Ask HN: Why do advertisers have so much money? | Hacker News Reader

Ask HN: Why do advertisers have so much money?

8 pointsatroyn3 comments

Google and Facebook are multi-billion dollar businesses based on advertising dollars. Snapchat's valuation is under-written by its advertising potential. It's obvious that advertising is big business, but why do advertisers have so much money?

Advertising doesn't produce products on its own, yet it dwarfs the scale of many industries that do. Conversely, advertising forms a fraction of the budgets of any of these industries, taken individually. How does advertising create such a disproportionate amount of value?

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If you had a blackbox, where for every $1 you put inserted, you got out $1.25, how much money would you try to put in?

A tuned online advertising campaign does exactly that for advertisers. Google and Facebook harvest even more granular data so you can adjust more finely tuned knobs to improve advertising performance. This is the whole reason why a lot of advertising dollars are moving away from broadcast and print media to online media.

Advertising is often about "building brand awareness". You can't be sure that there is an acceptable ROI, just an expectation that there will be. Often companies will burn through investors' money trying to reach "critical mass". But no ad agency is going to dissuade the client management's false expectations.

It's often said "half the money spent on advertising doesn't work ...", e.g. http://staff.washington.edu/gray/misc/which-half.html

I believe that the simple answer you are looking for is scalability. For many businesses, especially online business, to be successful they need to be able to reach beyond their local communities for customers.

All of the companies you mentioned that generate their revenue from advertising and many others have reached a critical mass in their audience size. This allows them to be a viable channel for a wide variety of vertical markets and or an extremely targeted option in a limited set of vertical markets. This is the reason advertising can dwarf manufacturing. Advertising can touch multiple verticals and have multiple customers spending dollars to compete for the same customer.

The real challenge for those companies that generate their revenue from advertising is the ability to identify audience interest and intent. Advertising companies that do well in generating revenue from advertisers are generally able to identify their audience’s interest and intent when it comes to products and services thus providing their advertisers with the best possible marketing opportunities.

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