There is a fundamental misunderstanding (intentional or not) with these types of studies and claims.
Limited-time promotions, e.g. a 10% off sale, work on short timescales that are easily measured. You can easily say what the ROI is of an advertised promotion, and it is often positive. (Side note, these promotions have a more-difficult-to-measure detrimental effect on your long-term profitability, closely related to the point I am about to make below)
Brand advertising, in contrast, works on a spread-out scale of years or decades. When Coca-Cola runs a polar bear ad at Christmastime they don't do it to increase sales of Coke that week, nor should it be measured that way.
The actual effect that a brand advertisement has, is to add PENNIES (not dollars) to their sales every day, for the next 100 YEARS. It's a long-term investment. And for these reasons hard if not impossible to measure or control for confounders - but that doesn't mean it doesn't work!!
And without that brand investment, their brand value is continuously eroding away, at a rate of pennies (or more) per day.
Source: Been on the leading edge of marketing and advertising for over 12 years
>Brand advertising, in contrast, works on a spread-out scale of years or decades...The actual effect that a brand advertisement has, is to add PENNIES (not dollars) to their sales every day, for the next 100 YEARS. It's a long-term investment. And for these reasons hard if not impossible to measure or control for confounders - but that doesn't mean it doesn't work!!
Car brands are the obvious example of brand advertising. They are among the most common TV advertisers but they don't expect people to immediately go out and spend $50k on a new Mercedes-Benz after watching a 30 second commercial. They just want to establish Mercedes-Benz as a brand of luxury, performance, technology, etc. That way the next time you are in the market to buy a car you already have an ingrained positive perception of Mercedes-Benz that might help sway your decision.
That is the important part. Their production capability is limited to a level that is below current demand. It therefore doesn't make any sense for them to invest in increasing future demand until their production capability consistently exceeds the level of current demand.
Elon is one giant ad, and he has equity. Just because its not defined as traditional advertising, doesnt mean they dont promote the brand. They have physical car showrooms with large tesla logos. They litterally spent millions to put a tesla in space...
From a Google search, Elon made 11 billion last year in tesla stock options pay, while the ceo of Ford made 11 million, and in 2020, ford spent 2.8 billion on advertising. So in the viewpoint that Elon does all the advertising for them, they are paying quite a premium for it.
But the study is about TV advertising effectiveness, and the OP mentioned it being very valuable in the auto industry. I just pointed out that the hottest brand in auto industry is spending 0 on TV or any ads for that matter.
What is your point? No one is claiming that advertising is the only way to increase demand. It is simply one option to increase demand, an option that Tesla has no use for at the moment.
If Elon Musk is one of the richest men in the world and draws roughly a minimum wage salary, is salary really that valuable to building personal wealth?
That is the equivalent of what you are asking. Musk has other forms of income and wealth accumulation that other people don't have. Therefore his salary shouldn't be used to compare to people who don't have those other methods of income. Similarly Tesla has other advantages that help increase demand (or limit the upside of further increasing demand). Other companies that don't have those same advantages can still benefit from increasing demand through advertising.
The only conclusion we can draw from Tesla's lack of advertising is that the company leadership feels that it is not the best use of company money. Any attempt to extrapolate that out to the auto industry or advertising in general is making a lot of assumptions.
"Lack of advertisement" should be "Lack of conventional advertisement"
Musk is strongly associated with Tesla in many people's minds and he's very capable of keeping himself in the public's focus. Then there's SpaceX which literally launched a Tesla into space. Umm, that launch was advertising. Even if it didn't come out of an "Advertising" budget line. Every manned SpaceX launch uses a Tesla vehicle to get the astronauts to the craft and, in the US at least, SpaceX is hot the past few years.
If Toyota or Ford had a space launch company you could be confident they'd tie their trucks into it, drag the Ford Shuttle S150 out with a fleet of F150s. Who needs conventional advertisement when that's your public image?
Then there's the fact that Tesla's vehicles are still unique in the market place with few direct competitors (though that's changing). There's no need to spend money advertising when you're the only company making status symbol electric vehicles that are (somewhat) affordable. A Honda Fit, not a status symbol even if it is more practical financially. Honda and Toyota's midsize sedans aren't differentiable, not really. They rely on branding and conventional advertising to make people prefer one to the other. All the other auto makers are in that same situation with most of their vehicles.
It is semantic debate and what you are talking is certainly marketing, but it isn't really advertising. Advertising usually requires paying someone else to communicate the message.
"If Elon Musk is one of the richest men in the world and draws roughly a minimum wage salary, is salary really that valuable to building personal wealth?"
These rich boys take out loans at 0, or 1%, and take their pay from that.
I still don't know quite how the tax dodge works? It makes sence. You get a loan, and that is not taxed, and eventually pay it back at a low interest rate. I thought corporate expenditures were scrutinized a bit more though?
If you own stock that goes up 10% per year, and you take out a 5% loan against it, the appreciation in the stock more than covers the interest on the loan, so why would you ever pay it off?
When I was small, the same thing was said about Ferrari. Obviously we didn't understand that F1 is marketing as much as magazine ads are. In the same way though, Tesla might not do declarative advertising but things like Musk's appearance on Rick and Morty or favourable media coverage fulfil the exact same role.
