TV Advertising Effectiveness and Profitability
onlinelibrary.wiley.com
onlinelibrary.wiley.com
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
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.
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.
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.
Yes, most people don’t have billions of dollars of equities they can borrow against to finance their lifestyle.
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?
Edit: I also think TSLA isn't a car company. More like a battery company.
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 ?
I mean there is probably a number you can put on having one of the most famous people on Earth hawking the brand 24/7 ...
https://www.visualcapitalist.com/worlds-top-car-manufacturer...
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.
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.
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.
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.
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.
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.
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.
"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.
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.
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.
[0] https://www.forbes.com/sites/dalebuss/2012/05/24/ford-has-bu...)
Could you go over some of them or point to some resource? I'd love to learn more!
== 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."
[0] https://blogs.cfainstitute.org/investor/2019/01/11/a-renaiss...
[1] https://www.bdc.ca/en/articles-tools/change-ownership/sell-b...
[2] https://www.wiley.com/en-us/Financial+Valuation%3A+Applicati...
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).
When I walk into the store there are a very limited number of colas on offer: a can of pepsi, a can of coke, etc.
What exactly is the advert for? My choice has largely been made.
I think a lot of the long-term bonus of ads is to simply build a moat that other competitors find difficult to surmount.
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.
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.
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.
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.
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.
"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....
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?
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?
[0] https://onlinelibrary.wiley.com/action/downloadSupplement?do...
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?
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.
At least it's the best argument from the advertisers side.
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.
Something something Sriracha
At least I think that's their logic.
Spending money to chant a specific message to tune brain chemistry, awareness, and memory, lest they die out.
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.
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".
https://thelastpsychiatrist.com/2011/11/luxury_branding_the_...
Are you saying that you don't know if long term brand advertisement works?
But I know that exercising daily will most likely have a positive effect.
Would you say that might be a source of bias?
Look at SpaceX and Tesla. They barely advertise and have huge brand recognition.
I'd buy Sennheiser over Beats. Krispy Kreme over Dunkin. Costco.
My partner loves Zara.
I don't have a high opinion of brands that advertise.
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.
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%.
Starlink? That's consumer-facing.
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.
The show rooms they have at most higher end shopping malls are definitely an advertisement. I'm with you on Sennheiser though.
> 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.
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.
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.
AliExpress has this flow almost perfected but they are ultimately still limited by the sellers on their site where Facebook wouldn’t be.
So in the end Google makes more profit per ticket than the companies delivering the service itself.
You should see how much PI lawyers pay for AdWords - it's bonkers. Hundreds of dollars per click.
1: https://slatestarcodex.com/2014/07/30/meditations-on-moloch/
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.
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 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.
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 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 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.
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).
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.
It should be:
> The ROI analysis shows negative ROIs at the margin for more than 80% of brands, implying over-investment in advertising by most firms.
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.
My personal opinion however is that ad industry is a big scam.
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.
There is also an interactive website where you can play around with some of the data: https://advertising-effects.chicagobooth.edu/
Both are linked from the lead author's website: https://voices.uchicago.edu/bradleyshapiro/
Where you can't measure response rate directly.
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."
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.
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.
e.g. You don't burn a dollar to save 20 cents on income tax because you are still loosing 80 cents.
OR
You have $2, reinvest an extra $1 on marketing with 80% return. You now have 1.8 total profit. You pay 0.36 in taxes, leaving 1.46
You will always loose money if the marketing ROI is less than 100%
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%
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.
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.
How do studies catch the roi over decades?
I wonder why something like CK can benefit so drastically from TV Ads while others are not even close to breaking even on that investment.
Is it the quality of the ads or the nature of the product?