An augmented product has been enhanced by its seller with added features or services to distinguish it from the same product offered by its competitors. Augmenting a product involves including intangible benefits or add-ons that go beyond the product itself.
Examples of the features used to create augmented products might include free delivery or in-home installation of a service. Cosmetics companies tend to offer free makeovers and travel-size samples to augment their products.
Key Takeaways
Every product comes in at least three versions: the core, the actual, and the augmented.
The augmented product adds features and services that distinguish it from the same or similar products offered by other sellers.
Product augmentation doesn’t change the actual product, but instead, adds value to the purchase.
An augmented product may have a perceived value that gives the consumer a reason to buy it and may allow the seller to command a premium price.
How an Augmented Product Works
To marketing professionals, every product comes in at least three versions: The core, the actual, and the augmented.
Core Product
The core product is not a physical object. It is the product’s benefit to the consumer. For example, a lipstick will make its buyer attractive; a pair of sneakers will make her healthier; a new phone will help you communicate more efficiently.
Actual Product
The actual product is the item for sale, including the unique branding, design, and packaging that is attached to it. The actual product and its features must deliver on the core-product expectations that consumers want from the product. A car, for example, should function seamlessly with all of its features to deliver the core product and create customer value.
Augmented Product
The augmented product adds on features and services that distinguish it from similar products offered by the competition. The add ons don’t change the actual product and may have a minimal impact on the cost of producing the product. However, an augmented product may have a perceived value that gives the consumer a reason to buy it. The added value may also allow the seller to command a premium price.
Augmentation doesn’t change the product being sold. However, augmentation adds value to the experience for the consumer and can lead to brand loyalty.
Examples of Augmented Products
It’s no secret that companies that can effectively create augmented products create a positive buying experience and have the best chance of developing a loyal base of repeat customers.
Apple TV
Apple Inc. (AAPL) launched its video and TV streaming service in 2019. To boost awareness of the new product and increase sagging iPhone sales, the company created an add-on or augmentation for anyone purchasing a device as stated below from the company’s website.
“Starting today, customers who purchase any iPhone, iPad, Apple TV, iPod touch or Mac can enjoy one year of Apple TV+ for free.”
Discounts and Freebies
A discount coupon for a future purchase is a product augmentation, as is an offer of a refund if the customer is dissatisfied. A free recipe book offered with the purchase of a kitchen appliance such as a crockpot creates an augmented product.
More expensive purchases often come with enhanced augmentation. In-store financing for furniture purchases, a free trial, or free delivery all augment the product being offered. A cable company competing for new business might offer a more convenient home installation schedule to attract customers.
Service Sells
Good customer service and store ambiance are augmentations that brick-and-mortar retailers add to their entire range of products. A generous return policy and in-store demonstrations are others. A retail store that sells cooking supplies might offer free cooking classes with each purchase. Apple, for example, offers teaching and guidance for how to use their products through their retail locations. An engaging website to help customers learn about a product or service, as well as an online support team, are product augmentations.
In considering almost any purchase, consumers have a wealth of options. An augmented product has been made to stand out from other products, or the same product offered by other sellers.
An aleatory contract is an agreement whereby the parties involved do not have to perform a particular action until a specific, triggering event occurs. Events are those that cannot be controlled by either party, such as natural disasters and death. Aleatory contracts are commonly used in insurance policies. For example, the insurer does not have to pay the insured until an event, such as a fire that results in property loss. Aleatory contracts—also called aleatory insurance—are helpful because they typically help the purchaser reduce financial risk.
Key Takeaways
An aleatory contract is an agreement whereby the parties involved do not have to perform a particular action until a specific event occurs.
The trigger events aleatory contracts are those that cannot be controlled by either party, such as natural disasters or death.
Insurance policies use aleatory contracts whereby the insurer doesn’t have to pay the insured until an event, such as a fire resulting in property loss.
Understanding an Aleatory Contract
Aleatory contracts are historically related to gambling and appeared in Roman law as contracts related to chance events. In insurance, an aleatory contract refers to an insurance arrangement in which the payouts to the insured are unbalanced. Until the insurance policy results in a payout, the insured pays premiums without receiving anything in return besides coverage. When the payouts do occur, they can far outweigh the sum of premiums paid to the insurer. If the event does not occur, the promise outlined in the contract will not be performed.
How Aleatory Contracts Work
Risk assessment is an important factor to the party, taking a higher risk when considering entering into an aleatory contract. Life insurance policies are considered aleatory contracts, as they do not benefit the policyholder until the event itself (death) comes to pass. Only then will the policy allow the agreed amount of money or services stipulated in the aleatory contract. The death of someone is an uncertain event as no one can predict in advance with certainty that when the insured will die. However, the amount which the insured’s beneficiary will receive is certainly much more than what the insured has paid as a premium.