Based off the comments I guess this is tesla. Isn't this just based off of their inflated stock price. If someone was seriously considering buying the company they wouldn't make an offer based off the stock price?
I would not call Elon Musks Twitter and other public performances ‘no advertising whatsoever’. They don’t pay for it cash to adv companies, but they got in hot waters with SEC because of it, for example.
Someone here was arguing that advertising can't be measured only through impact on present sales but "good will and long term value". Tesla seemingly has good will beyond any competitors.
Also Tesla is buying battery cells, sells cars and expects to have third parties supply batteries long term - how can they be a battery company ?
But Apple sells computers ? Tesla is selling some battery installations from what I saw but their core business is cars. You could claim they are valued as a software company because of FSD, but I don't really see the battery angle, they would be not be anywhere close their valuation if they were valued on that angle.
> Car brands are the obvious example of brand advertising.
Car commercials crack me up. Nissan is running commercials lately in the US on how dynamic, sporty, and fun to drive reckless/fast their cars are on TV.
"Boring" utilitarian cars have gotten much, much better over time, and can easily match acceleration times of previous "pony" cars of the 90s and earlier — cars that were once considered fast, sporty, and fun to drive.
They can do it while being much larger and achieving much better MPG, as well as being a lot safer.
Utilitarian electric vehicles are even better, but not quite commonplace yet.
> "Boring" utilitarian cars have gotten much, much better over time
I would rather the commercial tell me how purposeful their car is, not how much fun it would be to drive. It's extremely fake/in bad taste/disconnected from reality to try to sell me a Nissan Versa based on how much fun I am going to have in it.
Over here, almost all the ads call the cars "over equipped". Always make me think: could you please remove the superfluous equipment then, and reduce the price?
But it's hard to refute the case that it's not true. I haven't watched TV in years nor have I seen Coca Cola bear in a time longer than that but I'm still acutely aware of Coca Cola's brand.
Another example where this is more clearly felt is consumer goods. I always buy Tide - I couldn't tell you why until someone pointed it out to me. When I went to college and had to buy detergent there was easily 10 brands of detergent and Tide felt the safest. I've been watching Tide ads for the better part of 18 years and I feel that had to have some decision into why I paid a 10% premium for the brand.
==One of the ways that advertisers and marketing people stay employed is they say that the output of their effort and money spent is not quantifiable.==
It gets quantified as "Goodwill" any time a company is valued (acquisition, IPO, investment, etc.) or releases financial statement (it's on the balance sheet).
Coca-Cola is coming up a lot in this discussion. They have Goodwill of $17.7 billion, along with additional intangible assets of $11.2 billion. That $29 billion of Goodwill makes up about 32% of Coke's total assets of $90 billion.
Goodwill only ever shows up as the result of an acquisition. If a company with a book value of $1B gets acquired for $10B, the balance sheet of the acquirer will see its goodwill increase by $9B after the acquisition closes. Nobody's doing a bottom up estimate of brand value to come up with that $9B, it's just the fudge factor double entry accounting needs in order to make the Equity = Assests - Liabilities equation continue to hold.
This is true from a pure accounting perspective. In reality, if a company only has discounted cash flows to imply a $1b valuation but sells for $10b, there must be something to explain that difference. In accounting, it's just an equation to make things balance. However, for the firm who decided to offer $10b, there is clearly some additional value they are applying to the $1b book.
In double entry accounting, the $9B has to go somewhere, or you defeat the primary objective, which is to make it harder to forget transactions by maintaining a number of invariants. The two relevant ones here are [Equity]_t = [Assests]_t - [Liabilities]_t, and [Equity]_t = [Equity]_t-1 + [Profit]_t + [net cash from stock issuance/buybacks]_t - [dividends]_t
The method that GAAP chooses is to move the $9B from cash to goodwill (assuming a cash transaction), which is a transfer from one type of asset to another. The alternative that I think you're suggesting is to move it from cash to expenses for the period in question. There's not necessarily a right answer to this question, accounting conventions are subjective, but I think most people think that the market premium you pay in an acquisition is more like acquiring an asset that will yield future business profits than an expense which, now that you've paid it, will have no future utility to the business. And it's easy enough to look at it the other way if you care to: the goodwill is reported in the balance sheet, and the cash flow statement shows the huge outlay of cash.
I don't know the details, but I'm pretty sure it's tax related. I'll bet companies would love to be able to do that. Because then that company could deduct that capital loss from their income to lower or eliminate their tax burden.
I was under the impression that marketing costs fall under a cost of revenue column and goodwill is just a BS account item to account for differences in money spent and 'market value' during m&a.
"The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some reasons why goodwill exists."
The first three are directly tied to advertising and brand-building. You call it "BS" for some reason (you seem not to believe in it), but it is a real thing and we have financial methods to account for it.
> You call it "BS" for some reason (you seem not to believe in it)
The balance sheet is typically abbreviated as BS, so a BS account is a balance sheet account.
It's been a while since I've had anything to do with goodwill, but if I remember correctly it's most commonly the difference in the assets net market value and the purchase price of a company. So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference.
