In the United States, advertising is a $250 Billion dollar industry, worldwide, that figure is closer to half a Trillion dollars. Yes T as in “Trillion”. So, it must work right? RIGHT? Right?
Advertising OBVIOUSLY works, otherwise why would so many companies advertise?
Freakonomics likes to look at issues and ideas from a different angle, in this episode they do not disappoint. Unless that is however if you work at an agency that swears by using television advertising. If this applies to you or your company, be prepared to consider taking a different approach.
Levitt was trying to understand the efficiency of advertising and went to a large multinational company that wanted to know if their Billion Dollar advertising budget was effective or not. By the end of the story it becomes apparent that the company didn’t actually want to know if they were wasting a Billion dollar per year advertising. What you take away from the research is that for every dollar invested in television advertising you get back roughly 0.01% in sales growth. Which means the research tells us that television advertising is relatively ineffective at increasing sales.
The average ad elasticity measures the percent change in quantity in sales. In traditional papers they referenced an ad elasticity of .2 or a 20% lift in sales as the average or benchmark which isn’t all that bad. But what the researches found was that on average the ad elasticity they found was .01 or less than 1% lift in sales. For every $100 you spend, you will return $1 in sales. Quite a dramatic difference in ad revenue and returns!
The Pittsburg Blackout
An economists dream is a natural experiment. When an intern at a newspaper in Pittsburg accidentally stopped advertising for a month they had inadvertently created a natural experiment. Eleven months of ads, compared to one month with none. They reviewed the sales data over that month. This was a car dealership that had been advertising like this for a better part of a decade. They took a month off, naturally, you would expect to see a large dip in their sales numbers during this break. So what did the data say? No change at all.
Advertising Wasn’t Driving Sales
Advertising wasn’t driving sales. Now, the ironic part is the dealership, when confronted with the data didn’t believe it and kept on advertising monthly.
The ironic part was when the owners found out about this natural experiment that proved the ads weren’t driving behavior of consumers they didn’t want to believe it and they didn’t want more studies to be done. They went back to adverting in the paper again.
Whether advertising works or not is a null question, it really doesn’t matter. What does matter is whether or not your leader(s) are going to be willing to change or adapt when confronted with this new information.
The Podcasts are worth a listen. The first against advertising and the second for advertising, albeit for different reasons.
Does Advertising work? Short answer, not nearly as much as you’d think.
eBay’s Experiment That Saved $1 Million Dollars
The second episode in the two part series was all on the topic of digital advertising. One great story from this episode was when eBay stopped digital ads for brand name recognition and opted for simply coming up in organic search. The result? A saving of a million dollars and no trackable change in website visits or sales.
Developing a deeper understanding of how online advertising works is important for companies and individuals to make better decisions in the future. It’s not about advertising more and more, on the contrary, what’s the least amount you need to spend to increase sales by a significant amount? When you spend _____ what’s your return on sales? These are the questions marketing departments need to be asking.