Transcript Industry Profit or Producer Surplus

INTERPRETING AND COMMUNICATING
CHECKOFF PROGRAM EVALUATION RESULTS
Dr. Gary W. Williams
Professor, Agricultural Economics
Director, Texas Agribusiness Market
Research Center (TAMRC)
Dr. John P. Nichols
Professor, Agricultural Economics
Interim Head, Department of Agricultural Economics
Texas A&M University
College Station, Texas
“Quantitative Evaluation of Advertising and Promotion Programs”
Commodity Promotion Evaluation Workshop
for Researchers and Managers
2006 Spring NEC-63 Meeting
Monterey, California
March 9, 2006
The Research
Isn’t Done …
… Until the Results Are
Communicated!
Why Do Checkoff Groups Want
Their Programs Evaluated?
Simply to satisfy the legislative requirements
To demonstrate their effectiveness in
expanding markets and enhancing profit.
To assist in the design and adjustment of
the program’s long-run strategic plan
To serve the information needs of contributors,
industry, and other stakeholders
To provide the necessary economic
ammunition to respond to legal challenges
What Do Evaluation Studies
Typically Provide?
Measures of Program “Effectiveness”
Retail Sales and Price Impacts
Benefits to Producers and Other Program
Contributors
Other Measure of Effectiveness:
- Production and Industry Growth Impacts
- Market Share Impacts
- Export Competitiveness Impacts
What Do Evaluation Studies
Typically Provide?
Aggregate Measures of Effectiveness
Benefit-Cost Ratio (BCR): The total benefits
of the program divided by the total costs
of promotion.
Marginal Rate of Return (MRR): The percent
change in program benefits from a 1%
change in advertising expenditures.
Internal Rate of Return (IRR): The return
that a firm earns if it expands or invests
in itself rather than investing that money
elsewhere.
Communication Dilemma
Results of Checkoff Program
Evaluations Are Often:
Not Well Understood
Considered “Unbelievable”
RESULTS NOT UNDERSTOOD
Economic Jargon Often Gets in the Way
“Advertising Elasticity” … instead of how
responsive demand is to advertising
“Marginal Effects of Advertising”… instead
of the additional sales from each additional
dollar in advertising
“Spillover Effects of Advertising” … instead
of how your advertising affects your
competitors’ markets and how their
advertising affects your market
“Producer Surplus” “Economic Rent”
… instead of more easily understood
concepts like “profit” and “revenue”
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
Estimated AMEs reported in different
forms and calculated in different ways
- Retail BCR: increase in retail sales revenue
per dollar invested in advertising
- Industry Profit or Producer Surplus BCR: increase in industry
profit or producer surplus per dollar invested in advertising
- Static BCR: increase in returns per $ of advertising assuming
nothing (including price) changes except demand as a result of
advertising
- Simultaneous BCR: increase in returns per $ of advertising
assuming demand as well as supply, price and other relevant
market variables can change as a result of advertising
- Discounted BCR: any of previous BCRs in which the returns are
discounted to present value to account for the time value of
money
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
Estimated AMEs reported in different
forms and calculated in different ways
- Retail BCR: increase in retail sales revenue per dollar
invested in advertising
- Industry Profit or Producer Surplus BCR:
increase in industry profit or producer surplus
per dollar invested in advertising
- Static BCR: increase in returns per $ of advertising assuming
nothing (including price) changes except demand as a result of
advertising
- Simultaneous BCR: increase in returns per $ of advertising
assuming demand as well as supply, price and other relevant
market variables can change as a result of advertising
- Discounted BCR: any of previous BCRs in which the returns are
discounted to present value to account for the time value of
money
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
Estimated AMEs reported in different
forms and calculated in different ways
- Retail BCR: increase in retail sales revenue per dollar
invested in advertising
- Industry Profit or Producer Surplus BCR: increase in industry
profit or producer surplus per dollar invested in advertising
- Static BCR: increase in returns per $ of
advertising assuming nothing (including price)
changes except demand as a result of
advertising
- Simultaneous BCR: increase in returns per $ of advertising
assuming demand as well as supply, price and other relevant
market variables can change as a result of advertising
- Discounted BCR: any of previous BCRs in which the returns are
discounted to present value to account for the time value of
money
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
Estimated AMEs reported in different
forms and calculated in different ways
- Retail BCR: increase in retail sales revenue per dollar
invested in advertising
- Industry Profit or Producer Surplus BCR: increase in industry
profit or producer surplus per dollar invested in advertising
- Static BCR: increase in returns per $ of advertising assuming
nothing (including price) changes except demand as a result of
advertising
- Simultaneous BCR: increase in returns per $
of advertising assuming demand as well as
supply, price and other relevant market
variables can change as a result of advertising
- Discounted BCR: any of previous BCRs in which the returns are
discounted to present value to account for the time value of
money
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
Estimated AMEs reported in different
forms and calculated in different ways
- Retail BCR: increase in retail sales revenue per dollar
invested in advertising
- Industry Profit or Producer Surplus BCR: increase in industry
profit or producer surplus per dollar invested in advertising
- Static BCR: increase in returns per $ of advertising assuming
nothing (including price) changes except demand as a result of
advertising
- Simultaneous BCR: increase in returns per $ of advertising
assuming demand as well as supply, price and other relevant
market variables can change as a result of advertising
- Discounted BCR: any of previous BCRs in
which the returns are discounted to present
value to account for the time value of money
RESULTS NOT UNDERSTOOD
Results Not Straight-Forward
in Their Interpretation
No Clear Criteria for Interpreting AMEs
- BCR > 1 typically interpreted to mean that
the returns to advertising > the costs
- But how high must the BCR be in order to
justify a conclusion that benefits of the
program sufficiently exceed the costs to
warrant continuation of the program?