In certain cases, if the insured has not paid the regular premiums to keep the policy in force, the insurer is not obliged to pay the policy benefit, even though an insured has made some premium payments for the policy. In other types of insurance contracts, if the insured doesn’t die during the policy term, then nothing will be payable on maturity, such as with term life insurance.
Annuities and Aleatory Contracts
Another type of aleatory contract where each party takes on a defined level of risk exposure is an annuity. An annuity contract is an agreement between an individual investor and an insurance company whereby the investor pays a lump sum or a series of premiums to the annuity provider. In return, the contract legally binds the insurance company to pay periodic payments to the annuity holder—called the annuitant—once the annuitant reaches a certain milestone, such as retirement. However, the investor might risk losing the premiums paid into the annuity if they withdraw the money too early. On the other hand, the person might live a long life and receive payments that far exceed the original amount that was paid for the annuity.
Annuity contracts can be very helpful to investors, but they can also be extremely complex. There are various types of annuities each with its own rules that include how and when payouts are structured, fee schedules, and surrender charges—if money is withdrawn too soon.
Special Considerations
For investors who plan on leaving their retirement funds to a beneficiary, it’s important to note that the U.S. Congress passed the SECURE Act in 2019, which made rule changes to beneficiaries of retirement plans. As of 2020, non-spousal beneficiaries of retirement accounts must withdraw all of the funds in the inherited account within ten years of the owner’s death. In the past, beneficiaries could stretch out the distributions—or withdrawals—over their lifetime. The new ruling eliminates the stretch provision, which means all of the funds, including annuity contracts within the retirement account–must be withdrawn within the 10-year rule.
Also, the new law reduces the legal risks for insurance companies by limiting their liability if they fail to make annuity payments. In other words, the Act reduces the ability for the account holder to sue the annuity provider for breach of contract. It’s important that investors seek help from a financial professional to review the fine print of any aleatory contract as well as how the SECURE Act might impact their financial plan.
An activist investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run.
The activist investor’s goals may be as modest as advising company management or as ambitious as forcing the sale of the company, divestitures or restructuring, or replacing the board of directors.
Unlike private equity firms that buy and restructure companies in order to profit when they are resold, activist investors seldom acquire full or majority stakes. Instead, they use public communications and private discussions to win over other shareholders and company insiders. When such efforts fail, an activist investor may pursue a proxy contest to elect new directors in order to force the company to meet their demands.
Key Takeaways
Activist investors buy minority stakes in public companies to change how they are run.
If they fail to persuade company managers, they may wage a proxy fight for board seats.
Some hedge funds specialize in activist investing while institutional investors may engage in it from time to time.
Investor activism may focus on maximizing shareholder value or on the company’s social responsibilities.
The SEC has proposed tougher disclosure rules for activist investors that critics contend may make activism unprofitable.
Understanding Activist Investors
Activist investors are sometimes called shareholder activists, a term also used to describe those lobbying companies to improve working conditions for the overseas employees of their contractors, or backers of a dissident board slate elected to fight climate change.
However, many activist investor campaigns seek only to maximize shareholder value, and most of those are the work of hedge funds specializing in the unique mix of public pressure, behind-the-scenes lobbying, and business expertise required.
Unlike the public pension funds and mutual funds that also engage in activism at times, activist hedge funds may hold highly concentrated stakes and supplement them with additional leverage from derivatives like stock options to offset the considerable cost of such campaigns. In contrast with institutional investors that sometimes turn to activism after owning a disappointing investment for years, activist hedge funds typically buy a stake in an underperforming company shortly before calling for change, and hope to profit from the resulting turnaround and price appreciation.
In contrast to institutional investors, activist hedge funds are also more willing to use confrontational tactics, from poison-pen letters to management and unflattering public reports to proxy fights seeking to oust incumbent directors.
The rise of activist investors has been described as an effective market response to the agency problem, which arises when agents (in this case company managements) have the opportunity and the means to enrich themselves at the expense of clients (in this case shareholders—a diffuse group with limited powers to safeguard its ownership interests.)
How Activist Investors Make Their Case
Investor activists often announce their campaigns by filing a Schedule 13D form with the U.S. Securities and Exchange Commission (SEC), which must be filed within 10 calendar days of acquiring 5% or more of a company’s voting class shares.
Qualified institutional investors and passive investors, meaning those not trying to acquire or influence control of the company, may instead file a simplified Schedule 13G with less stringent disclosure requirements and thresholds. Schedule 13D filers must disclose, among other facts, their reasons for acquiring the stake and any plans they may have for the company in terms of mergers and acquisitions, asset disposals, capitalization or dividends, or other policies.
