THE EFFECT OF ADVERTISING ON THE SALES PERFORMANCE OF SERVICE INDUSTRIES IN UGANDA: A CASE STUDY OF PAX INSURANCE CO. LTD, COLVILLE STREET, KAMPALA
ABSTRACT
The study was about establishing the effect of advertising on sales performance with Pax insurance Co. Ltd as the case study. The specific objectives of the study included; to determine the effect of advertising on the market share, to establish the effect of advertising on the profitability and to examine the effect of advertising on the rate of asset returnof Pax insurance co. ltd.
The study followed a descriptive research design with quantitative method. Secondary data was obtained from the management and was used for analysis. Other sources of information included Journals, books and internet.
The study revealed through linear regression that there is a statistically significant effect of advertising expense on the sales of the company. The study further showed that number of customers significantly impacted the sales performance of the company. From the findings, the researcher concluded that the decline in sales was partly due to the amount invested in advertisement that is the advertising expense of the company and the number of customers buying company products.
In relation to the problem of declining sales of the company, the researcher recommended that the company focus on increasing advertising expenditure, increase on number of supermarket branches country wide, look at sales promotion strategies employed by the competitors and lastly improve on customer services offered.
CHAPTER ONE
INTRODUCTION
1.0 Introduction
This chapter presents background to the study, Statement of the problem, purpose of the study, objectives of the study, Research Questions, scope of the Study and Significance of the Study.
1.1 Background to the study
Advertising is any paid form of non-personal presentation and promotion of ideas, goods, or services by an identified sponsor (Kotler and Armstrong, 2005). Worldwide, there are various forms of advertising adopted by various organizations such as informative advertising, persuasive advertising and comparison advertising. Most organization uses informative advertising to inform consumers about a new product or service whereas firms use persuasive advertising to describe available products and services, corrects false impressions and builds the image of the company.
Most insurance organizations on the African continent use advertising to address to insurance customers (transformational), this category may also include business reports, information brochures of announcements on payment of new shares, reports on investment program results and several other financial announcements (informational). The first type contains dominant psychological messages, while the latter involves factual or logically verifiable messages, in order to impart banks’ products and services to current and potential customers (Schware, 2005).
The selection of insurance advertising means depends on a company’s target group. Most insurance institutions in East Africa such as SWICO address their advertising to customers and thus advertise their products and services through the mass media. The press and television are the preferred means for larger organizations that have branches across Uganda. Advertisements on investment programs usually appear in the trade press, while investment programs appear in almost all wide circulation newspapers as they are addressed to small investors (Schware, 2005).Advertising if used at the right time and in an effective way can lead to the creation of awareness about a product and service and very importantly, create and build a brand.
Pax insurance co. ltd located Colville street, Kampala in addition to media advertising concentrates on promotions, events, discount offers and loyalty rewards including the u-club cards for accumulating point whenever one shops so as to capture customers. Promotions like winning a car, shopping vouchers keep the customers buying promptly (Uganda Securities Exchange, 2014).
MC Cathy (2006) argues that advertising’s complexity stems from the nonlinear nature of its effects, its interaction with other variables in generating sales, and the fact that its effects can play out over time. The shape of sales response patterns and the dynamics that characterize the sales-advertising relationship have been the subject of discussion and controversy in research circles for many years. Today’s growing emphasis on advertising accountability reminds us about and underscores the importance of advertising sales response modeling since it can enable management to forecast sales, estimate optimal advertising levels and thus reduce operational inefficiency. This suggests an empirical investigation which constitutes a step in that direction and, in the process; it aims at shedding some light on the sales-advertising relationship subject.
1.2 Statement of the Problem
Pax insurance co. ltd carries out frequent advertising of their products to increase their sales volume.It advertises using radio, television and newspapers. Despite all the advertising efforts, organizations have realized a non-proportionate rise in the demand for their products as compared to the advertising expenses. Customers have barely increased therefore negatively impacting the sales of these companies (Dunn et al., 2008). Advertising expense has proven to be cost ineffective for the time and this has prompted businesses to cut on their other expenses like wages, allowances and also laying off employees. Thus, this study sought to establish the effect of advertising on sales performance of service industries in Uganda.
