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XXI

USELESS vs. USEFUL ADVERTISING

   MODERN national advertising is very different from the definition of advertising found in the dictionary: "To inform or apprise; to make known through the press."

   This was the idea of advertising in the days when the merchant was content to print the fact of the receipt of a shipment of "New Orleans molasses" or of "Scotch ginghams."

   "Such a conception of advertising," says Mr. George French in "Advertising," "is now not only inadequate, but false and misleading. It is now one of the minor functions of advertising to announce or give notice. Its major function is to persuade." Mr. French is the leader of those advertising men who are engaged in the Herculean task of cleaning the Augean stables, and, to mix metaphors, of weaning the advertising world from the Fleshpots of Egypt. Moses and Aaron succeeded in weaning the Hebrews from the fleshpots of Egypt, but they had the assistance of Jehovah. Mr. French can look for no such divine interposition, and it is to be feared that without it he will serve as a convenient phraser of virtuous aspirations which will merely cloak the old game of exploiting the credulity of the public.

   Selling merchandise to the consumer by national advertising is selling merchandise in a very different way from that of the merchants of a less strenuous time. Then merchants used to assemble goods, and await the demands of the public. Both the makers and the storekeepers supplied the necessities of the public, but permitted the public itself to develop its own needs and propensities to purchase. Customers went to the stores because necessities, rather than artificially created desires, had developed in their lives. They bought goods when their pantry shelves were emptied or their clothes were worn out. The new things they bought were needed principally to replace those which had been consumed.

   In a statement made before the Interstate and Foreign Commerce Committee of the House of Representatives, Mr. Edward A. Filene, of Wm. Filene's Sons Company, of Boston, gave a graphic picture of some of the evils caused by nationally advertised trademarked goods. Mr. Filene is an unquestioned authority upon merchandising. The company of which he is president is the largest specialty store of its kind in the world. Its annual sales exceed twenty-five million dollars.

   All business men seek either to get out of the way of competition, or to get above competition. Getting above competition helps the public. That is, if we get above competition by selling goods of the same quality at less price or a better quality of goods at the same price, we are performing a public service. We have no right to exist except as we serve the public, and fortunately, that we should not be tempted too much, we find as a general rule, that as we serve the public, so we flourish in business.

   Mr. Filene then said that advertisers of trademarked articles were not seeking to get above competition, but to get out of the way of competition, and that as more and more articles were trademarked, finally almost all articles in common use would be sold out of the way of competition at prices higher than the cost of producing them warranted.

   We ought not to do anything that will stand in the way of younger men growing up, with their newer and more up to the times ideas getting their chance. But they do not get their chance when the market is preempted by trade-marked articles, with the advantage of enormous profits and enormous funds to advertise back of them, so that by constant hammering of their names into the public mind, those articles get such possession of the buying public that reasoning buyers do not use ordinary reasoning and caution in purchasing them, and buy them because of their advertising, although they may have been reduced in quality or they may have been reduced in weight.

   While all this is happening, and the old trade-marked thing is at least tending to deteriorate, there are being produced other articles--by young, more efficient, better educated, better trained men--better for the public to buy in quality and design and in all things, and the public does not buy them because there have been such enormous profits in the trade-marked article that the public has been advertised and talked to and plied with booklets until they have come to believe that this article has superiorities that they, not being chemists and analysts and so forth, cannot find out that it does not possess.

   In determining what advertising is useful and what useless to the consumer, there is no better criterion than Mr. Filene's. If any kind of advertising tends to increase price competition, and lower the price level of goods to the consumer, then that is useful advertising. If any kind of advertising tends to eliminate competition as to price or, as Mr. Filene puts it, to get out of the way of competition, then that advertising is, to put it mildly, useless.

   National advertising, except when it is used to introduce new commodities, is a device for enabling a manufacturer to get out of the way of competition. It is, from the consumer's standpoint, a useless process of bragging. Retail advertising, on the other hand, generally intensifies price competition. The greater the amount of retail advertising in a city, the greater is the competition between the retailers. The public is offered better and better values by the retailers and prices are steadily reduced.

   The retailer advertises for the purpose of inducing people to trade at his store. To a great extent it is a matter of indifference to him just what they buy from him, so long as he has the opportunity of supplying their needs. His advertising is his method of notifying his patrons of his latest offerings. His real work is to assemble, literally from all over the world, attractive lines of merchandise at attractive prices, and whether his advertising pays him or not does not depend so much upon the persuasiveness of his advertisements as upon his merchandising skill. If he is to secure any permanent return from his advertising, he must continuously render a merchandising service that tends to reduce, little by little, the price of every article that he carries in his stock.

