Advertising Allowance – Definition

Cite this article as:"Advertising Allowance – Definition," in The Business Professor, updated February 10, 2020, last accessed August 13, 2020, https://thebusinessprofessor.com/lesson/advertising-allowance-definition/.

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Advertising Allowance Definition

An advertising allowance refers to money (allowance) that manufacturers of products pay retailers to publicize their products. Advertising allowance comes in diverse forms, while some manufacturers or service providers pay money to retailers, others offer retailers discounts on products or service purchased as a form of compensation.

The Advertising allowance method is used by manufacturers who need to get news about their products out there through retailers. The money paid covers expenses incurred by the retailer in the course of marketing products. Retailers are not paid advertising allowance arbitrarily, rather, there are requirements they must meet before they can access the allowance. For instance, a manufacturer can require that retailers present proof that they advertised their products as well as converting some advertisements to sales.

A Little More on What is an Advertising Allowance

Payment of advertising allowance to retailers is a mechanism used by manufacturers and service providers to promote sales and increase profit. This allowance serves as an incentive for retailers to push products to clients, thereby popularizing the brand of a manufacturer. Advertising allowances are paid in exchange for advertisements done by retailers, discounts given on products purchased by retailers is also a form of advertisement allowance.

Other terms for advertising allowance are “marketing co-op allowance” or “promotional allowance.” Payment of this allowance to retailers helps producers boost the recognition of their products which will increase sales and profit margin.

Advertising Allowance in Practice

Usually, the amount of advertising allowance that a manufacturer pays to a retailer is based on the number of purchases made or the extent at which the retailer markets the goods of the manufacturer. Advertising standards and practices differ from one manufacturer to another,  certain manufacturers are restricted to specific advertisement practices. But generally, manufacturers pay advertising costs to retailers who help them push their products forward.

Before a retailer can be eligible to receive an advertising allowance form a manufacturer, the company must approve the advertisement and the retailer must present evidence of actually carrying out the advertisement.

Advertising Allowance Example

Company A manufactures textbooks and notepads for college students, Retailer A has a book store in some colleges. Company A can have an agreement with Retailer A to help advertise its products across colleges in exchange for advertisement allowance which can either be paid in cash or paid in form of a discount to retailer A when purchasing textbooks and notepads for sale. The advertising allowance method can be used by manufacturers across different industries.

Reference for “Advertising Allowance”

https://www.investopedia.com/terms/a/advertising-allowance.asp

www.businessdictionary.com/definition/advertising-allowance.html

https://www.mbaskool.com › Concepts › Marketing and Strategy

https://financial-dictionary.thefreedictionary.com/Advertising+Allowances

https://marketing-dictionary.org/a/advertising-allowance/

Academics research on “Advertising Allowance”

Co-op advertising models in manufacturer–retailer supply chains: A game theory approach, Huang, Z., & Li, S. X. (2001). Co-op advertising models in manufacturer–retailer supply chains: A game theory approach. European journal of operational research, 135(3), 527-544. In the literature of cooperative (co-op) advertising, the focus of research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies the dominance of the manufacturer over retailers. Recent market structure reviews have shown a shift of retailing power from manufacturers to retailers. Retailers have equal or even greater power than a manufacturer when it comes to retailing. Based on this new market phenomenon, we intend to explore the role of vertical co-op advertising efficiency with respect to transactions between a manufacturer and a retailer through brand name investments, local advertising expenditures, and sharing rules of advertising expenses. Three co-op advertising models are discussed which are based on two noncooperative games and one cooperative game. In a leader–follower noncooperative game, the manufacturer is assumed to be a leader who first specifies the brand name investment and the co-op subsidization policy. The retailer, as a follower, then decides on the local advertising level. In a noncooperative simultaneous move game, the manufacturer and the retailer are assumed to act simultaneously and independently. In a cooperative game, the system profit is maximized for every Pareto efficient co-op advertising scheme, but not for any other schemes. All Pareto efficient co-op advertising schemes are associated with a single local advertising level and a single brand name investment level, but with variable sharing policies of advertising expenses. The best Pareto efficient advertising scheme is obtained taking members’ risk attitudes into account. Utilizing the Nash bargaining model, we discuss two situations that (a) both members are risk averse, and (b) both members are risk neutral. Our results are consistent with the bargaining literature.

Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount, Yue, J., Austin, J., Wang, M. C., & Huang, Z. (2006). Coordination of cooperative advertising in a two-level supply chain when manufacturer offers discount. European Journal of Operational Research, 168(1), 65-85. We studied the coordination of cooperative advertisement in a manufacturer–retailer supply chain when the manufacturer offers price deductions to customers. With a price sensitive market, the expected demand with cooperative advertising and price deduction is demonstrated. When the manufacturer is a leader, we obtained the optimal national brand name investment, local advertisement and associated manufacturer’s allowance with any given price deduction. When the manufacturer offers more price deduction to customers, the retailer will increase local advertisement if the manufacturer provides the same portion of the local advertising allowance. We obtained the necessary and sufficient condition for the price deduction to ensure an increase of manufacturer’s profit, and a search procedure for determining such an optimal price deduction is provided as well. When the manufacturer and retailer are partners, we obtained the optimal national brand name investment and local advertisement. For any given price deduction, the total profit for the supply chain with cooperative scheme is always higher than that with the non-cooperative scheme. When price elasticity of demand is larger than one, the resulting closed form optimal price deduction with partnership is also obtained. To increase profits for both parties in a supply chain, we recommend that coordination in local and national cooperative advertising with a partnership relationship between manufacturer and retailer is the best solution. The bargaining results show how to share the profit gain between the manufacturer and the retailer, and determine the associated pricing and advertising policies for both parties.

An analysis of manufacturer‐retailer supply chain coordination in cooperative advertising, Huang, Z., Li, S. X., & Mahajan, V. (2002). An analysis of manufacturer‐retailer supply chain coordination in cooperative advertising. Decision sciences, 33(3), 469-494. In the literature of cooperative (co‐op) advertising, the focus of the research is on a relationship in which a manufacturer is the leader and retailers are followers. This relationship implies the dominance of the manufacturer over retailers. Recent market trends have shown a shift in power from manufacturers to retailers. Retailers, as a result, may now possess equal or even greater power than a manufacturer in some instances when it comes to retailing. Based on this new market phenomenon, we intend to explore the role of co‐op advertising in a manufacturer‐retailer supply chain through brand name investments, local advertising expenditures, and sharing rules of advertising expenses. Two co‐op advertising models are developed and compared. The first co‐op advertising model is based on the traditional leader‐follower relationship of a manufacturer and a retailer. The second model incorporates partnership into co‐op advertising coordination. Business examples and managerial implications of the models have been discussed. A cooperative bargaining technique is utilized to implement the partnership co‐op advertising model.

A note on “Cooperative advertising, game theory and manufacturer–retailer supply chains”, Xie, J., & Ai, S. (2006). A note on “Cooperative advertising, game theory and manufacturer–retailer supply chains”. Omega, 34(5), 501-504. This note extends the results in the manufacturer-dominated game model of the paper by Li et al. (Omega 30 (2002) 347) to the case where the manufacturer’s marginal profit is not large enough. In such situations, the profit of the entire supply chain under the co-op advertising mode is higher than the one under the Stackelberg game, which is consistent with the results of the original paper. However, the advertising expenditures of the manufacturer and the retailer under the co-op advertising model are not always larger than those under the Stackelberg game, which is different from the results of the original paper. Furthermore, the results are also compared with the simultaneous move game of the paper by Huang and Li (Eur. J. Oper. Res. 135 (2001) 527). The manufacturer always prefers the leader–follower structure rather than the simultaneous move structure, which is consistent with the results of the original paper. However, the retailer always prefers the simultaneous move structure rather than the leader–follower structure, which differs from the results of the original paper.

A survey of game-theoretic models of cooperative advertising, Jørgensen, S., & Zaccour, G. (2014). A survey of game-theoretic models of cooperative advertising. European Journal of Operational Research, 237(1), 1-14. The paper surveys the literature on cooperative advertising in marketing channels (supply chains) using game theoretic methods. During the last decade, in particular, this literature has expanded considerably and has studied static as well as dynamic settings. The survey is divided into two main parts. The first one deals with simple marketing channels having one supplier and one reseller only. The second one covers marketing channels of a more complex structure, having more than one supplier and/or reseller.

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