Advertising efficiency and profitability: Evidence from the pharmaceutical industry

Abstract

B2B firms spend considerable sums of money on promotional activities to promote their products and to build brand equity. An increasing proportion of this spending is being devoted to direct to end-user (DTE) advertising in an effort to pull end-users towards their products as a complement to their push promotional activities. This is particularly true for US-based pharmaceutical firms following the deregulation of DTE advertising. This trend suggests the necessity to investigate how efficiently DTE advertising expenditure is being managed, and to ascertain whether the level of efficiency has any impact on profitability. This study examined the level of DTE advertising efficiency for a sample of US-based pharmaceutical firms and went on to investigate the impact of the efficiency level on firm profitability. The findings of the study demonstrate that DTE advertising efficiency does vary between firms and, furthermore, that the higher the level of efficiency, the better is firm profitability. These results are robust to alternative measures of firm profitability, specifically, return on assets (ROA), return on equity (ROE), gross profit margin (GPM) and net profit margin (NPM).