When you apply the economics to advertising you learn some interesting things. Things that have profound ramifications for us in how advertising effects us — as individuals and as a society.
There’s been plenty written out there about what advertising means, about how it makes us feel. There have been cultural evaluations, phycological tomes, books written about the brilliant creative campaigns made by the Mad Men and Women of the industry. This isn’t a about how advertising makes us feel. This follows the money. Seems like an obvious exercise, right? You’d think the people who spend more than $200 billion dollars a year would delve into the economics of their industry. And they sort of have, but not really. They’ve been laboring under false assumptions. Economists — these days armed with scientific tactics involving studies of large pools of data and a new commitment to actually talking to people, instead of just jotting theories down to paper — have made attempts at setting the record straight. But the advertising industry — and the internet industry it funded — haven’t really listened. Aside from secret, expensive think tanks at universities funded by the largest brands on the planet, this knowledge hasn’t really permeated the industry. And even though it has profound ramifications on all of us, and society at large, society as a whole has been woefully underserved on this topic.
The question isn’t academic. Many of us feel deeply uneasy about advertising. Today, in the wake of the 2016 presidential election, many of us wonder if advertising is evil. Throughout history, like any good citizen, economists have struggled with this question. They have brought to bear their best methods at every point in history to weigh in on the topic. To economists, the field of advertising is like the “covers album.” Many famous economists have felt a compulsion to take a crack at it. The issue is a particularly thorny one for economists because at the core there is a contradiction: in a perfect economy, with rational human beings, advertising shouldn’t exist. Yet it does. And there is lots of it. Is this a good or bad thing for society? Economists’ opinions on the subject have changed through time, yet by the 1980’s, they had come to a rough consensus: advertising was good and bad, but more good than bad, mainly because it brought us awesome things like, you know, the news every night. Anyone who’s heard of Cambridge Analytica would be forgiven for wondering if that consensus is still correct. It seems clear that the time has come to revisit that eternal question: is advertising good or bad?
For seven years, I’ve been working on a book that rounds up everything we’ve learned through the years about the economics of advertising. From the earliest half-assed theories to the latest, scientific, methodical studies. When we do that, some sacred calfs end up being sacrificed. In my twenty years working in the advertising industry, I believed every one of these myths at one time or another. I’m willing to wager that anyone who’s spent any time thinking about advertising has believed at least one of them. I’m willing to bet that everyone who’s worked in advertising has believed most of them at some point.
Virtually all of the discussion about advertising in America falls prey to believing one or more of the five myths of advertising. In order to truly understand advertising’s economic — and indeed, overall — impact on society, these myths need to be permanently shattered.
Myth 1: “Advertising doesn’t work. At least not on me.”
The simple explanation here is that pride causes individuals to believe that advertising isn’t working on them. The more charitable explanation is: how can one really feel when their opinions have shifted in a new direction by 2%? The popular conception about advertising is that it’s supposed to radically change your mind: to inspire you, suddenly and unbidden, to decide “Yes! I DO need a new Toyota!” This does happen, occasionally, but the layperson is correct in thinking it usually doesn’t happen to them. Because that’s not the point. Advertising is like a flame under a kettle. In the first minute, the water got slightly warmer. It’s not boiling yet, no, but a change has been made. And when you’re Toyota, a 1 or 2 percent change in the public’s perception of their product at scale means billions of dollars.
Furthermore, while the individual human may be the expert on how their own mind works, science is the expert on how all minds work. And the science has shown — repeatedly — that we are not complete masters of our own opinions. For example, it has been shown in studies — famously popularized in Daniel Kahneman’s masterpiece Thinking, Fast and Slow — that if you ask a group of people (not just an individual person) if they are thinking of buying a car, the group as a whole suddenly becomes 10% more likely to buy a car (Kirmani 1990). Every time. Think about that. Think about what it means — both in terms of advertising’s effectiveness, and morally.
With the early work of Richard Thaler, Kahneman and Amos Tverskey, the field of economics underwent a revolution — known as behavioral economics — that radically changed the way we think about how humans make decisions. It would not be surprising to the average person to learn that we have discovered that humans don’t always make rational decisions. Yet when it comes to advertising, despite all evidence to the contrary, humans still often believe advertising doesn’t work on them. It does. There is no debate here. Science — economics, psychology, has proven this again and again. Yet the myth remains, even as the rational consequence of the myth beggars belief — that the smartest businesses on the planet repeatedly, year in and year out, waste billions of dollars for no reason.
