Origins

     Advertising on radio began amid controversy, as many public figures and some station operators initially felt the new medium should not depend on advertiser support. Secretary of Commerce Herbert Hoover and others believed radio should not be allowed to let advertising invade listeners' homes (although newspapers and magazines had been doing just that for decades). But as there was no other practical means of supporting operating costs, advertising on the air gradually attracted greater support.

     The American Telephone and Telegraph (AT&T)-operated New York City station WEAF is generally credited with selling the first radio advertisement (what the telephone company owner termed "toll broadcasting"), although other outlets may have made similar sales at about the same time. On 28 August 1922 the Queensboro Corporation spent $100 for a 15-minute commercial message on WEAF touting a new real estate venture. The same message was repeated for five days and again a month later, resulting in many apartment sales. But despite early sales to an oil company and American Express, paid advertising on the station caught on slowly, for too little was known about radio's sales potential.

     The critical turning point came in 1927-28 when several trends combined to increase acceptance of radio as an advertising medium. Among them were the development of national networks (the National Broadcasting Company [NBC] published its first pamphlet touting radio advertising in early 1927); the reduction of interference (thanks to the Federal Radio Commission [FRC] ); better and less-expensive radio receivers (which led to growing audiences); the first scientific audience research on radio; the recognition by pioneering advertisers of what radio could accomplish as a sales medium; the growing interest of advertising agencies (the first book on radio advertising was published in r927); and the general acceptance by the public of advertising as the means to pay for entertainment programming.

Radio Advertising Expands

     The Depression brought about an important change in radio advertising. Commercials became more direct, intent on getting listeners to commit to a purchase and focusing on prices.

     Some program-length advertisements were accepted by stations hard-pressed to stay in business, as was barter advertising (exchange of station time for goods the station or its personnel could use). Advertising agencies began to develop expertise in radio, and station representative firms began to appear in the early 1930s. Radio's portion of all advertising grew from about two percent in 1928 to nearly 11 percent in 1932.

     By the mid-193os, advertising agencies were not only selling most of radio network time but were increasingly producing the programs themselves. This control continued into the early years of television. About 60 percent of all radio advertising was placed with networks (primarily NBC-Red and the Columbia Broadcasting System [CBS]) and their owned stations, with the other 40 percent going to regional and local advertising on several hundred other stations. Daytime advertising focused on soap opera audiences, whereas evening or prime-time advertising helped to support the comedy, drama, and variety programs that attracted the largest audiences. Many advertiser names appeared in program titles to emphasize their support (and control). Most advertising revenue went to the most powerful stations in larger cities.

     World War II brought great prosperity to radio as advertisers flock to buy time when newspaper and magazine advertising was limited by paper rationing. Changes in tax laws served to encourage advertising expenditure of funds that would otherwise be taxed up to 90 percent. Such "ten-cent dollars" filled radio's coffers and led to sharp declines in sustaining (not advertiser-supported) program time. Many companies producing war goods advertised to keep their names before the public, and they often supported highbrow programming with limited (but important) audiences.

     Radio's post-war years were marked by a shift away from network advertising (because of television competition) and a growth of "spot" campaigns, in which advertisers would buy time on key stations in selected markets. By 1952 local radio advertising reached half of the medium's total time sales. But far more stations were sharing the advertising pie, thus sharply increasing competition. Radio also became a more direct competitor with local newspapers. Despite these trends, overall radio advertising sales increased each year, and, perhaps ironically, helped to support the expansion of television.    

     FM radio was a minor player in advertising sales for its first several decades. Only in the 1960s did FM outlets begin to see success in their quest for advertisers, thanks to independent programming, stereo, and a growing audience interested in quality sound. One FM station in Los Angeles experimented with an all classified-ad format but quickly failed. By about 1980, FM became the largest radio medium in terms of listeners, and soon among advertisers as well.

     Still, the overall growth in radio station numbers meant that many stations were barely surviving, and a substantial proportion actually lost money in many years. Competition among stations, and between radio and other media, became tighter. Listeners noted the gradual increase in time devoted to advertising messages, and "clutter" (multiple messages played consecutively) became an issue.