The initial 13D filing gives the activist investor a golden opportunity to publicize their case for change at the targeted company. At the same time, the filing curtails the activist’s ability to alter their stake in, and plans for, the company out of the public eye. Any changes to the facts disclosed on a Schedule 13D must be reported in an amended filing “promptly,” under current SEC rules.
Activist investors may use amended Schedule 13D filings to comment on a company’s response to their proposals. For example, when Netflix, Inc. (NFLX) adopted a poison pill after funds affiliated with Carl Icahn reported a stake of nearly 10% in the video streaming company, the funds filed an amended disclosure calling the poison pill “an example of poor corporate governance.” Activist investors may also write sharply worded letters to incumbent managers, issue press releases arguing their case to other shareholders, or privately lobby institutional investors to side with them.
Whichever tactics activist investors use must be persuasive, since the only way to overcome opposition from entrenched company management short of a hostile takeover is to persuade a sufficient number of other shareholders to replace the board in a proxy fight, or at least to be able to credibly threaten to do so.
The Future of Shareholder Activism
There has been a claim that “activism is dying,” lamented Carl Icahn in May 2022, contrasting the legendary investor’s few-holds-barred approach seen in the past. Some have feared the changes proposed to the Schedule 13D disclosure requirements in 2022 constitute a pressing threat, with Elliott Investment Management stating publicly that the proposed rules “will virtually shut down activism.”
In February 2022 the SEC had proposed shortening the initial Schedule 13 filing deadline from 10 calendar days to 5, with amendments due within a day of a material change rather than “promptly” as currently. The proposal, if passed, would effectively force 13D filers to specify holdings of derivatives (such as options) that confer an economic interest in the company without the shareholder rights associated with an outright stock position. Perhaps more controversially, the proposed rules would no longer require investors to agree to act in concert and be designated a single group by the SEC for Schedule 13D reporting purposes. Rules have also been proposed to make it harder for activist shareholders to squash a company’s environmental or other pro-ESG initiatives.
SEC Chair Gary Gensler argued the stepped up requirements proposed would address “an information asymmetry” between activist investors and other shareholders. Critics countered the proposed rules would make activism unprofitable by making it more difficult and costly for activist investors to accumulate significant stakes, while inhibiting communication among shareholders.
Despite these proposed rule changes, shareholder activism does not seem to be slowing down (at least, not yet). For example, activist investor Nelson Peltz reportedly made a profit of more than $150 million by acquiring shares of Disney (DIS) in November 2022, in a move that prompted a proxy fight against the returning CEO, Bob Iger; however, this brief fight was called off after Iger announced a restructuring plan that is expected to save the media giant $5.5 billion in costs and cut 7,000 employees. Peltz has expressed satisfaction with the company’s direction and decision to make changes, praising Iger and his management team. In early 2023, ValueAct Capital Management, a San Francisco-based activist hedge fund, took a stake in streaming media company Spotify Technology SA (SPOT), with the goal of cutting costs and streamlining management. ValueAct has also disclosed a major position and board seat in SalesForce (CRM), which now has no less than five large activist investor shareholders on board with long positions, resulting in early 2023 cost cutting measures that include layoffs of 10% of the company’s employees. In all three of the these examples, markets have reacted positively to the inclusion of activist shareholders, seeing their share prices afterwards outperform.
Do Activist Investors Ever Settle With Companies?
Yes, because activist investing is not a zero-sum game. Since activist investors and incumbent managers share an interest in the company’s success, they may sometimes agree to a mutually acceptable compromise. Such agreements typically grant the activist investor representation on the company board in exchange for a pledge to support management and the company’s director nominees for a specified time. The agreements may also specify steps management will take at activist investors’ behest, while including standstill provisions preventing the activist from increasing their stake in the company or requiring them to maintain a specified minimum stake.
Is Shareholder Activism Dying?
While some fear recently proposed SEC rule changes may put a damper on activist investing, it has not yet seemed to slow down. After taking a dip in 2020 and 2021 due to COVID19 restrictions, activist investors were seen back above 2019 levels. In fact, shareholder activism activity hit a record high in 2022. Some predict this upward trend will continue through 2023 and beyond despite regulatory roadblocks that may be put in the way, although only time will tell.
Do Activist Investors Create Value?
Activist investors have been effective at times in addressing the agency problem faced by shareholders whose interests don’t always coincide with those of entrenched management teams. They’ve certainly created value for themselves and other shareholders. Activist investing can’t easily be pigeonholed as good or bad, however. Activist investors look out for themselves and realize the lion’s share of the value they unlock. Their relatively short-term focus on strategies likely to lift the share price, such as return of capital to shareholders in the form of dividends or share buybacks, can prevent companies from making needed long-term investments.