Does some advertising work better? Yes. Does some advertising fail completely? Occasionally. But the evidence says that the advertising that fails completely usually fails because not enough money was spent on it. And the advertising that works usually gets more money allocated to it. Therefore most advertising works. And over time, the money spent on ineffective advertising falls away.
Advertising is not a pistol. You don’t fire ten shots at a target, hoping one hits, but maybe none of the shots hit. Advertising is a shotgun. It almost certainly will hit its target, even if individual pieces of the shot blast will be wasted. This, then, was Wanamaker’s dilemma: “Half the money I spent on advertising is wasted. The problem is I don’t know which half.”
Myth 2: “Targeting matters.”
Taking Wanamaker’s dilemma a bit further, it is important to know that — in the big picture — targeting doesn’t matter in advertising. Were advertising a pistol, you could get better at aiming. You could shoot one well-targeted bullet, and hit the target. But you can’t shoot half a shotgun shell.
Now, this might seem like some kind of metaphor i just made up. It might be more of that home-spun ad philosophy from a grizzled old ad vet that we have come to take as science and gospel in this industry. But I assure you it is not. It is science. But it is more than that. It is common sense. Think it through: who is going to sell more products? Someone who makes a toothpaste everyone uses, or someone who makes a toothpaste for denture wearers. The answer is obvious. So, even if the denture toothpaste costs twice is much, who is going to make more revenue? Again. The answer is obvious. The company that makes toothpaste for everyone. This would be mathematically true even if every single denture wearer decided they needed to spend twice as much for the toothpaste just for them, even though many of them rationally decide that good old fashioned toothpaste is just fine. So if this is all true, then, who will have the most money to spend on advertising? The toothpaste for everyone. And why would a toothpaste for everyone need to target at all? It doesn’t.
This is true in nearly every category: the product with the broadest appeal has the most money to spend on advertising, and they care the least about targeting.
You might hear about “personnae” in advertising: companies making a fictional biography of their “prototypical customer” and catering their advertising to that customer. While this can be a useful exercise in helping to craft your advertising message, the science shows us again and again that, in the words of noted advertising economist Byron Sharp, “it’s common practice for marketers to say ‘We skew towards young women, so that’s our media target.’ But this thinking is incorrect. What you should be saying is, ‘Why? Is there something wrong with our marketing?” (Sharp 2010)
Look at this another way. Some products — especially business-to-business (B2B) products — have very few purchasers. Doesn’t it make some sense to target these products to their potential buyers? Well, yes, it does. And we do. The reason this is far less important than most people think takes some explaining, but once you grasp it, it seems obvious. Imagine a four quadrant axis — price on one axis, number of buyers for the product on the other axis. Every B2B products falls somewhere on this spectrum.
Right off the bat, we can ignore the entire bottom half of this graph — if there aren’t many buyers, and the product doesn’t cost much, there won’t be enough money to advertise. If there are few buyers, and the product is super expensive, you might have enough money to advertise, but there are so few buyers, most of the time a personal, sales-driven approach makes more sense. Imagine a product that costs a billion dollars and has one buyer. You’d be much smarter going and finding that one person and talking to them than spending money on advertising.
On the top half of the graph, the same thing can be said about a low price object that has many buyers. You’ll definitely have some ad dollars, but not tons unless your B2B product has millions of buyers, in which case, you’re in the same boat as a toothpaste company. There’s no real point in targeting. Finally, if your product has many buyers and costs lot, you’ll definitely have enough money for advertising. Your advertising will work a lot like high-end consumer advertising (think all of those business credit card ads you see). This is tautological: the more buyers you have, the more ad money you have to spend. Thus, while there are exceptions to this construct, they are, by definition, small exceptions.
Make no mistake: B2B advertising is about half the advertising money spent in the US. So those small exceptions can add up — this is where Google makes almost all of its money. But when we’re talking about advertising as a single, monolithic thing, they are the exception rather than the rule.
Myth 3: “‘ad dollars’ are moving here.” Or there. Or whatever.
