(By Charlie Sislen) Anyone who took Economics 101 in college (or even high school) learned about Adam Smith’s theory of supply and demand. For those who don’t remember, it says that pricing fluctuates based on the market’s supply and demand. If demand is constant, and supply goes down, pricing will rise. Conversely, if demand is constant and supply goes up, prices will fall.
Those who have been in the business for decades will remember that, when TV was sold out because of heightened demand, radio could raise its prices. This was because supply was limited and demand had increased.
So, what happens when you have unlimited supply? Theory says that prices for that commodity (key word) would go to zero. In other words, a negative auction that brings the price of every unit to zero.
This is not just a theory. If you think of all advertising or impressions as equal, we live in a world of unlimited supply. It is hard to argue that advertising on the Internet has no limits. Impressions are always available; therefore there is an unlimited amount of advertising available for purchase.
Clearly it makes no business sense to offer advertisers a commercial schedule for zero dollars.
So how does radio defy Adam Smith’s law of supply and demand? The key word is differentiation. Adam Smith built this theory on all available supply being identical. Again, the word comes down to commodity. By definition, all commodities are identical.
However, advertising is not a commodity. Every advertising outlet has unique characteristics. Each delivers:
- A different audience
- A way to impact different senses (visual vs. audio)
- A different environment
In other words, an advertiser cannot base its advertising decisions purely on price. Radio sales reps need to establish value. An advertising campaign, no matter how inexpensive, has no value if it does not impact the target group. Sell the value of radio as local audio that listeners have an emotional relationship with. Don’t negative sell other advertising outlets, but differentiate your radio station, and the other assets that you are selling, as the best value no matter the price.
Charlie Sislen is a partner at Research Director, Inc. He can be reached at 410-956-0363 or by e-mail at [email protected]. This essay is part of a series titled “Growing the Radio Pie.” To view past articles, visit The Ratings Experts at Research Director, Inc. online here.