   On the other hand, national advertisers are consciously and deliberately creating a demand for their trade-marked products for the purpose of capitalizing the good will which they create and then drawing additional profits upon this fictitiously evoked asset.

   Mr. Paul E. Derrick says of such manufacturers ("How to Reduce Selling Costs." As I shall have occasion to quote Mr. Derrick at length, it is worth while remembering that his authority and standing in the advertising profession is attested by the fact that he was the creator of the "Gold Dust Twins," the benign old gentleman so long associated with Quaker Oats, and the world famous character "Johnnie Walker.") :

   They said to themselves, "There are so many million people who need exactly what I am making. They are every day buying something for exactly the same purpose as mine is intended. Some of the things are just as good as mine, some are not so good, and some are absolute rubbish. The public does not know whose goods it is buying and it does not care, but if it knew that it could not get anything better than mine, at an equal price, and if it could identify mine, and was entirely satisfied with them, I believe they would be asked for at the shops."

   To market the goods, plans must be based upon efficient advertising to the consumer to interest him in the goods; to induce his initial purchase, and by the same means, to continue to stimulate his interest and purchase, and to create an atmosphere of individuality for the goods offered. He must be educated to think of "A's Biscuit," instead of biscuits; of "X Bread," instead of bread; of "B's Shoes," instead of shoes; of "Y Matches," instead of matches.

   Mr. Derrick's description of the way in which national advertising enables manufacturers to reduce merchants to more vending machines is illuminating. He is pleading with British manufacturers to follow the trail blazed by the national advertisers in this country, and for that reason describes the entire process in all its nakedness.

   With the public "pulling" on the retailer for goods, as a result of the consumer advertising, it will require distinctly less "push" on the part of (the manufacturer's) salesman to secure a rapid and thorough distribution of them, and a constantly lessening effort and expense to keep them always accessible to the buying public. Indeed, by no other means can sufficiently thorough and widespread distribution be effected to ensure the permanence of a large profitable business. Salesmanship of advertised, price-protected lines differs essentially from salesmanship applied to unadvertised lines. The modern traveler is a representative of identified and advertised goods that represent the "house," not a representative of a remote and phantom house that his customer knows only as an address to which he makes occasional remittance. If qualified he is quick to appreciate the tremendous selling force which he controls when he takes out a well advertised line.

   He finds the dealer more interested in the story of the advertising behind the goods than in mere discussion of the goods, or the price.

   There are many opportunities offered the modern salesman to show the retailer how he can hitch his interests to the big advertising power with which the manufacturer is backing his goods. It is the salesman's business to demonstrate to the shopkeeper that it is to his interest to identify his shop with the advertised line, to attach the free advertising power to his business. . . . One of the economies of advertising is that it relieves the salesman from a great deal of the drudgery of selling. He does not have continually to expound the, value of the goods. Nor does he have to parry and thrust with his customers on the question of price. He can at once enter into intimate relations with his customer. He should show him how to get the biggest possible part of the profit from the advertising which is being applied to the article. Thus relieved of spending his time in gaining the attention of the dealer, and bargaining and wrangling over prices and terms, etc., it is possible for the salesman to do his business with greater dispatch.

   Is it not plain that by making it unnecessary for a retailer to discuss the quality, price, and value of the goods the salesman offers him, the national advertising of goods renders the retailer powerless to serve the interests of his customers? As a matter of fact, the salesman who sells an advertised product is seldom trained by the manufacturer to discuss these matters with retailers. He is a high pressure order taker. The merchant is compelled to buy from him. His customers have been persuaded by advertising to demand the advertised goods, and failure to supply them would merely result in his customers going to another dealer for them. Then, to induce the retailer to join in exploiting the consumer, he is shown by the salesman that what should interest him is not the true value which he might be able to offer his customers by careful inquiry into the nature of the goods and "bargaining and wrangling over prices and terms" so that he may be able to sell them to consumers at the lowest possible price, but the greater profit he can make on the advertised goods, either because of high gross profits, or because of the rapid turnover.

   To cap the climax, Mr. Derrick says:

   If the advertising is being efficiently done, and the salesman properly exploits it, the dealer, just the same as the consumer, has a conviction of the enhanced value of the goods as compared with competitive lines, and the whole transaction of selling to the trade is to a great extent lifted out of price competition.

   Mr. Derrick restates this argument in mathematical terms in two tables. He compares the division between the distributors and the manufacturer of the money received from the consumer for a cake of advertised soap and of unadvertised soap. In both cases, 100% represents the price which the consumer pays the retailer for the soap.