It is a myth to talk about advertising as a single, monolithic thing. Yet people make that mistake every day. “Ad dollars are moving from TV to the internet.” You’ll hear this statement stated as gospel, stated as fact, time and time again. It is a myth. There is no such thing as a generic “ad dollar.”
From the earliest days of economics, economists knew that there were really two things going on in advertising at the same time: two types of advertising. And that they were very different. John Maynard Keynes — and especially his disciples Joan Robinson and Edward Hastings Chamberlain — made this division explicit, analyzing and explaining each type of advertising as something completely different, with different ramifications, motivations and impacts.
Yet you yourself know this instinctively. It’s the difference between “Sale! 10% off” and “Just do it.”
You’d be forgiven for thinking that these two ad pitches are simply a matter of different styles, of different psychological approaches to getting you to buy toothpaste. But they are much more than that. They’r entirely different process. Entirely different sales funnels. Entirely different economics.
The former — “Sale! 10% off!” — Robinson and Chamberlain called selling costs. Today, we call it direct advertising.
The latter — “Just do it” — they called trademark. Today, we call it brand advertising.
The differences are huge. One works on you if you are already thinking about buying a product. One inspires you to buy a product. My friend, Percolate CEO Noah Brier, calls them “demand fulfillment” and “demand generation.” It is the difference between typing into Google “what kind of camera should I buy” and “what should I buy.”
That difference is key. For today, Google is only good at answering the first question. For the second, it is useless. So is Facebook.
But you know what isn’t useless for the second? Television.
With the advent of the internet and the rise of Google, direct advertising very swiftly moved to the web. Newspaper circulars disappeared: the classified section withered away to be nothing but legal notices. If you’re looking for a sale, the best kind of car to buy, or a good deal on Nikes, Google and the internet as a whole is your best friend.
That revolution is done. It happened. It is past tense. Armed with our new knowledge that there is two kinds of advertising, however, we can all of the sudden realize that getting a 10% off ad to move from the Times-Picayune to the internet is a very different thing than getting Nike to move its beautiful, emotionally moving Kobe ad to the internet. Sure, it’ll run on Youtube as well — and they may even throw YouTube a few bucks — but they’re gonna spend most of their money on running that ad on television. Even today. Noted internet research luminary Mary Meeker produces an “internet trends” slide deck. In her 2006 deck, she predicted that more of the ad money currently in television will move to the internet at a rapid clip. She predicted this again in 2008. And 2010, 2012, 2014 and 2018. It still hasn’t happened.
Will it happen, ever? It is difficult to say. But what is clear is Meeker is making the same mistake many of us make — thinking that there is a single, monolithic thing known as “ad dollars,” and that getting every dollar to move from television to the internet is equally difficult. She is wrong. Direct dollars lend themselves to the internet very well. Brand dollars do not. And there are a lot of brand dollars.
Myth 4: “Ad spending is driven by technology.”
“But the internet will only get better at advertising,” they will say. And maybe you do too! My comeback would be “how? why?” Will the internet one day get better at emotionally moving us? Because TV is really, really good at that. And these days, well, the internet isn’t looking especially promising. And when it does emotional move us — Netflix, perhaps — it looks a lot like television.
Television is a phenomenally effective medium to give people the feels. It is so good, in fact, it marks the only single time that technology made a difference on how much advertisers spend.
This is vitally important. Here we come to the fourth widespread myth about advertising: that technology influences how much advertisers spend on advertising overall. It is not true.
There are only two things that effect how much an advertiser is willing to spend on all of their advertising: the industry they are in, and the economy as a whole. Advertising by industry as a share of GDP is remarkably constant. All big soap brands spend about the same percentage of their revenue on advertising. They move in sync, and they pretty much only move when the economy as a whole goes up or down. Technology — the entire internet from the beginning of its existence to now — hasn’t made a lick of difference in this number. Only one thing ever did: television. Television was so profound in its cultural impact, so completely transformative to society, that that one invention and that one invention only caused advertising to work so much better that brands across all industries started spending more on their advertising. And since then, they’ve only moved along with the economy as a whole. The internet hasn’t made a lick of difference.