Types of Announcements

     In addition to entertainment programming, radio stations generally air commercials, station promotional announcements (promos), non-revenue generating announcements intended to encourage further radio listening, and public service announcements (PSAs), which air in support of not-for-profit organizations (ranging from the American Red Cross to a local civic group). All four of these categories are generally referred to as spots and range up to 60 seconds in length each.

     Commercials are played in blocks or sets sometimes consisting of six or more announcements at a time. Depending on spot lengths, a commercial break might consume five continuous minutes of airtime. More than $19.5 billion was spent on radio advertising in the United States in 2002; about three­ fourths of that total was spent on local advertising. When the advertising is sold effectively-based on the station's listening audience and program approach-a listener may benefit by receiving worthwhile consumer information.

     For the potential advertiser, a radio station is in the ear leas­ing business. Just as the radio station must build listener awareness of its programming, advertising clients need listener awareness of the goods or services they sell and, most importantly, the clients need customer traffic. The job of radio advertising is to provide the ears of listeners who will hear the ad buyer's message and then visit the store or otherwise obtain the product or service advertised.

Sales Department

      A sales manager or general sales manager supervises day-to­-day station sales operations and helps make revenue projections for the station. The members of the sales staff are usually called account executives (AEs), although some stations may refer to them as marketing executives or marketing consultants.

     It is the job of account executives to prospect for potential clients, develop client presentations, secure advertising buys, and service the account. Servicing includes ensuring that ads run when they should, updating ad copy as needed, and, in some smaller markets, collecting payment. Radio account executives are usually paid according to their sales performance. AEs may be paid a straight commission or a percentage of the sales dollars they generate. The latter compensation plan carries a strong incentive for the salesperson to produce results, but it also means the AE has little financial security.

     Another approach is to pay the account executive a "draw" against commission. The draw enables the AE to receive minimum compensation based on anticipated sales. Once this minimum is reached, additional compensation is paid through sales commissions. If the AE is paid a commission based on advertising sold-rather than advertising revenue collected from clients-and later has a client who defaults on a bill, the AE may have a "charge back" to the draw and commission. In other words, the account executive must return any income earned on ads that aired but were not paid for. For this reason, many stations pay account executives based on advertising revenue collected rather than advertising sold.

     As with any electronic medium, the biggest problem stations face is inventory management. For any station, "inventory" refers to the number of commercials the station has available for sale. Advertising time is a perishable commodity. Any commercial inventory not sold is lost forever. There is no effective way for the station to store, save, or warehouse the unsold commercial inventory for use at a future time when demand is higher, nor can stations effectively place additional commercials in their broadcast schedule. Airing more spots may create a short-term revenue increase, but commercial clutter is cited by listeners as one of the biggest distractions to radio listening. A decline in audience will consequently lessen the station's effectiveness in selling future advertising time.

     The radio industry publication Duncan's American Radio estimates that radio listening in 2000 was at its lowest level in 20 years. The Wall Street Journal cited reasons for decreased listening: a survey of 1,071 respondents by Edison Media Research found listener perceptions of increased ad clutter on many stations. Another study found commuters who owned a cell-phone reported less listening to the radio than a year earlier.

Benefits and Disadvantages of Radio Advertising

     Radio advertising, when compared with television, cable, newspaper, or magazine advertising, offers the advertiser some unique advantages. Over the course of a typical week, nearly everyone listens at least briefly. Radio reaches more than three­ fourths of all consumers each day and about 95 percent of all consumers during a typical week. That exceeds the number of newspaper readers and television viewers. The typical person spends about three hours listening to radio on an average weekday, almost always while doing something else (especially driving).

     There are, of course, disadvantages to advertising on radio. It is virtually impossible to buy advertising on just one or two radio stations and still meet an advertiser's marketing needs. The multitude of stations in most markets and their specialized formats (and thus relatively narrow audiences) often mean an advertiser must purchase time on multiple stations in the same market. Radio is sometimes considered a "background" medium. Listeners often tune-out commercials or, even worse, tune to another station when commercials air. Where people listen to the radio-in cars for example-often makes it difficult for consumers to benefit from such information as telephone numbers, addresses, or other product attributes. When a station's audience is perceived as being small, the tenth may think the ad buy will not be effective. When the station's listening audience is large, a client may think an ad campaign involves overspending for uninterested listeners.