This is, of course, a simplification as I'm sure goodwill is regulated under GAAP/IFRS. But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.
==So if company A buys company B, which has assets of $50 for $100, then they'll add $50 in goodwill to account for the difference.==
Goodwill is an asset and we frequently see it monetized. It isn't just a made-up number to make things balance, it is a stand-in for particularly "hard-to-value" assets like perception. Ford famously licensed their logo and built a $1 billion business [0]. Prior to the licensing deal, that value would have only been captured as Goodwill on Ford's balance sheet. It is the value of the blue shield that they have built over decades of company performance and advertising.
==But it does mean that you can't use goodwill to accurately estimate the effects of brand advertising as there could reasons other than brand marketing for a company being traded above its assets' fair market value at the time of the sale.==
Goodwill is a combination of many things, one of the largest pieces being brand value. Publicly traded companies generate a Goodwill number each time they release a financial statement.
== The Intangible Valuation Renaissance: Five Methods [0]
== 3 methods for valuing intangible assets [1]:
1. Under the excess earnings method, valuators forecast the after-tax cash flow that the asset is expected to generate. This method can be the most complex (and costly), but is also usually the most accurate.
2. Under the relief from royalty method, valuators forecast the revenue that the asset is expected to generate, then apply a comparable industry royalty rate and subtract taxes.
3. Under the cost method, valuators determine the cost to develop the asset (i.e. labour and materials), plus a reasonable return on that investment. This method is often used for early-stage companies where forecasts are difficult to prepare or in instances where information doesn’t exist to use the first two methods.
== Financial Valuation: Applications and Models [2]
"Coverage includes state-of-the-art methods for the valuation of closely-held businesses, nonpublic entities, intangible, and other assets, with comprehensive discussion on valuation theory, a consensus view on application, and the tools to make it happen."
A lot of marketing activity is measured these days. A lot of the measurement ends up being through proxies that may correlate poorly with what you really care about. But you might be surprised at the amount of data associated with marketing campaigns, content marketing, events, and so forth. It's a lot more than used to be the case.
It clearly is quantifiable. The market is changing but if you capitalize advertising costs in financial results then you see that long-term investment in advertising does produce results, and companies in these industries view this investment as their moat (and btw, if you sell a FMCG into a grocer, they will want to know what you are investing into the brand...they know it works too).
Now, to be clear, this isn't the same thing as saying that all TV advertising has a positive ROI. It doesn't, I would guess that most is negative. But it is also true that there are a small number of firms who have made it work (as in most things, 80/20), and most of this gain is not easily measurable over discrete periods...it is continuous investment over decades.
But the market has clearly changed. People are spending their time doing different things. I think TV advertising time at certain periods is maybe cheap, but almost all the rest is overvalued junk. AdTech online isn't particularly well developed for this kind of campaign, online advertising isn't particularly effective either (the move to intention doesn't fit the long-term strategy that FMCG and similar big buyers of TV ads have) but it is probably more effective. Maybe if TV costs go down this will change, but...I don't know (radio and door-to-door is undervalued imo).
I think I have the opposite reaction from the same data. The reason I can't get my own sugar water on a grocery store shelf is because the grocery store doesn't want to give space to something that only sells half as well. And, they are humans too, so I'm sure they are biased by the ads/perception of what they think other people want.
I think a lot of the long-term bonus of ads is to simply build a moat that other competitors find difficult to surmount.
I think you're overlooking a couple of grocery-specific issues.
Many major retailers will require that new brands invest a certain amount of money in advertising product to their region/market before stocking the product. It's also common to 'lease' shelf space to manufacturers.
I think we largely agree. I know people who have launched food items (bug snacks) that were piloted in a dozen or so Whole Foods. They didn't sell enough in the trial period that they weren't given offer/lease to return.
It was a super niche product they were making but were up against a couple products that I've at least seen ads for online. I think, theoretically, if those other companies didn't have a brand presence then perhaps my friends snacks would have had a slightly better shot at staying on the shelfs. However, from the other products data they may have seen no short-term gain from their ads.
A lot of marketing money is "paid" (simplifying here, but I can expand if desired) to get that shelf space from the store, as well, in ways that you probably didn't know/haven't thought about.
1. You may already have a brand, but many don't - so they want people to switch.
2. People who don't drink soda need to get hooked somehow!
3. Increasing consumption. Think about the "Got Milk?" campaigns of the 90s - they weren't saying "drink XYZ brand milk", they were looking to increase milk consumption.
I think #3 is probably the biggest factor, tbh. That's why you see ads for cotton, milk, beef, avocado, etc.
#3 is because there are middlemen that don't count. The middlemen in dairy want you to buy their brand of milk. However the guy who owns the cows sells to whichever dairy gives the best deal (the big farms all have a contract with one dairy to supply only them, but there are enough small guys who sell to who ever they can). The guy who owns the cows wants you to buy milk and doesn't care what brand it is.
The same applies to the others you named: sure there are brand, but there is something large below the brand that doesn't care what brand, only that you are eating.
I think you're missing the biggest reason for product advertising, which is to notify/remind potential users/consumers that the product exists.
