Beyond the Return on Advertising: Elasticity of the Return on Advertising as a Diagnostic Metric to Maximize Profit

With increased marketing expenditures, managers need to be equipped with valid and reliable measures capable of showing links between marketing investments and a firm's profitable performance. In this paper we demonstrate that traditional return on advertising (ROA) can be a misleading metric if a firm's goal is profit maximization. Then, we introduce a new diagnostic tool: the elasticity of ROA and show how this metric can help marketing managers to choose more profitable levels of advertising. This new measure has the same virtues as other traditional measures of elasticity and provides real advantages over the conventional metrics.