1.3 Objectives of the Study
1.3.1 General Objective
The main aim of the study was establish the effect of advertising on sales performance of service industries in Uganda. A case study of Pax insurance co. ltd, Colville Street, Kampala.
1.3.2 Specific Objectives
- To determine the effect of advertising on the market share of Pax insurance co. ltd
- To establish the effect of advertising on the profitability of Pax insurance co. ltd.
- To examine the effect of advertising on the rate of asset return of Pax insurance co. ltd.
1.4 Research Questions
- What is the effect of advertising on the market share of Pax insurance co. ltd?
- What is the effect of advertising on the profitability of Pax insurance co. ltd?
- What is the effect of advertising on the rate of asset return of Pax insurance co. ltd?
1.5 Scope of the Study
This covers the content, geographical, and time.
1.5.1 Content Scope
The study covered the effect of advertising on sales performance. Major emphasis was put on effect of advertising on the market share, profitability and the rate of asset return.
1.5.2 Geographical Scope
The study was carried out at Pax insurance co. ltd located on Colville Street, Kampala.
1.5.3 Time Scope
The study considered 2012-2016 as the period of data to be considered in the organization. This because the information got was current basing on economic changes in organizations.
1.6 Significance of the Study
This study is of importance to the researcher because it provides information for academic purposes and also complements other previous studies on the same subject.
The study is a source of reference on how to revive, adapt and also follow the advertisement according to the dynamic markets available to the retail businesses.
This study was successfully carried out and it helps supermarkets and experts to gauge the amount of importance to attach on advertising as a promotional tool.
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This Chapter highlights the ideas put forward by some of the researchers about the subject under investigation and their findings.
2.1 Review of variables
2.1.1 Advertising
Advertising is any paid form of non personal presentation and promotion of ideas, goods, or services by an identified sponsor (Kotler and Armstrong, 2010). There are various forms of advertising like informative advertising, persuasive advertising, comparison advertising, and reminder advertising. Informative advertising is used to inform consumers about a new product, service or future or build primary demand. It describes available products and services, corrects false impressions and builds the image of the company, (Kotler, 2010).Advertising can be done through print media which includes news papers ,magazines ,brochures ,Audio media for example Radio, and visual media which includes billboards, and television (Kotler and Armstrong 2010).
Dunn et al. (2008) viewed advertising from its functional perspectives, hence they define it as a paid, non-personal communication through various media by business firms, non-profit organization, and individuals who are in some way identified in the advertising message and who hope to inform or persuade members of a particular audience. Advertising is the non-personal communication of marketing-related information in a target audience, usually paid for by in order to reach the specific objectives of the sponsor. Advertising is a message paid for by an identified sponsor and delivered through some medium of mass communication. Etzel et al. (2007) noted that the purpose of advertising is to create awareness of the advertised product and provide information that will assist the consumer to make purchase decision, the relevance of advertising as a promotional strategy, therefore, depends on its ability to influence consumer not only to purchase but to continue to repurchase and eventually develop-brand loyalty. Consequently, many organizations spend a huge amount of money on advertising and brand management.
Advertising may influence consumers in many different ways, but the primary goal of advertising is to increase the probability that consumers exposed to an advertisement will behave or believe as the advertiser wishes (Stafford and Stafford, 2003). Thus, the ultimate objective of advertising strategies is to sell things persuasively and creatively. Advertising is used by commercial firms trying to sell products and services; by politicians and political interest groups to sell ideas or persuade voters by not-for-profit organizations to raise funds, solicit volunteers, or influence the actions of viewers; and by governments seeking to encourage or discourage particular activities, such a wearing seatbelts, participating in the census, or ceasing to smoke. The forms that advertising takes and the media in which advertisements appear are as varied as the advertisers themselves and the messages that they wish to deliver (Schmidt and Spreng 2000). Advertising is an indicator of the growth, betterment and perfection of the business environment. Not only does advertising mirror the business environment, it also affects and gets affected by our style of life. It is not at all surprising that advertising is one of the most closely scrutinized of all business institutions. In today’s environment, advertisers are closely examined by the target audience for whom the advertisement is meant for in the society.