Many people are unaware that a given product exists at all, and others are unaware of all its potential uses; even occasional users can sometimes forget that they liked a product or found it useful.
If you cannot measure then you are just bluffing that it works! You cannot know yourself for god's sake!
"Been on the leading edge of marketing and advertising for over 12 years "
Aaaaaah, I see! It is your personal interest to be payed very well for unsubstantiated claims! Fishing in troubled waters. We will consider your !!opinion!! accordingly....
Okay, I agree with everything you've said. In a "Data driven" organization, how do you prove that your brand marketing is working in order to protect it? A new leader comes in and says "this isn't adding value, you cant prove it's adding value, I'm cutting it unless you can prove it." What's your response?
You can a/b test brand marketing effectiveness. Test and control markets over a long time frame, let's say 6 months to a year. The problem is that the level of investment is quite high and that the total results take a long time to reach significance.
Do you ever find annoying that the current narrative on the internet ( and on HN ) that All advertisement are bad? Approaching to the point of finding people working inside Ads industry as witch hunt?
I agree with you on large national/international brands; however most of the brands that I see on cable TV in the U.S. aren't similar to Coca Cola. They are a fitness device that I have never heard of. They are a dry good that I didn't know existed. I would love to provide an example, but I can't remember any of those brands.
The study cited by the OP has an interesting appendix [0]. It shows the depths they went to in order to conduct the study. The level of ads are also dissected into national, regional, and local ads. If you look at the final table in the study which shows all the categories of brands examined, I would challenge anyone to remember a brand or product they saw on TV related to many of them. Dough products? Eggs?
Maybe I have seen an add for a paper product (top category of advertising), but I can't remember who that would be. Bounty... maybe?
This is exactly the problem: it is impossible to measure how much advertising helps. And maybe there are some measurements but they are not known.
You might be right or you might be wrong.
For example, I do not see Tesla commercials on TV so I wonder if they will sell more cars in next decade if they advertise as other car companies? Is Tesla making a mistake?
> it is impossible to measure how much advertising helps
That is false. It is impossible to measure exactly, but statistics can put a range on it, confidence intervals, and other such things (which I've mostly forgotten since school). We can measure all this to close enough.
If a competitive alternative cool electric car appears, and they use advertising to steer the opinion of the public of being the best electric cars on the market ... I think Tesla will start advertising!
And this is the best argument to bring back old school banner ads that were just an image without any third party js, or tracking. Advertisements don't have to work NOW they have to work eventually.
At least it's the best argument from the advertisers side.
> is to add PENNIES (not dollars) to their sales every day
How much growth has Coca-Cola seen on their specific "Coke" line of products? How many people who don't already drink Coke, Coke Zero, or Diet Coke are going to be influenced by a (probably very expensive) TV advertisement reminding them that Coke as a brand of sugary drink exists?
I feel like if they ever wanted to save millions and millions of dollars, they could just stop advertising.
You and I certainly do not need to see any more Coca-Cola advertisements to remember that the brand exists when we are choosing what drink to buy. But there are hundreds of thousands of people born every day. If Coca-Cola stops advertising it may not impact their sales for years, but eventually they could fade away.
They have to keep up the appearance that they are pretty much the only cola drink you ever want to buy. If they stop all their advertising, people would start seeing other brands (and I don't mean just Pepsi, all the other lesser known local brands as well) as viable options.
The ketchup industry stopped advertising, and over the next 50 years their market share went down. Nobody knows for sure how much was stopping advertising, but nobody wants to take a chance.
If you're not measuring value delivered, how do you know that you're actually delivering value? Remember, you're the person that you can most easily fool.
Fields as diverse as active fund management and psychic readings have been filled with practitioners who were wrong about the value that they thought that they were delivering. I have no particular reason to believe that brand management isn't another.
> Brand advertising, in contrast, works on a spread-out scale of years or decades. When Coca-Cola runs a polar bear ad at Christmastime they don't do it to increase sales of Coke that week, nor should it be measured that way.
Curious... A year ago, an older lady gave our daughter a little Coca-cola polar bear stuffed animal. It seems their advertising dollars are still having an "influence".
I fundamentally disagree with your Coca Cola example. This is a prime example of introducing a new use case for a product which is traditionally associated with summer and warmer climates. It’s done directly to increase sales during the winter time and to associate the brand with Christmas.
Overly long, a bit smarmy. The main points, that the audience for that ad aspires to be old money while at best being nouveau riche, and ads that appear to be for women but are placed in a men's magazine are actually for men both seem accurate to me.
And no one wants to hear this. They want results tomorrow because their job depends on it. All good advertising is long-term advertising, but hardly anyone has the patience for it anymore.
... which is pretty convenient for you and guys, because if you look at it that long-term way, nobody can tell that your whole product is a useless scam
I think its fair to say that the reasons a rocket company does not need to advertise dont apply to companies that people buy weekly/monthly on a grocery store shelf.
Besides, the advertising budget of other government contractors/satellite companies is also close to zero.
The better question is "If I ran Pepsi today - would I drastically lower the advertising budget". I'm not sure what my move would be but I don't think looking at short term ROI of TV ads would be informative.