                   The Unadvertised Soap

Retail selling price .................................. 100%
Selling costs based upon retail selling price:
   Retail charge ...................... 33-1/3%
   Wholesale charge ................... 16-2/3%
   Manufacturer's charge .............. 5 %
   Total Selling Cost ............................. 55%
Balance of retail selling price in hand for ex-
   penses, production and manufacturer's profit......... 45%
   
                    The Advertised Soap

Retail selling price ............................ 100%
Selling costs based upon retail selling price:
   Retail charge ......................... 25 %
   Wholesale charge ...................... 7-1/2%
   Manufacturer's charge .............5%
   Added for advertising .........   10%
                                     --- 15 %
   Total selling cost ............................ 47-1/2%
Balance of retail selling price in hand for pro-
   duction and manufacturer's profit ................... 52-1/2 %

   These selling charges are exhibited throughout on the basis of the retail selling price, and, in the first example, based upon turn-over, are equivalent to 33-1/3 per cent for the retailer, 25 per cent for the wholesaler, and 10 per cent for the manufacturer. In the latter example, the selling charges are equivalent, upon turnover, to 25 per cent for the retailer, 10 per cent for the wholesaler, and, including advertising, over 22 per cent for the manufacturer. We, however, find that we have still in hand 52-1/2 per cent for production and manufacturer's profit as against 45 per cent for the unadvertised article--a positive saving of seven and a half per cent upon the total turn-over, figured on final retail price.

   In other words, the economic advantage to the public is seven and a half per cent of its purchase price expressed in either better value, or lower price, or extra profit to the manufacturer. In any event it is increased national wealth due to increased economy and commercial efficiency.

   It is almost incredible that a man of Mr. Derrick's experience in business should speak of this as of economic advantage to the public. That it is of no advantage to anyone but the manufacturers and the advertising industries is easy to demonstrate by giving this demonstration an "acid test."

   Since Mr. Derrick has selected soap for purposes of illustration, we too will take soap for our counter-illustration. Instead, however, of comparing two hypothetical soaps, we will take two actual soaps, one of which is nationally advertised, and the other unadvertised. We will then be able to see what actually happens when the consumer's purchase price is divided between manufacturer, wholesaler, and retailer.

   The nationally advertised soap which we shall use for comparison is a flaked soap--the most successful brand on the market. It is advertised as a special product to be used "For all fine laundering." It comes in a five ounce carton, and costs twelve cents.

   The unadvertised soap is a similar product recommended "For delicate laundering," and costs twenty-two cents for a sixteen ounce carton.

   The reputation of the advertised soap flakes is a reputation created by national advertising. The reputation of its unadvertised competitor is based upon the fact that it is sold with the recommendation of the grocery department of one of New York's largest department stores. There is no difference between the claims made for the two products. The directions for using them are identica. My own tests of the two indicate no discernible difference between them.

   Now if both these two products are figured on the basis of 5 ounce cartons, and the consumer's expenditure divided in accordance with Mr. Derrick's formulas, this is how each factor in the sale would share in the consumer's money

                The Unadvertised Soap Flakes

Retail price of 5 ounces ............. ............ $.06875
Selling costs based upon retail selling price:
   Retail charge (33-1/3%) ........... $.02291-2/3
   Wholesale charge (16-2/3%) ........  .01145-5/6
   Manufacturer's charge (5%) ........  .00343-3/4
   Total selling cost (55%)...........  .0378125
Balance of retail selling price in hand for
   production and manufacturer's profit
   (45%) .............................              $.0309375

               The Advertised Soap Flakes

Retail price of 5 ounces .......................... $.12
Selling costs based upon retail price:
   Retail charge (25%) ................ $.03
   Wholesale charge (7-1/2%) .......... .009
   Manufacturer's charge (5%) ... $.006
   Added for advertising (10%) ..  .012
                                   .... .018
Total selling cost (47-1/2%) ...................     .057
Balance of retail selling price in hand for produc-
   tion and manufacturer's profit (52-1/2%)........ $.063

  

 

  THE UNADVERTISED SOAP FLAKES vs. THE ADVERTISED SOAP FLAKES

   The two circles show the distribution of what the consumer pays for five ounces of the two soap flakes. The stippled areas show the amounts received by the manufacturer; the white areas, the amounts received by the wholesaler and retailer. Note how the shares of the wholesaler and retailer are reduced in order to make room for the national advertising and the added profit of the manufacturer of the advertised soap flakes, and how much larger is the sum paid by the consumer for the same quantity of advertised soap flakes.

   These two tables show that every time the advertised article is bought by a consumer, he pays nearly twice as much for it as he would for the unadvertised article. He loses nearly 50 per cent of what he pays; the retailer loses twenty-five per cent of his margin; the wholesaler loses on his margin forty-five percent. But the manufacturer, after deducting marketing costs, (which instead of being less than on the unadvertised soap, as Mr. Derrick assumes, are nearly six times as much), gets more than twice as much for his five ounces as does the manufacturer of the unadvertised article.