     The first job of the sales staff is to help clients understand how effective radio is when compared with competing advertising media. The second and more difficult job is to sell advertising time on a specific station. Proliferation of radio stations and continued fragmentation of audiences has made it vital for stations to market a station brand to both listeners and advertisers. Advertisers are no longer buying based solely on a station's audience. They are aware of the listener demographic profile and the station's on-air presence, which includes announcers, music, and promotional events. Listener demographics refers to listener age range, gender, ethnicity, socio­ economic background, consumer spending patterns, and a host of other qualitative variables.

     Any advertiser must be concerned with both the formal and the hidden costs of purchasing radio time. The most obvious expense is the stated cost of the time, expressed either as actual dollars charged or in terms of cost per thousand listeners. Hidden cost refers to the quality or nature of the audience an advertiser is buying. How closely does this audience match the advertiser's customer profile? Significant deviation from those consumers whom the advertiser needs to reach probably indicates an inefficient advertising purchase.

     Radio station owners and the Radio Advertising Bureau, an industry trade group, work to maintain radio's position as a valuable ad source. Most radio station managers acknowledge that their biggest competitors are not other radio stations in the market playing the same music and attempting to attract the same listener group. The biggest competitors for radio station time sales are usually local newspapers and, to a lesser degree, television stations, billboards, or direct mail. By the turn of the century, radio advertising was accounting for about eight percent of all advertising expenditure-an increase from the medium's low point from the 1950s into the 1980s, but far below radio's network heyday of the mid-1940s.

Radio Advertising Clients

      Radio stations generally sell advertising to three distinct groups of clients: local, regional (or "national spot"), and national. The percentage of clients in each category varies with market size and the station's ratings. Small market stations air primarily local ads. Successful stations in large markets command more regional and national advertising. Nearly 80 percent of all dollars spent purchasing radio time are for local advertising.

     National advertisers are often involved in local ad sales through cooperative advertising programs. These allow local retailers to share the cost of radio time with a national firm. The national company provides an advertising allowance to the local retailer, usually determined by the dollar value of the inventory purchased from the national company. This advertising allowance can be used to buy ads to promote both the national brand and the local retailer. National manufacturers may also produce radio commercials that only need the local retailer's name added as a "local tag" at the end of the ad.

Advertising Effectiveness

      The effectiveness of radio advertising is gauged by measuring the reach and frequency of ad exposure. Reach refers to the number of different people who are exposed to the ad, whereas frequency refers to the number of times different people hear the ad. Even though virtually all of the population will listen to the radio at some point during the week, it will take multiple ads to ensure that all listener segments hear an ad. Also, radio ads probably won't produce the degree of effectiveness the advertiser wants if consumers are exposed to the ad only one time.

     The nature of radio use suggests that consumers are often engaged in other activities while they listen to radio. To create an impression in the consumer's mind, repeated exposure to the message (frequency) is typically needed. To increase the likelihood that ads will cause the consumer to take action, frequent exposure to the message is desired. The advertiser might schedule multiple days of advertising with one or more ads per hour during a selected time period to increase frequency.

     Radio advertising sales depend on quantitatively and qualitatively identifying the listeners to a particular station. Quantity is measured by radio ratings.

     Research helps a radio station further quantify the listening audience-advertisers want to know how many people are listening and just who the listeners are, with respect to age, income, or gender. By collecting such listener demographic information, radio advertising effectiveness can be evaluated for specific audience segments, such as women 25 to 49 years of age.

     Two of the most common calculations for comparing advertising effectiveness are "Gross Impressions" and "Cost Per Thousand" comparisons. Gross Impressions (Gis) measure the total number of people reached with a given commercial message. Gis are calculated by multiplying the AQH (average quarter hour) persons estimate for the particular daypart by the number of spots to be run in the daypart. The number of listeners or AQH persons is the number of persons listening to the station in a  5-minute period.