It is effectively advertised by everyone for Elon for near 0 dollars. Launch a rocket (different company) the article will mention Tesla for them. Talk about saving the environment guess who gets mentioned. Talk about power needs, Tesla comes up as cars are becoming a large consumer of electricity, solar, coal, nuke, etc.
His advertising is basically being done for free by companies who do not even really realize it.
And yet https://cometcleaner.com/ is an enduring consumer brand that has been around for decades and does basically no advertising.
A story that I remember from the 80s is that the brought in a consultant to improve sales. Rather than advertising, they opted to add one more hole to their cans. Sales went up 20%.
I think if we get to the point where they are trying to get people to switch their cell phone or internet plans - they will do more traditional tv/online advertising.
That being said - I don't think a successful one-time advertising push by a completely new field speaks to the long-term benefits of it once they (presumably) become established.
SpaceX and Tesla absolutely have marketing in the forum of a crazy CEO that makes the news a lot. SpaceX fancy rockets gives him a platform to spew crazy shit all the time and the media loves it.
Beats makes inferior products and yet has twice the revenue of Sennheiser. That's because of marketing.
Academics divide awareness into status (perceived quality) effects and reputation (actual quality) effects. Paid marketing influences both, but there are other ways of getting your name out there, and some companies are better at it than others.
> I'd buy Sennheiser over Beats
Sennheiser has a higher reputational quality than Beats, but most people know of Beats because of Beats' affiliations (status) and their large marketing budget.
They actually make their products more expensive than necessary by making the client pay for something they have no use for: advertisement - making it less competitive by this extra price. I avoid heavily advertised product when I have a choice (and when not, then it has just no benefit for the company to pay for advertisement: I'd buy it without adverts for the same price.)
SpaceX and Tesla do viral marketing, and they are really good at it.
In a narrow sense, Tesla doesn't advertise: they don't buy ad spots on TV, but they certainly do it in other ways. I mean, SpaceX started because Elon Musk wanted to buy a Russian ICBM to put a small greenhouse on Mars as a publicity stunt, Russians said "WTF lol no", Elon Musk said "Ok, I will make my own rockets". I don't know if it is true but it certainly shows the lengths Elon Musk is ready to go when it comes to marketing.
And you say you'd buy Sennheiser over Beats, but you certainly know about Beats. Everyone knows about Beats. To give an idea of the power of Beats relentless advertising, audiophiles (Beats supposed enemies) make articles like "list of bass heavy headphones that are better and cheaper than Beats" (that are not that much cheaper). It may seem like they are attacking Beats, but instead, they have just set them as a reference. Bass heavy headphones = Beats. They talk smugly about how Beats prioritize form over function (Headphones that look cool = Beats). Guess what someone who wants bass heavy headphones that look cool will buy, even though they Beats is far from the only one offering such products?
You won't buy Beats, they don't care, you are not their target. If they want to capture your market, they will create or buy another brand, and use a different marketing strategy.
Advertising is at its core a prisoner's dilemma. If every competitor in a certain space puts in $100 in advertising, they can all expect $0 in returns. However if a single company put in nothing they would be in a worse place because their competitors' returns would automatically become higher.
It’s partially a prisoner’s dilemma. Advertising reduces search costs for buyers to a certain point, after which it raises them again due to a glut of similar messaging. There is a moderate point at which buyers are hearing about enough potential options and are able to conduct a more effective search for products/vendors/sellers, and the cost is reasonable for the sellers (it reduces their sales costs, gets their economy of scale beyond the threshold needed to viable produce and serve customers.)
Beyond that moderate point is where the dilemma sets in as each company wants to increase advertising until the additional return is no longer positive—-but if every company pushes to the same point, the additional return at that stopping point becomes negative.
Which is why I think push advertising is the wrong model for product discovery. Facebook has all the information to be the best shopping meta-search in the world. They could become the go-to place for product discovery usurping Amazon and Google if they just turned their ad platform around and let shoppers drive.
AliExpress has this flow almost perfected but they are ultimately still limited by the sellers on their site where Facebook wouldn’t be.
Certainly FB/Ali’s model is appropriate for many markets. There is still a perverse incentive since the publisher/market-maker doesn’t want to limit investment in advertising, but the degree to which campaigns can be measured makes it harder to hide the results of overspending.
A guy doing marketing for a travel company once told me they had to spend an enormous amount of money on Google, for their own brand. People would search "brand cityA cityB", but a competitor would buy the top spot. How much were the competitor willing to spend? Basically their whole margin for that sale, as it was still better than nothing. So this company had to match that.
So in the end Google makes more profit per ticket than the companies delivering the service itself.
The Slate Star Codex guy calls this a multipolar trap [1]. A market is in some equilibrium. Then, one person does something "expensive" to gain an edge on everyone else. Eventually, in order to remain competitive, everyone has to do that expensive thing, and the market settles on a new equilibrium where we're back to nobody having the edge but now everyone is paying.