   Obviously, the manufacturer doesn't, as Mr. Derrick suggests, give the additional price which national advertising enables him to get to the public in a better value or a lower price.

   He takes it out of the consumer's and retailer's and wholesaler's pocket-books and puts it into his own.

   Isn't Mr. Derrick, to say the least, disingenious in describing the process of selling a nationally advertised product as an addition to the national wealth, when it is really a method of transferring wealth from the consumer, the retailer, and the wholesaler, to the manufacturer and the advertising industries which he supports? The consumer of an advertised article, it is plain, loses right and left, at every step in the movement of the goods from the manufacturer to his laundry, solely in order to contribute ten per cent of his expenditures to the support of the advertising industry and to enable manufacturers to double, treble, and quadruple their profits.

   The greater the investment which the manufacturer makes in national advertising, the larger is the gross profit which he must make on his product in order to cover the expense of his advertising and the interest on his investment. If he increases his prices or reduces the quantity in his package, or lowers the cost of production, he is in position not only to meet heavy expeditures in advertising, but eventually to increase the amount which he can spend for this purpose. If, instead of spending $100,000.00 in creating and stimulating consumer demands for his goods, he spends $250,000.00, he is then in position to secure an even higher price for his goods and to increase his sales as well.

   All national advertising tends to create vicious chains in which the increases in national advertising appropriations by manufacturers tend to increase the price level of all goods. As nationally advertised brands become more and more the dominant factors in any line of goods, the prices set by the manufacturers upon the nationally advertised goods become the market prices for all goods in the line, whether advertised or not. The unadvertised goods naturally profit by the situation. Instead of being normally priced at something above their cost of production, they are priced just below the price of the advertised goods. If nationally advertised canned soup sells at ten cents, and the unadvertised soups could be sold at a fair profit at five cents, instead of the unadvertised soups being sold at five cents, they are naturally sold at just a little below the price asked for the dominant advertised soup, at nine cents. They are priced just a little lower than the nationally advertised line, but not nearly as low as they would be if the nationally advertised goods were not in existence at all.

   Where is there in all this the slightest economy for those who consume nationally advertised products? If the manufacturer succeeds in his advertising campaign, he succeeds in increasing his individual profits. He succeeds in hypnotizing the public into asking for his goods irrespective of the price he sets upon them, and at the same time is enabled to demand from the distributors a larger share of the margin they would ordinarily receive from the public for the goods.

   But the manufacturers are not content with the power which national advertising alone gives them in fixing the prices on their products. They have spent fortunes, both as individuals and banded in organizations, in trying to fix by law the prices at which retailers might resell to the public. So far as custom and advertising enabled them to do it, they always fix their prices. But what they are seeking by federal legislation to secure for themselves is the absolute power to reduce retailers to mere vending machines selling their products at uniform prices and at profits fixed by themselves. At one time it was the practice for them to try to do this by means of resale contracts, or by licenses based upon patents, but the courts held these contracts and methods to be against public policy and to be violations of our anti-trust laws. At nearly every session of Congress for the past fifteen years they have tried to do it by securing special legislation, but Congress, for the same good reason, has refused to enact any law that would make the fixing of resale prices legal.

   Unable to restrain price competition in this way, they have been driven to redouble the volume and the effectiveness of their advertising. Normal competition, competition in prices which tends to produce lower price levels, is thus more than ever replaced by advertising competition--competition in persuading the public that their brand is so much better than any competing product that the public will demand it in spite of high prices.

   In addition to giving them power to raise consumer prices, it gives them the power to fix the profits which wholesalers and retailers who handle their products shall make. The greater the consumer pressure upon the dealer, the greater power has the manufacturer to reduce the discounts which he allows to his distributors, until on many advertised articles the distributors do not make enough to cover their operating expenses.

   As Mr. Edward A. Filene puts it in the statement from which we have already quoted:

   I have been through it and suffered from trademarked articles that I had to sell at less than cost. I had to buy and sell at a price that did not leave a living profit.

   What happened with trade-marked goods, which at first we were induced to handle because of a reasonable profit, was that the retail price became fixed by advertising and custom. You could not increase it, because if you increased it, the customers thought all your goods were subject to the same increase, which was not true. But the price to us was increased by the manufacturer until there was not a living profit in distributing the goods.

   You can get a great many instances of that kind of thing. The tendency is with many trade-marked articles, that in time the cost will go up, and that at first the increased cost will be borne by the middleman or retailer, until the retailer gets up against the wall, and is compelled to get a newer thing. In many cases a better article could have replaced those articles, provided there had been freedom to do so.


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