry ❖ 12
SOLUTIONS TO REVIEW QUESTIONS
1. Briefly describe the power struggle now taking place in the promotion industry. Who,
beyond advertising agencies, is exerting power in the industry, and in what ways?
A surprising shift of power is taking place within the promotion industry. Consumers
2. Do you think the increasing independence and control consumers gain through new
technologies like digital video recorders, the Internet, digital music players, and cell
phones will make brand promotion less important? Explain.
One might assume that as consumers gain more control over the messages they
3. What are the primary characteristics of second-generation Internet use and services
(Web 2.0)? How does Web 2.0 shape marketers’ decisions related to integrated
marketing communication?
The phenomenon of Web 2.0 is generally characterized by the rise of social
4. The
U.S.
government spends millions of dollars each year trying to recruit young men
and women into the armed services. What forms of integrated marketing communication
(IMC) would be best suited to this recruiting effort?
The U.S. government is clearly engaged in a persuasive effort. Mass-mediated
5. Huge advertisers such as Procter & Gamble spend billions of dollars on advertising
Chapter 2: The Structure of the Advertising Industry ❖ 13
every year, yet they still rely on advertising agencies to prepare most of their messages.
Why wouldn’t a big company do all its own advertising in-house?
The Procter & Gamble example is vivid testimony that a unique set of knowledge and
skills defines the advertising profession. P&G is in the business of creating value for
6. What is the marketer’s role in IMC?
Before enlisting the services of an agency, the marketer must be able to: (1) fully
understand and describe the value that the firm’s brand provides to users; (2) fully
(6) be committed to using brand promotion tools as part of the organization’s overall
7. As marketers become more enamored with the idea of IMC, why would it make sense
for an advertising agency to develop a reputation as a full-service provider?
The traditional advertising agency’s expertise involves development of ad campaigns
and placing them in mass-media outlets like television, radio, newspapers, and
targeted customer. Importantly, with the various tools that are being used, speaking to
the customer with a “common voice” has become both essential and more
8. Explain the viewpoint that a commission-based compensation system may actually
give ad agencies an incentive to do the wrong things for their clients.
In a commission-based compensation system, the agency is paid a percentage of the
media space or time that it places for a client. This system can have two unwanted
Chapter 2: The Structure of the Advertising Industry ❖ 14
this may discourage the agency from recommending nontraditional (e.g., event
times when cutting one’s advertising budget is the right thing to do. Agencies
9. What makes production of promotional materials the area where advertisers and their
agencies are most likely to call on external facilitators for expertise and assistance?
Advertising agencies are paid to develop creative concepts. Often, bringing these
specialists needed in the production of advertising. No ad agency or client could
10. Give an example of how the skills of a public relations firm might be employed to
reinforce the message that a sponsor is trying to communicate through other forms of
promotion.
New-product introduction is likely to be accompanied by some level of advertising
support; product introductions are also an excellent time to engage a public relations
SOLUTIONS TO EXPERIENTIAL EXERCISES
1. Break up into groups, and simulate a small business planning to advertise a new or
innovative product. Once you have chosen a general industry and a product to promote,
perform the following tasks, and present your answers to the class.
a. Pick the main trend in the marketing industry that you think would have the greatest
effect on promoting your brand.
Students’ answers should include one of the following with an explanation: the
Chapter 2: The Structure of the Advertising Industry ❖ 15
b. Determine which category of marketers your business is classified under, and
describe the role of brand promotion for organizations in that category. How does this
role apply to your campaign?
c. Select one type of advertising or promotion agency that would be the most effective in
providing appropriate services to achieve your brand promotion goals. Explain your
choice.
d. Select one external facilitator that would provide specialization services to help
ensure the success of your campaign, and explain your reasoning.
e. Choose an existing media organization that would be best suited for advertising and
promoting your brand’s identity. What makes it the best choice?
The students can use the information in the text to help them answer the previous
2. This chapter highlights some of the challenges facing marketers and agencies as
consumers have gained greater control of information sources—blocking telemarketing
calls, for instance, and carefully guarding the privacy of cell phone numbers and other
contact information. Working in the same groups, brainstorm ways that marketers still
can reach out to consumers and invite them to learn more about your brand. As your
team develops ideas, also explain how you would address these questions:
a. What ethical issues might arise in your approach to consumers? How would you
navigate privacy concerns?
b. Are there any legal risks or potential challenges to your approach?
3. Choose a popular brand from a local or national advertiser, and try to determine
what media organizations the advertiser is using to target its audience. Does the brand
have a special site on the Internet? Can you find television or billboard ads for your
product? Are there media organizations you couldn’t find that you believe would be
suitable or innovative for advertising this brand? Explain.
Chapter 2: The Structure of the Advertising Industry ❖ 16
4. Identify the four primary compensation methods discussed in this chapter, and discuss
which would best hold both clients and agencies to ethical and responsible business
practices. What risks exist in each method? Apart from the threat of regulatory inquiries
or criminal investigations, discuss why it is important for agency billing systems to be
fully transparent and accountable.
POWERPOINT PRESENTATIONS
Use the Instructor PowerPoint files to pace your instruction and provide class notes on
key ideas and themes. Each presentation provides a slide-by-slide coordination with the
chapter’s learning outcomes, definitions, and visuals. Encourage students to use the
accompanying Student PowerPoint presentation to align and reinforce classroom
instruction with studying outside of the classroom.
VIDEOS
To view the two videos for this chapter, go to the PROMO book companion website,
www.cengage.com/login.
(*) Indicates the correct answer in the multiple-choice video questions.
Microsoft Kin SOCIALologist
1. The book suggests that a power shift is occurring between marketers and consumers
with “much consumer control exerted online.” Describe how the Microsoft Kin
“Socialologist” video demonstrates this statement.
2. The book points out how significantly the world of promotion is changing, including
how advertising agencies specialize and are organized. Based on your reading and
Chapter 2: The Structure of the Advertising Industry ❖ 17
viewing the video, what type of agency mentioned in your book would be likely to create
such a video? Explain your reasons for your contentions.
3. In the Microsoft Kin “Socialologist” video, Rosa’s mission is to:
4. The Microsoft Kin “Socialologist” video explores which of the following questions
through Rosa?
5. The Microsoft Kin “Socialologist” video is different from traditional ad agency work
in what ways?
Microsoft XBOX: Gears of War 3 Ashes to Ashes
1. The book discusses the “pace and complexity of change in the promotions industry.”
Consider the video Microsoft XBOX “ Ashes to Ashes.” What do you think are the likely
goals for this particular video?
2. The book discusses the “pace and complexity of change in the promotions industry.”
Consider the video Microsoft XBOX “ Ashes to Ashes.” What do you think are the
distribution channels for this particular video?
Chapter 2: The Structure of the Advertising Industry ❖ 18
3. The video Microsoft XBOX “Ashes to Ashes” is:
4. The Microsoft XBOX “Gears of War 3 Ashes to Ashes” illustrates a key point in
Chapter 2:
d. Gaming is increasingly only of interest to people under 17 years of age
5. You’ve viewed the video Microsoft XBOX “Gears of War 3 Ashes to Ashes.” Based
on your reading and viewing the video, what type of agency mentioned in the book would
be likely to create such a video?