Ouch. Never thought of it this way. I know it’s borderline anti-American — but when you have such compelling incentive structures at what point should we demand government regulation? If 80% of advertising is not helping consumers discover products — arguably the primary functional purpose of advertising — then isn’t this in a way an economic sickness wasting the resources and stifling innovation?
It's bizarre to me that the government hasn't stepped in to regulate/ban medical advertising in America. Nobody wants it – not consumers, not doctors, not even the drug manufacturers themselves.
Medical advertising is obviously heavily regulated, save for supplements.
Arguments specifically against advertising medical devices and drugs are patently absurd. Prescription drugs and medical devices are literally the only ad on TV that requires an expert with a decade of training and a fiduciary duty to you to approve it before you can purchase.
Bans on things that are deadly like unhealthy foods, or things with proven negative ROI and for which debt cannot be forgiven (student loans for liberal arts degrees) don't even enter the conversation.
There's at least one group that likes drug ads: the advertising industry. High-dollar clients with long commercials (to fit in all their required disclaimers), and they're probably the ones with the connections to the appropriate regulators.
Personally I absolutely despise drug commercials, there's not much that will make me change the channel, mute, or turn off the TV faster. Is there a more blatant display of the faults of capitalism?
>There's at least one group that likes drug ads: the advertising industry.
There's another group that likes drug ads: media corporations! Part of the reason big pham spends $billions on ads is to buy the support of the media giants.
It's not even attributable to "capitalism," per se, because the US and New Zealand are the only places on Earth where they are legal. I may be blinkered as to global laws, so maybe I'll just say the Western Earth.
I feel that there is different types of advertisement. Brand advertising isn't so much about acquiring new customers but about reassuring existing ones. Like I honestly feel car makers don't need to advertise on the web or TV, yet they do it anyway. I have the car I have and I'm not looking to buy another for 5-7 years, yet Toyota and Ford will advertise to me as if to say "I'm still here in case you change your mind." I can't imagine the ROI is particularly high, yet not doing would be worse since competitors would silence you out. At the same time M-B isn't advertising to sell you a car but to sell you the exciting lifestyle you're going to have in their car. You already bought or planned to buy their car they are only reassuring your decision.
While you personally are not buying a car, every day there are hundreds of people in any small city who buy a car, so it is important to advertise to them. You personally might never buy a car, but they don't know how to target people who are not buying a car "soon".
If neither Pepsi or Coca-Cola advertised I think its plausible their positions in the market relative to each other could be the same proportion they are now. However, it would make it easier for restaurants, grocery stores, etc. to go with non-brand sodas (that also don't advertise).
I mean a few restaurants in my city are trying the non-Coke/Pepsi thing but after chatting with an owner about it they said it was more expensive because the local brands don’t have the logistics network.
That might be true for products or services that people need and know. But what about new or less known ones? For example, I will buy a car and one car only. All the advertising is not going to make me buy two. However, for electronics, I might buy an additional TV or another tablet, or gaming console.
You mean zero-sum. Advertising is a zero sum game.
I can't find the tweet but someone referenced the fact that if you lump traditional and digital media together, the TAM of advertising has basically been stagnate for decades. We just think its grown because FB/Google/etc have gobbled it all up.
It's not quite true that advertising is a zero-sum game. There are economic benefits from increased competition, and from improvements in presented choice.
It is definitely true that the economic benefits don't accrue to the advertiser! And it's also true that the economic benefits decrease as advertising saturates. But it's still not zero.
Let me rephrase because I don't think you understand what part of the advertising industry I'm referring to as zero-sum.
Advertising is basically cultivation of people's attention. There is a finite amount of eyeballs/"time of eyeballs" in any given any day for their attention. If all advertisers are trying to capture this attention, it means that for every advertiser who is able to capture an eyeball, it means another advertiser loses the ability to capture the eyeball (hence why Google/Facebook ads are auction based).
How exactly does their logic not add up? This is actually a specific example of a prisoners dilemma taught in some intro to game theory classes, with the classic example being the tobacco companies
Well it assumes a zero-sum game from the perspective of the competitors. The combined advertising effort of all competitors could grow the entire pie that they each share. Even though their percentage of the pie stays the same, the magnitude of the slice could be bigger, and that improvement in magnitude could outstrip the advertising cost, thus making it worthwhile.
In heavily saturated markets (notably cigarettes as the main well known case study), advertising can be more zero sum than not. No model is perfect, but the prisoners dilemma model for advertising is at least useful in a couple well known cases.
> If every competitor in a certain space puts in $100 in advertising, they can all expect $0 in returns. However if a single company put in nothing they would be in a worse place because their competitors' returns would automatically become higher.
Assume competitors A, B and C and all put $100 each into advertising. That's $300 spent on advertising. Each competitor only has to earn $101 in sales to get > $0 returns. There is no theoretical limit on how much each competitor can earn in sales. Let's randomly say each company makes $500 in sales. That's a return of $400 per company. If a single company puts in nothing, they may likely earn less in sales, so let's say company A spends nothing on advertising but still earns $450 in sales, meanwhile B and C spend $150 on advertising and make $475 in sales. Company A gets a return of $450, and companies B and C get a return of $325 each.
Anyway, all this math is irrelevant. OP said each company should expect $0 in returns. Where does that $0 come from? There is no rule that says they will earn $0 in returns.