     Cost Per Thousand provides a way to compare the cost of reaching the targeted audience either on a single station or among multiple stations. Cost per Thousand determines the cost of reaching a thousand station listeners (sometimes referred to as "Listeners Per Dollar"; in some small markets, the calculation could be cost per hundred). The simplest way to calculate Cost per Thousand is to divide the cost of the ad by the number of listeners (in thousands) who are expected to hear the ad.

     It is important also to consider listener demographics. A listener profile that better matches a product or service may justify paying a higher Cost per Thousand. Another method for calculating Cost per Thousand is to divide the total cost of the ad schedule by the total number of Gross Impressions. "Reverse Cost Per Thousand" enables an account executive to determine the maximum rate per spot that a competing station can charge to remain as cost-effective as his or her own station.

     It is also helpful for account executives and advertisers to know a station's "exclusive cume listeners." Rather than count listeners multiple times during the day, this calculation allows the advertiser to see how many different people listen to the station during a day. A Contemporary Hits Radio format will usually have greater listener turnover and a higher cume because there are usually several stations in a market with this format or a complementary format, and listeners are prone to change stations frequently. On the other hand, the only station in a market will have a smaller exclusive audience or cume.

     Optimum Effective Scheduling is a radio ad scheduling strategy that is based on audience turnover. Optimum Effective Scheduling proposes to improve the effectiveness of a client's ad schedule by calculating the number of spots a client should run. Optimum Effective Scheduling was developed by Steve Marx and Pierre Bouvard to balance the desire for ad frequency and reach while producing an effective commercial schedule. Marx and Bouvard use station turnover or TIO (cume audience divided by AQH) times a constant they created, 3.29, to determine the number of spots an advertiser should schedule each week (see Marx and Bouvard, 1993).

     From the standpoint of generating ad revenue for the radio station, stations with low turnover are at a disadvantage when using Optimum Effective Scheduling. Their audience listens longer and thus fewer spots are needed to produce an effective schedule of reach and frequency. Assuming ad rates per thousand listeners are reasonably comparable, these stations must attract more clients to generate the same amount of ad revenue as the station with high listener turnover.

Advertising Rates

      Radio station advertising rates were once typically printed out on a rate card. Most rare cards were valid for six months to a year. Cards listed the charges for either programs or spot advertisements at different times of the day (dayparts). The card might also specify a price discount as the client purchased more ads per day or per week. This rate card is sometimes referred to as a quantity card or quantity-discount rate card. The quantity card might be an effective way to reward loyal advertising clients but is a poor technique for managing valuable advertising inventory. The radio station, with a limited inventory of commercial time, is discounting the price of its product. The discount applies, no matter what the available advertising situation is like.

     Increasingly replacing formal rate cards is the grid rate card system. Using an inventory tracking software package, the grid allows a radio station to track inventory available for sale. This might mean keeping track of the number of commercial minutes sold or the total number of commercial units (spots) available for sale. The inventory management system also enables the radio station to increase or decrease its ad rate in response to customer demand. When a radio station has sold nearly all the advertising it can effectively schedule, it should be able to charge more for remaining commercial units. A grid rate card enables the station to adjust advertising rates according to the amount of inventory remaining.

     Once the station's sales department has established a record with clients of pricing inventory according to demand, account executives may be more effective in pre-selling advertising time, which should decrease the likelihood of lost ad inventory. When retailers place advertising orders earlier, the station can project revenue more effectively. The longer a client waits to buy commercials, the more likely the available supply of ad time will decrease and the price of the remaining time will increase.

     Radio advertising continues to be an important business for station owners. Ownership consolidation has increased sales pressures for account executives, but it has also lessened direct competition by decreasing the number of station owners. Radio's biggest challenge will be to make sure programming and advertising remain relevant to users who have at their disposal a wider range of substitute products ranging from satellite delivery audio to downloaded and home-burned CDs or MP3 audio files.