[jacquesm]

There's a good joke about that, it goes like this:

A man is seated next to Bill Gates in the business class of an airplane. Mr. Gates, he asks, how come that with your name and brand recognition and your tremendous turnover as well as the locked-in nature of your customers that you still spend money on advertising.

Gates replies: Do you like the speed at which this aircraft is travelling ? How about we turn the engines off ?

[InclinedPlane]

I'm not overly convinced. A big reason why most major corporations advertise so heavily is just because it's something that big companies do, it can be tough to buck a trend especially when billions are on the line.

But aside from that, advertising is a business expense that is fully tax deductible. For many big businesses the net cost of advertising is zero.

[jacquesm]

If something is tax-deductible that does not mean that the net cost of doing it is zero.

For example:

We have a turnover of $100, a tax deductible cost of $40, our gross profits before taxes are $60, say we pay 50% tax the net is $30. If we had not made the $40 tax deductible expense the net would have been $50.

So the net cost of stuff that is tax deductible is not zero.

[Retric]

Let's say Cisco spends $1B on advertizing and ends up with an extra 800M in sales and $900M in profit after taxes. Was that a good idea?

PS: The actual numbers may look like this. By selling more units your price per unit usually drops. But, sometimes it's better to sell fewer things at a higher margin. For a company like Cisco maintains a specific brand image is worth a lot. They may sell cheap home networking equipment but they don't use the Cisco brand.

[jacquesm]

Obviously not, but the argument was made that because advertising is tax deductible that it was essentially free. Nobody talked about the effective result of the advertising on the bottom line because of the extra revenue that it might bring, or how bad it would be to advertise ineffectively.

[Retric]

Obviously not err my point was 1B in pretax money is generally worth significantly less than 900M in after tax money.

Clearly it's not free, but due to the tax break advertizing can have a lower ROI and still be a better investment.

[InclinedPlane]

That's an interesting hypothetical. However, in practice most billion dollar company's advertising budgets tend to be much less than their taxes.

[notahacker]

I like the old John Wanamaker quote: "I know that half of my advertising budget is wasted, but I’m not sure which half"

[eru]

It's a bit like buying lottery tickets.