> This is actually a specific example of a prisoners dilemma taught in some intro to game theory classes
You are correct that prisoner's dilemma is taught in intro to game theory, but you are not correct that this is an example of it.
You are correct, but if you look at total instead of marginal the picture's not much better. While 80% of brands have negative marginal ROI, 67% (2/3) have negative net ROI, and so would presumably be better off with zero advertising.
Not necessarily. The thing to measure is the marginal ROI at zero advertising spend. Derivatives are not bounded by their average value across a range.
The claim was: "67% (2/3) have negative net ROI, and so would presumably be better off with zero advertising."
If they truly have negative net ROI, they would be better off with zero spending than their actual spending. The claim holds.
> The thing to measure is the marginal ROI at zero advertising spend. Derivatives are not bounded by their average value across a range.
OK, so if we're going to get super pedantic... the derivative could be negative at the current value, and at zero, and there could be a positive ROI for some value of spending (between 0 and the amount spent, or even for some value more than what was spent). But it's not really likely, nor relevant to the point the person above made.
Furthering the pedantry, even assuming monotonically decreasing ROI as ad spending increases, as long as ROI of the first dollar was positive, there would be some optimum between zero and current levels. But my original statement still holds, zero would be preferable to current levels of spending for those brands.
Submitted title was "Advertisement has a negative return on investment for more than 80% of brands", which broke the site guidelines, which ask: "Please use the original title, unless it is misleading or linkbait; don't editorialize.". We've fixed it now.
I can't see the whole article, but if they don't mention advertising for brand recognition then they are missing half the puzzle (i.e. indirect effectiveness, which is almost impossible to measure).
Coca Cola doesn't shower 16-25 year males with ads because they think they'll walk out the door and go buy a can of Coke. They do it because when they have discretionary income (age 22+), they recognize the brand. This is impossible to measure precisely.
I am the marketing director at a professional service firm. We started advertising on radio and tv about 7 years ago. The first campaign we did generated clients at a cost of about $10,000 each. That was very expensive and we were disappointed. We kept going and we’ve seen the cost per acquisition go lower every year. After 7 years we are around 750$. Brand advertising is like a flywheel: you keep fueling it and it takes a while before it’s actually spinning. I really don’t think you can measure ROI. Especially since it helps your business in other ways too. Since we have been advertising it’s actually been easier for us to attract talent. Having a known brand is immensely powerful.
I work for a company involved in search engine advertising.
While it's technically possible to track conversions, very very few customers actually do it. Some don't have a great way to track it (health-care products where there's a privacy issue, brand advertising, informational advertising, services where there's no obvious immediate call to action, etc.)
Even among those who do track "conversions," I'd say under 10% of them actually define a conversion as something where money is exchanged immediately, which makes it hard to defraud. More than half of the conversion tracking we see just requires the user to spend a certain amount of time on the website, visit a certain number of pages or to provide an email address.
Not surprisingly, we see a massive dropoff in conversion percentage when money needs to change hands. It's more than 90%. Also, not surprisingly, when some action is required for conversion, we see more than half of the visitors taking that exact action and nothing more.
Our analysis of the above is that more than half of clickers on search ads, and probably more like 80%+ are just bots (or human "bots" in clickfarms) clicking the ads and then pretending to convert. Their incentive is that they are clicking ads on search pages where they get a share of the revenue.
Interestingly, when we alert customers to this dynamic and try to get them to shift their ad spend or conversion tracking to prevent this kind of behavior, they actively do not care and prevent us from doing it. Our analysis there is that marketing managers in general know that what they're doing is largely ineffective, but they don't want to admit that to their bosses because then it puts their jobs at risk.
So, what we do is help them maximize where we can, without pushing them too hard on the above: "Humankind cannot bear very much reality."
Also where "modern" "smart" platforms decide it's acceptable to chop up a video into a dozen slices and insert the same. exact. ad. in between each segment, causing half the viewers to swear off that brand for life?
Hulu is one of the worst at this, and it's astounding to me how seemingly willfully dumb advertisers can be.
It makes me think that no one in this industry actually cares. You've got marketing and advertising executives commanding eight figure budgets, inventing whatever metrics they need to showcase success and protect their jobs. They pay YouTube, Hulu, Samsung, etc millions, who provide back whatever engineered metrics they need to keep getting those paychecks.
You'd think there'd at least be some evidence in mapping advertising spend back to revenue, but I suspect that the platforms who can actually do this (e.g. Etsy) don't last very long or see worse advertising revenue, because it becomes startlingly obvious how poorly advertising works (especially when automated at scale).
It's a house of cards, with so many people deeply invested, spending their entire careers justifying their position, that it probably wont ever change.
I don't know if it's for a lack of bidders, or if the ads are that way by design. Some of what you're paying for is brand identification and repetitive commercials are one way to get that. Despite however annoying it might seem. The pool being advertised to will consider the advertised brand when 'Good/Service Need X' arises, whereas they likely would not without the ads.