- Typical BCRs range from 2:1 to 10:1. So how
do we interpret a BCR of 50:1 or 100:1?
- And how do we interpret a BCR at the bottom
of or below the typical range? Negative?
RESULTS NOT UNDERSTOOD
Results Do Not Answer Fundamental
Questions of Checkoff Contributors
Is the Advertising a “Good” Investment for
Those Who Pay for the Program?
- Could they do better by keeping checkoff money
and investing in other common investment
alternatives?
- Economists: A fundamental concern for program
evaluations is the opportunity cost of the
checkoff funds.
- Non-Economists: If contributors think they could
do better by investing checkoff funds in financial
instruments and earn a greater return, then they
will be unconvinced by an estimated BCR that is
positive and “high.”
RESULTS NOT UNDERSTOOD
Results Do Not Answer Fundamental
Questions of Checkoff Contributors
Whether or Not and How Contributors
Personally Benefit from Their Contributions?
- Contributors expect that the money they
contribute to a Checkoff Program will be
spent in such a way that they will individually
be better off than they would have been
without contributing.
- The AMEs we typically provide do little to
communicate how different groups of
contributors with different economic
characteristics benefit from checkoff
program activities.
RESULTS NOT “BELIEVABLE”
Costs Are Observable But Benefits Are Not
Contributors See the Effects of Checkoff
Assessments on their Bottom Lines But Have No
Way of Knowing What Portion of Their Revenues
Are Directly Attributable to Those Assessments
- Evaluations specifically intended to measure the
portion of industry revenues that can be
attributed to checkoff promotion programs.
- Compare actual sales or revenues to nebulous
concepts like “what might have been earned in
the absence of the program.”
- We tell producers that the $5 or $6 of revenue
earned for every $ spent on advertising is actually
in their pockets but they just don’t know it.
RESULTS NOT “BELIEVABLE”
Costs Are Observable But Benefits Are Not
Contributors See the Effects of Checkoff
Assessments on their Bottom Lines But Have No
Way of Knowing What Portion of Their Revenues
Are Directly Attributable to Those Assessments
- Evaluations specifically intended to measure the
portion of industry revenues that can be
attributed to checkoff promotion programs.
- Compare actual sales or revenues to nebulous
concepts like “what might have been earned in
the absence of the program.”
This Concept Has Proved
- Difficult
We tell producers
that
the $5 or $6 of revenue
to
Communicate.
earned for every $ spent on advertising is actually
in their pockets but they just don’t know it.
RESULTS NOT “BELIEVABLE”
Large BCRs Often Taken As
Implying Large Market Impacts
Checkoff Programs Are Only One of Many
Factors That Impact Markets
- Total checkoff assessment collections compared
to farm sales are usually quite small (less than
0.5% in most cases).
- Large BCRs can be calculated by dividing a small
return by an even smaller cost.
- So even if the BCR is large, the actual market
impacts may actually be quite small and easily
overwhelmed by the effects of the many other
market forces.
- Nevertheless, “large” positive BCRs are often
taken to mean that the program has a large
impact on market demand, prices, profitability.
RESULTS NOT “BELIEVABLE”
Checkoff Boards Tend to Oversell
Actual and Potential Program Impacts
Contributors Come to Expect Large Impacts
When the Impacts Are Usually Quite Modest
- When they do not see the large effects they have
been told to expect, they disbelieve the research
results.
- Contributors must be educated about the true
potential of their checkoff programs.
- Sell checkoff programs as tools to contribute to
higher demand, prices, and profits in good years
and to reduce downside pressure in bad years
rather than as a panacea for the financial
problems faced by contributors.
RESULTS NOT “BELIEVABLE”
Focus on Inappropriate
Measures of “Effectiveness”
Market Price a Key Market Indicator But
a Poor Indicator of Program Effectiveness
- Price effects of advertising depend on how
responsive supply is to price changes.