Which Activist Investor Generates the Largest Share-Price Gains at the Outset?
It is difficult to know for sure which activist investors have been the more successful dollar-for-dollar and what other factors may cause particular stocks to rise in addition to an activist taking on a stake, but we can look to SEC disclosures and public statements made by these investors. Elliott Investment Management, for one, claims that its investments receive an average rise of 8% in the shares of the target company on the day the firm made its stake public. According to Elliot, its activist engagements have increased the market values of the targeted companies by an aggregate of more $30 billion.
Who Are the Biggest Activist Investors?
The largest activist shareholders by assets under management (AUM) as of Q1 2023 are listed in the table below, led by New York City-based Third Point Partners:
Largest Activist Investment Firms by AUM (Q1 2023)
Rank
Profile
Managed AUM
Region
1.
Third Point Partners
$18,1 billion
North America
2.
Pershing Square Capital Management
$16,8 billion
North America
3.
ValueAct Capital
$13,2 billion
North America
4.
Eminence Capital
$10,5 billion
North America
5.
Pentwater Capital Management
$9,9 billion
North America
6.
Starboard Value LP
$9,2 billion
North America
7.
Trian Fund Management
$7.6 billion
North America
8.
Effissimo Capital Management
$6,8 billion
Asia
9.
Sachem Head Capital Management
$6,2 billion
North America
10.
Scopia Capital Management
$2,7 billion
North America
Source: Sovereign Wealth Fund Institute (SWFI)
The Bottom Line
When activist investors use their significant but still relatively small minority stakes to push for change at publicly listed companies, they must often exercise their rights as shareholders to the fullest to get the attention of incumbent management and persuade other shareholders. Activists often call for extreme cost cutting measures, including layoffs, more streamlined management, and disposing of unprofitable units. The discipline they impose promotes shareholder-friendly policies at other companies as well. But they are not always right, and any public benefit they provide may be incidental to their pursuit of profits for themselves and their clients.
An advertising budget is an estimate of a company’s promotional expenditures over a certain time period. More importantly, it is the money a company is willing to set aside to accomplish its marketing objectives.
Key Takeaways
An advertising budget is the amount of money set aside for purposes of marketing and advertisements.
The cost of advertising dollars must be weighed against the potential recognized revenues that those dollars will generate.
Demographic research and customer segmentation can create profiles to help optimize the returns to advertising spending.
Understanding Advertising Budget
An advertising budget is part of a company’s overall sales or marketing budget that can be viewed as an investment in a company’s growth. The best advertising budgets—and campaigns—focus on customers’ needs and problems and on providing solutions to these issues, not company problems such as an overstock reduction.
When creating an advertising budget, a company must weigh the value of spending an advertising dollar against the value of that dollar as recognized revenue. Before deciding on a specific amount, companies should make certain determinations to ensure that the advertising budget is in line with their promotional and marketing goals:
The target consumer — Knowing the consumer and having their demographic profile can help guide advertising spend.
Best media type for the target consumer — Mobile or internet advertising, via social media, may be the answer, although traditional media, such as print, television, and radio may be best for a given product, market, or target consumer.
Right approach for the target consumer — Depending on the product or service, consider if appealing to the consumer’s emotions or intelligence is a suitable strategy.
Expected profit from each dollar of advertising spending — This may be the most important question to answer, as well as the most difficult.
The best advertising budgets—and campaigns—focus on customers’ needs and solving their problems, not company problems such as an overstock reduction.
Advertising Budget Levels
Companies can determine their advertising budget levels in several different ways, each of which has its positives and negatives:
Spend as much as possible — This strategy, which sets aside just enough money to fund operations, is popular with startups that see a positive return on investment on their advertising spend. The key is anticipating when the strategy will start showing diminishing returns and knowing when to switch strategies.
Allocate a percentage of sales — This is as simple as allocating a specific percentage based on the previous year’s total gross sales or average sales. It is common for a business to spend 2% to 5% of annual revenues on advertising. This strategy is simple and safe but is based on past performance and may not be the most flexible choice for a changing marketplace. It also assumes that sales are directly linked to advertising.
Spend what the competition spends — This is as simple as adhering to the industry average for advertising costs. Of course, no market is exactly the same and such a strategy may not be sufficiently flexible.
Budget based on goals and tasks — This strategy, wherein you determine the objectives and the resources needed to achieve them, has pros and cons. On the upside, this can be the most targeted method of budgeting and the most effective. On the downside, it can be expensive and risky.