2.1.2 Sales performance
According to Steve (2006), sales performance refers to the act of performing financial activity. In broader sense, sales performance refers to the degree to which financial objectives being or has been accomplished. It is the process of measuring the results of a firm’s policies and operations in monetary terms. It is used to measure firm’s overall financial health over a given period of time and can also be used to compare similar firms across the same organization or to compare industries or sectors in aggregation.
According to Gibson (2010), sales performance is a subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm’s overall financial health over a given period of time, and can be used to compare similar firms across the same organization or to compare industries or sectors.
There are many different ways to measure sales performance, but all measures should be taken in aggregation. Line items such as revenue from operations, operating income or cash flow from operations can be used, as well as total unit sales. Furthermore, the analyst or investor may wish to look deeper into financial statements and seek out margin growth rates or any declining debt (Gibson, 2010).
2.2 Effect of advertising on the market share
The inherent complexity in quantifying the marketing activities has often become a barrier in developing metrics for marketing measurement. O’Sullivan and Abela (2007) report that the ability to measure the internal marketing performance causes a significant impact on firm performance, profitability; stock return and marketing’s stature within the firm. In recent years a number of studies suggest that a firm’s advertising directly affects stock returns. This is in addition to the indirect effect of advertising through increase in sales revenues and profits (Hanssensetal, 2007).
The effect of the advertising on consumers rests on the theory of message repetition. Researchers have tried to estimate the effects of advertising on brand sales using field data (Leone and Schultz 2007). Most of these studies focus on many technical issues involved in efficiently capturing the unbiased effects of advertising, given the limitations of field data (Hanssens, Parsons, and Schultz 2007).
Deeper analysis of these studies finds that the effects of advertising are significantly greater than zero but do vary by market and product characteristics (Assmus and Lehmann 2004). Few studies have addressed the effect of advertising effects on market share. Little has been researched on capturing the impact of how the effects vary by creative medium or vehicle, and time of day for broad cast advertising. While marketers know that that consumer behavior is influenced by multiple factors, yet little research has been done on understanding the impact using the integrated marketing mix model (Sethi, 2009). This is attributed to the fragility of advertising’s effects and the complexities involved in getting bias-free estimates.
Naik and Raman (2003) present an insight as to how a marketer or a shareholder is keen on measuring the impact of advertising investment on market performance. To assess these effects marketers often use regression analysis. Arguing that OLS models introduce biasing effects, they put forward the Weiner Kalman Filter that provides estimates that are closer to the true parameters. Advertising’s effectiveness lies in its capability to help stimulate or maintain sales (Sethi, 2009). Thus, advertising is frequently used as an independent variable in explaining changes in sales.
Lodish et al (2003) believe that advertising effectiveness has to be captured by the additional sales of a product over and above those that would have happened in absence of any advertising or promotion. Although advertising managers have long believed that advertising’s impact on market share can persist longer than the current period, the tendency to assume that advertising’s effect on sales is short-term is yet prevalent (Clarke 2001). The inability of measures to differentiate the impact of advertisement between its short term and long term effects have resulted in wastage of advertising expenditure (Lodish et al, 1998).
Bass (1998) uses the analogy of capital budgeting process to capture the effectiveness of advertisement spending on market share. He suggests that the brand managers be allowed to spend as much as they want on advertising if the return they generate is able to beat an internally agreed hurdle. His belief rests on the premise that absolute size of the advertisement budget does not matter but the return on that budget is the criteria for advertisement effectiveness.
2.3 Effect of advertising on the profitability
The essence of advertising is to increase profitsby improving sales performance. (David et al, 2008). Advertising combines with a host of other influences to determine what contribution advertising makes to the buyer’s purchase decision. The retailer john Wanamaker is said to have remarked that he knew that only half of his advertising was effective but he was unable to know which half it was.
It is through advertising or other forms of promotion that brands in different market segments can effectively tell people in the market that a product is intended specially for them. The significance of advertising is to let customers know that an established brand is still around and it has certain characteristics, uses and benefits (Pride, 2009).
Effective advertising can increase sales of advertisers products, and by so doing increase their profits. Advertising provides consumers and other prospects with information about different products that are available to them. This enables consumers to compare and choose between the products and encourages competition. Competition encourages companies to be more price and quality conscious so as to retain customers and clients (Cambridge international college training manual, 2000).