- In industry with no supply controls and highly
elastic (price responsive) supply, most benefits
of advertising come from a sales increase rather
than from a price increase.
- In industry with inelastic (price unresponsive)
supply, most advertising benefits come from price
increase rather than from sales increase.
- BUT long-run supply response can dampen price
effects of advertising over many years.
RESULTS NOT “BELIEVABLE”
Focus on Inappropriate
Measures of “Effectiveness”
The Appropriate Measure of “Effectiveness”
Depends on Objectives of Promotion Program
- We tend to report BCRs and other AMEs because
we assume that the driving objective of all
promotion programs is to enhance profitability.
- Strategic Plans often reveal other objectives or
sub-objectives of more immediate interest and
relevance.
ALB VISION
“A unified, thriving American Lamb Industry that
concentrates its resources around a prioritized and
measurable plan that fosters the opportunity for
profitability of all Contributors.”
ALB STRATEGIC PLAN
1. Increase American Lamb demand by 19% by 2010
2. Protect & enhance the business climate for
American lamb
3. Leverage the ALB budget
4. Expand markets and market share for American
lamb
5. Establish open and interactive communications
with all segments of the industry
6. Gather research data and evaluate programs
ALB VISION
“A unified, thriving American Lamb Industry that
concentrates its resources around a prioritized and
measurable plan that fosters the opportunity for
profitability of all Contributors.”
ALB STRATEGIC PLAN
1. Increase American Lamb demand by 10% by 2010
2. Protect & enhance the business climate for
American lamb
3. Leverage the ALB budget
4. Expand markets and market share for American
lamb
5. Establish open and interactive communications
with all segments of the industry
6. Gather research data and evaluate programs
IMPROVING COMMUNICATION
Recognize that Communication
is a Two-Way Street
For Researchers to Communicate Better, Then
Checkoff Groups Need to Better Communicate
What They Want from an Evaluation
- What do you want to know about your programs?
- What metrics do you focus on?
- What implies program success to you?
Increased Sales?
Higher Price?
Industry Growth?
Increased Exports?
Reduced Imports?
IMPROVING COMMUNICATION
Recognize that Communication
is a Two-Way Street
Also, Researchers Need to Know Why a Program
Evaluation is Wanted
- Legislative reporting requirements?
Let the researchers design the study objectives
and measures of effectiveness.
- Assist in program management?
Researchers need to know what that means to you
so they can provide measures to meet your needs.
- Strategic Plans provide insights into appropriate
evaluation objectives and measures.
IMPROVING COMMUNICATION
Inform Boards About What
Can and Cannot Be Done
They Usually Do Not Understand Extensive
Data Requirements
They Need to Understand the Types of
Evaluations Typically Not Done By
Agricultural Economists
- Consumer attitude and awareness studies typically
done by advertising firms, market research firms, and
business school researchers.
- The typical checkoff program evaluation attempts to
measure directly the effects of advertising on demand
without concern for attitudes and awareness.
PROMOTION
RETAIL
SALES/PRICE
IMPROVING COMMUNICATION
Inform Boards About What
Can and Cannot Be Done
They Also Need to Understand What Our Tools
Will Allow US to Do and NOT Do Effectively
- CAN DO EFFECTIVELY: Provide reasonable
estimates of the returns to checkoff program
activities in the aggregate.
- CANNOT DO EFFECTIVELY: Provide reasonable
estimates of the returns to specific checkoff
program activities.
?
Firm
Performance
IMPROVING COMMUNICATION
Inform Boards About What
Can and Cannot Be Done
They Also Need to Understand What Our Tools
Will Allow US to Do and NOT Do Effectively
- CAN DO EFFECTIVELY: Provide reasonable
estimates of the returns to checkoff program
activities in the aggregate.
- CANNOT DO EFFECTIVELY: Provide reasonable
estimates of the returns to specific checkoff
program activities.
All
Firm
Activities
Firm
Performance
IMPROVING COMMUNICATION
Other Ways to Improve Communication
Reduce economic jargon in reports
Standardize and categorize measures of
program effectiveness
Develop measures that more readily convey
the success or failure of checkoff programs
in meeting their objectives
Be careful not to imply that large estimated
returns mean large program effects on demand,
prices, profits, etc.
Inform and educate on what checkoff programs
can reasonably be expected to achieve in terms
of magnitudes of effect
IMPROVING COMMUNICATION
Other Ways to Improve Communication
Be careful not to oversell what advertising
programs can accomplish
$ Sales
If you take all the credit for
periods when sales and
prices are growing …
… then you’ll have to take
the blame if sales and price
ever drop.
And contributors won’t
believe the estimates of
positive returns to the
advertising paid for with
$ Advertising Expenditures
their checkoff assessments.