Now, this isn’t to say it might, one day. But so far, the results have not been encouraging. The 2008 recession, of course, radically changed economic spending. It is our misfortune that this happened right when the internet really got going. So we still can’t say if, since then, this trend has changed. But we’re a decade past the recession now, and so far it doesn’t look like the internet has made much of a difference at all to total ad spend.
So the next time you hear someone say that the internet will save brands money, take it with a grain of salt. Maybe the internet will work extraordinarily well as an advertising medium one day. It hasn’t, yet. But even if it did, ask yourself: would a brand decide to suddenly stop spending as much money on advertising just when it started working better? No. Would they spend more? Well, yes. So much as their CEO will let them, and she will decide that number based on what she’s always decided it upon: the industry as a whole, how much her competition spends, and what her stockholders will let her spend.
And even if all that came to pass (and remember, so far the evidence is against this), if you believe at all in the laws of supply and demand, you’d believe that their competition — in this case, television, would adjust its price to become equally competitive. So nothing will change.
Yet time and time again we hear this myth. That the internet will somehow “win” advertising, even while all evidence is against it, and even while television ad spending as been growing consistently for the last 15 years.
Myth 5: “This is all academic.”
In reading this, you probably understand why it’s a myth when people say that “internet advertising is more effective.” Targeting is overrated — while it’s useful in some situations, it is useless for the biggest ad spenders. The internet is probably more effective for direct advertising: “sale! 10% off” or “what camera should I buy?” but it is far less effective for the larger pool of money going to brand advertising. It doesn’t make brands spend any less (or any more) money. It has made a lot of great tech, but it hasn’t put a real dent in television ad spending, even as the eyeballs have been moving to the internet.
You’d be forgiven for thinking that, with that calculus, the math is a wash and it could go either way. But there is one more factor to consider — one that goes back to our original question: is advertising good or bad? For economists, when endeavoring to determine if something is “good” or “bad” do so holistically. They attempt to answer the question for society as a whole. They add up all of the bad (“negative externalities”) and all of the good (“positive externalities”) and come up with an answer in the aggregate. And we are still leaving out one factor: the news.
As we’ve said, economists have consistently revised their opinions about whether or not advertising is good or bad. Society as a whole has grappled with this as well. From Stuart Chase and the Consumers Union to the outrage around Patent Medicines in the early 20th century, to the hysteria around subliminal advertising brought about by Vance Packard’s 1957, The Hidden Persuaders to economists such as John Kenneth Galbraith and Thorstein Veblen who achieved mainstream success with their screeds against advertising, to the Sao Paulo’s 2006 banning of billboards, society at large has periodically revisited the topic. They have asked themselves “this advertising stuff is annoying. Should it be regulated? Is all of this annoyance worth it?”
When Google burst on the scene and began scooping up ad dollars, it did not take a little bit of ad dollars from all different forms of media: it predominantly took them from our nation’s newspapers. And in doing so, Google struck a blow at the very heart of civil society, and what economists argued was advertising’s chief benefit: that it funded the news. Whether or not the internet succeeds in taking ad dollars from television, the ad dollars it already has taken hit us where it hurt the most: by reducing our news industry’s capacity to inform us.
This radically changes the equation by which economists determine advertising’s benefits. It takes away the largest positive externality that we have, historically used to defend advertising, and keep it relatively free from regulation.
The math has changed. It would be folly to not revise the equation.
Which Half is Wasted
The genius of Wanamaker’s quote (and it probably wasn’t really Wanamaker who said this, but one of his lieutenants) is that the answer could come from many avenues of thinking: am I spending too much on direct advertising instead of brand? Vice-versa? Or am I spending too much on television when I should move my ad dollars to the internet? Or should I give up on the internet and stick to what works? Should I make creative, moving advertising, or appeal to logic and math? The irony is that Wanamaker didn’t realize that there was another way to divide the pie: should the ad dollars I spend be beneficial to society? Or should it hurt society as a whole for my benefit?
As a society, we don’t know all of the answers to this question. But we are far further along than most people realize. The answers may soon be at hand. We may not like them.
Works cited
Kirmani, Amna (1990), “The Effect of Perceived Advertising Costs on Brand Perceptions,” Journal of Consumer Research, 17, 160–71.
Sharp, Byron & the Researchers of the Eherenberg-Bass Institute (2010) How Brands Grow: What Marketers Don’t Know, Melbourne: Oxford University Press