The decision to advertise implies a decision to compete in a new and aggressive way with in the market. This means the provider will no longer rely too solely upon personal sales man ship to gain distribution. Instead he implies his readiness to and intention of speaking directly to consumers in abroad countries. The decision to advertise also helps the marketer to expand his share in the market. Advertisement helps in development and expansion of the market and the consumer acceptance of the product. Dunn (2006) points out that the market needs and conditions are changing; there fore there is need for creativity in selling. This will show the company what to produce so as to satisfy the needs of the users. When companies produce such a commodity and they advertise, there is an automatic high response in consumption. Thus showing the relationship between advertising and sales performance.
Penchman(2002) found out that advertising has a greater potential of building awareness of people hence obtaining a high preference in the market share because a big percentage of the population has one or more of the mass medium such as radios and television. This fact introduces the advertised company to many people. If the advertising is satisfying it will lead to increase in volume of sales.
Pride et al (2009) observes that advertising often stimulates demand thus stimulating sales. For advertising to have a direct relationship with sales revenue, the entire market mix must be viewed by the customer as the right one.
Gordon (2003) states that companies advertise in order to compete in a new and aggressive way with in the marker, to increase their market share through increased customer, utilize the low cost way of teaching customers to create marketing approaches.
David et al (2008) recognizes that many scholars have heard different views on the effect of advertising on sales performance .however most of them agree that effective advertising will eventually increase revenue.
Jefikins (2009) has stated that in a competitive society there is not only competition between rival advertisers but choice between their rival products and services. Also people forget very easily and there fore the biggest advertiser in the world will get organization erupt very easily if he stopped advertising. Companies advertise to create familiarity with or of a product, which helps to create confidence in it. If a product is simply made available, it is important to inform people of its existence.
2.4 Effect of advertising on the rate of asset return
A customer or client or buyer is the recipient of a good, product, product or idea, obtained from a seller, vendor or supplier for a monetary or other valuable consideration. By making record of who your customers are and what you sold to them, you can work out who is buying or not hence determining your customer base. Because your customers are the most important people for any business because through their purchase, they increase sales; a resource upon which the success of the business depends thus may increase the rate of asset return with more sales. Customer satisfaction is at the heart of the selling process and one estimate is that it costs five times as much to attract new customers as it does to keep an existing one. The relationship between the customer and the business is therefore an important one because it increases repeated purchase increasing sales of the business in return (Dunn, 2014).
However good your product or service is, the simple truth is that no one will buy it if they don’t want it or believe they need it. And you will not persuade anyone that they want or need to buy what you are offering unless you clearly understand what it is your customers really want. Knowing and understanding customer needs is at the center of every successful business, whether it sells directly to individuals or other businesses. Once you have this knowledge, you can use it to persuade potential and existing customers that buying from you is in their best interest and hence enhancing your sales (Info entrepreneurs, 2009)
Customers are the most important people for any organization because they are the resource upon which the success of the business depends. Therefore, companies aim at creating and increasing customer base because customers are a main source of sale revenue for the company. The customer base may be considered the business’s target market, where customer behaviors are well understood through market research or past experience in the end company rate on the number of company assets may increase. (Forbes, 2013)
In today’s world, building relationships with customers is incredibly valuable to the success and growth of a business. Just one loyal customer can generate ongoing revenues, including new customer referrals that bring more sales to the business. Multiply this by additional long-term clients and leads, and the business will thrive (Lisa, 2014).
Businesses and organizations depend on repeat purchase, and therefore to establish a standing relationship between them and their customers so as to provide revenue and certainty of such organizations. For this same reason, company’s asset returns may increase in the process (Schware, 2005)
2.5 Conclusion
A great deal of research into relationship between sales response and advertising indicated that it is a function with decreasing returns. That is with more and more input, one gets less and less out put. This function rises slowly at first and then more rapidly before leveling off. Because most advertising campaigns must overcome a substantial inertia in the market. As the impact of repeated messages and resulting consumer learning attracts a large group of consumers, and sales per unit increase rapidly. As time passes, returns to advertising diminish because demand has, to a large extent been satisfied and more advertising input is necessary to convert a prospect in to a consumer. In general this response function has been found to exhibit decreasing returns as advertising expenditure is increased.
