Truth (or Fiction) in Advertising

Does advertising really work?  Yes, according to the former Chief Marketing Officer of Unilever.  But then again, that’s from the former CMO of one of the largest advertisers in the world.  Freakonomics ran 2 podcasts exploring the effectiveness of advertising – and found that the answer is more complex.

In the first podcast, the results of a research study showed that if a company were to increase its TV ad spending by 100%, it would only get a 1% increase in sales.  TV advertising doesn’t quite have the shine it once did, although it still makes up a third of the $250 billion of ad spending in the US.  So, what about digital advertising – is it generating better returns?

The second podcast explores the effectiveness of the $123 billion that companies spent on internet ads in the US in 2019.  Researchers found that almost 60% of digital ads aren’t actually seen, and even if they are seen, click-through rates are often as low as 0.01% to 0.03%.  And using AI and machine learning to target customers often just brings in those who were already going to buy the product.

Then why spend anything on internet advertising?  Good question, and one researcher interviewed on the podcast referred to the digital ad industry as a financial “bubble” waiting to burst when everyone realizes that it might not be all that effective.

But there are lots of different types of advertising, and they aren’t all going away – the challenge is to optimize ad spending.  In PriSim’s business simulation classes, participants grapple with the point of diminishing returns and the ROI of their advertising (aka, depending on the industry: marketing, business development, promotion, publicity, etc.).

As Steven Levitt, the author of Freakonomics, puts it, “I’m not implying that advertising doesn’t work.  I’m implying that we don’t have a very good idea about how well it works.”