AED is always positive, meaning that the demand always increases with increase in advertising expenditure. Whereas values of this ratio below 1 mean that the increase in demand is less than the increase in advertising expenditure, while values greater than 1 indicate that the rise in demand is more than the rise in expenditure. While this is a good way to estimate expected rise in advertising costs for growth in demand or the expected growth with rise in expense toward advertising, this is not the most accurate way. This ratio assumes that several other factors that may affect demand are constant, which cannot be the case in real life.
The demand of a certain good/service depends on, apart from expense on advertising, the following to name a few factors:
1. Income of the people of the region (state of economy): Expensive advertising may not yield very good results if the region has been recently hit by an economic crisis where people have been laid off on a large scale and are struggling to make ends meet; or in a region with generally low income.
2. Price of the product: No matter how much money is put in the advertising, if a similar product is in the market for a lower price that may take away from the success of the advertising.
3. Quality/Appeal of the ad: High expense doesn’t always mean high quality in terms of audio-visual or content. Or the ad just may lack appeal for the demographic the product is for.
All these factors can alter the demand of the product, and hence the AED. Thus, AED may not be the most accurate measure of effectiveness of increase in advertising expenditure.
Examples of advertising elasticity of demand: Wine=0.08, Cigarettes=0.04.