Similarly, the only game I play on my phone is a card game, and ever since I visited my company's website to check on something, our Google ad is shown between hands almost 90% of the time. I never click on it, so you'd think they'd stop showing it after the 500th time (it's been weeks since I visited the website). Is that just a ploy by Google to overcharge us for advertising?
You can never measure response rate directly. There will always be people who see your ad and then respond later (possibly by some other ad on a different platform that they wouldn't have responded to in the first place otherwise). This might or might not matter to you.
The large companies who buy ads have statistical departments tracking their ad response. They know how well the ads work to close enough for their purposes. Those departments don't need the direct response rate because there are better measures.
How do the tax write-offs factor in? It seems almost impossible that advertising doesn't provide benefit when you consider the money would have otherwise gone to taxes.
If they can't get 80% back, that's pretty bad. I was wondering how these marginal net negative numbers worked. If they're saying it's 95% back, then that's still higher than 80%.
Can you elaborate your calculation more? Are you using $1 from the $2 profit to reinvest in advertising? Also are you getting an 80% return on that $1 meaning getting back $1.8? ($1 investment in advertising + $0.8 profit)
In short, %80 return means that if you spend 1.0, you only get back 0.8. You forever lose the $1 spent, but get more sales and worth $0.8 after costs.
Here are more details (repeated for clarity)
Assumptions:
20% corporate tax rate (assessed on total profit)
80% Marginal rate of return for advertising (next dollar you can spend)
1) You have $2 profit (before taxes). You can take it and pay $0.4 in taxes, leaving $1.6 after taxes.
OR
You have $2 profit (before taxes), You spend an extra $1 on marketing with 80% return. The $1 spent on advertising returns you $0.8. You now have 1.8 total profit. You pay 20% ($0.36) in taxes, leaving 1.46
You will always loose money if the marketing ROI is less than 100%
Ok, thanks for the explanation. I got confused because of your definition of ROI. Normally, ROI of 80% would mean you invest $1 and get back $1.8 in return. see https://www.investopedia.com/terms/r/returnoninvestment.asp. What you described will mean -20% return and not 80% return. But I get the point you are making and I agree with it.
This is a great point, and the authors don't take it into account. Expensing advertising certainly provides tax shield and it will make a significant difference at the margin.
Edit: The taxation become relevant while considering expensing vs capitalizing advertising. I am not an accountant but from what I understand, at least in the US, advertising is commonly expensed.
Freakonomics has an episode that talks with one of the authors and summarizes a lot of the discourse that's happening on this thread [1]. Note that it's a two parter, one for TV and one for digital. It does a good job grabbing the economist's view trying to measure the ROI and the advertiser's view, as discussed by hammock.
I have not read the paper but I have done extensive ad effectiveness analysis and the one thing most papers ignore is that having your product listed in a store is a given. More often advertising is protecting your product's listing in a store. Ad spending isn't just about boosting your own sales, but those of the category and adjacent categories. If those 80% of brands stopped advertising to prevent $1mn of negative ROI but then were dropped by the store, causing $100mn of negative ROI.
I bought some woodstain the other week. I chose to seals quick drying woodstain because it’s woodstain that’s quick drying and from ronseals. It does exactly what it says on the tin
The only reason I chose this was because of the pervasive tv adverts in the 1990s when I was a teenager. Back then I had no need for woodstain, and very limited idea on what I would want it for, I didn’t buy any until 15 years after I stopped watching live tv (and thus tv adverts).
First place I’m going to look for a new sofa would be DFS, again because of the adverts, again from the 90s.
another effective means of increasing sales is to threaten people with violence if they dont purchase your products. of course these days thats not really tolerated. im not sure when, but i hope some day we stop tolerating the pollution of modern advertising
Imagine how low it would be if all internet users actually employed ad-blocking of some sort. Honestly remarkable how many people, faced with the prospect of sitting through extremely annoying video ads, or having their search results and webpages cluttered with useless ads, do nothing instead of spending one minute to install the appropriate blocker. Obviously not everyone is aware these exist, but you would think their curiosity would lead them to find out once they get fed up with having their time wasted by having their activities interrupted constantly and having manure shoved down their throat.
In the USA, adblocking penetration has been rising for years, but looks to be plateauing; this estimate says that a bit over a quarter of all internet users block advertising on their connected devices: https://www.statista.com/statistics/804008/ad-blocking-reach...
Limited-time promotions, e.g. a 10% off sale, work on short timescales that are easily measured. You can easily say what the ROI is of an advertised promotion, and it is often positive. (Side note, these promotions have a more-difficult-to-measure detrimental effect on your long-term profitability, closely related to the point I am about to make below)
Brand advertising, in contrast, works on a spread-out scale of years or decades. When Coca-Cola runs a polar bear ad at Christmastime they don't do it to increase sales of Coke that week, nor should it be measured that way.
The actual effect that a brand advertisement has, is to add PENNIES (not dollars) to their sales every day, for the next 100 YEARS. It's a long-term investment. And for these reasons hard if not impossible to measure or control for confounders - but that doesn't mean it doesn't work!!
And without that brand investment, their brand value is continuously eroding away, at a rate of pennies (or more) per day.
Source: Been on the leading edge of marketing and advertising for over 12 years