Question

Which of the following is the reason why companies are increasingly choosing to opt for an incentive-based system?

A. To encourage its agencies to use more mass media advertising
B. To encourage its agencies to stop using network TV advertising
C. To avoid the involvement of its top management in the decision making process
D. To demand more accountability and pay the agencies based on their performance
E. To encourage its agencies to keep detailed records of the costs it incurs while working with the client

Answer 1

Companies choose incentive-based systems to ensure accountability and reward for performance, driving agencies to produce measurable results and adapt to the evolving advertising landscape. This method promotes innovative campaigns in a market of monopolistic competition to increase company profits.

Step-by-step explanation:

Companies are increasingly adopting an incentive-based system because it aligns the interests of their agencies with the desired outcomes, encouraging performance-based rewards. This approach demands more accountability from advertising agencies, as they are paid based on actual performance results rather than efforts or inputs. Unlike traditional systems that might pay for effort or input without guaranteeing results, an incentive-based system ensures that agencies are motivated to deliver measurable, successful outcomes.

The changing landscape of media and technology has led to a decline in conventional advertising's effectiveness, prompting companies to seek new ways to engage with consumers. In this context, the incentive-based system acts as a mechanism to drive innovation and efficiency among agencies, rewarding those that can adapt and succeed in this evolved advertising environment.

With the need for companies to stand out in a market of monopolistic competition, effective advertising is crucial. By employing incentive-based systems, companies push agencies to create advertising campaigns that either make the demand curve more inelastic or increase demand, aiming to boost company profits through differentiation and increased sales or higher prices.