Does Advertising Actually Work? (Part 1: TV) (Ep. 440) - Freakonomics Freakonomics
"LEVITT: “The problem is that we spend almost a billion dollars a year on advertising, and we don’t know whether it works or not.” I said, “Okay, what do you know?” And they put up these PowerPoint slides. And they were some of the most beautiful PowerPoint slides you’ve ever seen.
These slides seemed to show the value of the firm’s advertising. But Levitt was skeptical... The executives told Levitt that there was one thing they knew to be true: that the TV ads they ran were much more effective, dollar-for-dollar, than their newspaper ads. They also said that they’d been advertising in every big Sunday newspaper in the U.S., every week, for the past 15 years... Levitt did try to analyze the data the firm gave him. But because the company only ran TV ads exactly when customers were already planning to buy a lot of stuff, it was impossible to disentangle... Levitt did offer to help the company run a randomized experiment. Their newspaper advertising would be perfect for that. Since those ads ran everywhere every week, they could stop running them in certain markets and measure the effect on sales.
LEVITT: And they said to me, “Are you crazy? We can’t turn off the newspaper ads. One time we hired this summer intern and his job was to do the newspaper inserts for Pittsburgh, and the guy was so incompetent that he just didn’t do it. And when the C.E.O. found that out, he said, ‘If you ever do that again, you’re all fired.’”
The Pittsburgh blackout lasted an entire month.
LEVITT: So, I said to them, “Well, okay. But when you looked at the results, what happened to the sales in Pittsburgh when you were dark for a month?” And they called me back about a week later and they said, “You’re not going to believe it. We looked at the data in Pittsburgh, and we saw no impact on sales when they didn’t do any inserts for a month.” I said, “Oh, my God, that’s amazing! Okay, so when can we get started?”
Started, that is, with a wide-scale experiment to replicate the Pittsburgh accident.
LEVITT: They said, “Are you crazy?” It was almost if they found out they didn’t work, it was far worse for these people than it was not finding out it didn’t work. Because then they had to explain why for the last 15 years they had been wasting $200 million a year. So, they were happy to just live in a world in which as long as there were ads in every market, every Sunday, life was good...
Stephen DUBNER: So, economists like you are always telling the rest of us that firms are, if nothing else, profit-maximizing animals — that they really know how to spend money that’s going to help make more money, and to not spend money that’s wasted.
LEVITT: So, any economist who tells you that firms are profit-maximizing has not ever worked with firms. That’s a simple model we use when we teach beginning economics because it’s easy to solve mathematically. But the realistic picture is that firms are composed of people, and all of the foibles and shortcomings that people exhibit in their everyday life, they bring those to work with them... a trio of academic researchers in the States did this massive analysis of consumer-packaged goods and they found that, “The vast majority of brands over-invest in advertising and could increase profits by reducing their advertising spending.”...
TUCHMAN: What if we were to implement a ban on e-cigarette advertising, like some policy groups are calling for? What would be the impact on sales of tobacco cigarettes? And so, I find that approximately 130 million more packs of cigarettes would have been sold in the U.S. in the absence of e-cigarette advertising. And that’s each year... “Hey, it’d be really nice if we had a good source that we could use as a benchmark for the effectiveness of television advertising.”
There was in fact an existing benchmark in the marketing literature, based on a series of earlier papers.
TUCHMAN: Yeah, some of these papers come back with benchmarks of around the average ad elasticity is 0.15 or 0.2...
But when Tuchman, Shapiro, and Hitsch calculated the ad elasticity in their own research, they found a much smaller number: .01... [They did] a massive empirical analysis of many products across many categories, using better data than the previous researchers who did individual case studies had had available... To narrow it down, Tuchman and her co-authors focused on the top 500 brands as measured by dollar sales. Brands like Coca-Cola and Pampers and Folgers and Bud Light. So, these sales data represent half of the data equation..."
TUCHMAN: But of course, we’re interested in measuring ad effectiveness. So, then we need to take this sales data and merge it up with the advertising data that is also collected by Nielsen. And ultimately, we were left with 288 out of those initial 500 brands.
Does this mean that 212 of the top 500 consumer-packaged-goods brands don’t routinely advertise on TV?
TUCHMAN: There are a few brands that advertised very, very few weeks, where we wouldn’t have enough variation in the data to measure anything. So, it’s not all 212. But yes, there are many brands that are choosing not to advertise on TV.
Brands like Crisco, Bumble Bee Tuna, and Naked Fruit Juice. So plainly, there are plenty of successful companies who don’t think TV advertising is as worthwhile as the ad industry seems to think...
We find that almost all brands seem to be over-advertising, and that they are earning a negative R.O.I. from advertising in an average week. And if they were to instead decide not to advertise in a given week, they would earn higher profits... We find that the median brand in our data has an ad elasticity of around .01...
WEED: Advertising funds a huge amount of things we see around us. So, all our free entertainment. Google searches, Google Maps, posting on Facebook or tweeting or indeed a large amount of TV is all for free. In fact, the free press — the backbone of democracy — is funded by advertising. So, I would start with saying that advertising does a lot of good."
Of course, those in advertising will just quote "Benjamin Franklin" who as all ad people "know" said "Stopping advertising to save money is like stopping the clock to save time", since they have their vested interests and people believe what they want to believe
I wonder when the libertarians will come along to mock Steven Levitt for not understanding Economics 101
Does Advertising Actually Work? (Part 2: Digital) (Ep. 441) - Freakonomics Freakonomics
"LEVITT: And so, you, of course, have a correlation between when you’re advertising on TV and when you’re selling things. But it’s not necessarily or even primarily because of the ads. It’s because the company knows when the big selling days are, and they target the ads around it. So, teasing out the causal part, the sales that wouldn’t have happened absent the advertising, it’s just a really hard problem...
TADELIS: So, I got on a call with them and very quickly was able to confirm that what they were doing was quite wrong... Which was on a landline, which will make sense in a second.
And when Tadelis suggested that the consultants’ proposed methodology wouldn’t be able to untangle correlation and causation:
TADELIS: They responded using a whole bunch of jargon, especially the term “proprietary transformation functions.”... Then the head of the company replied by saying that to do the marginal measurement, they’re going to use Lagrange multipliers. Well, I paused for a second because I know what Lagrange multipliers are. I used to teach this stuff, and I couldn’t understand what they were trying to do here. And that’s when the dime dropped. They were trying to out-jargon me.So, I replied by saying, “Well, we all know that the Lagrange multipliers measure the shadow values of constraints in an optimization problem. So, it would really help me if you explain to me, what is your objective function and what are your constraints?” After a short pause, and this is where I have to take my hat off to the founder of that consulting company, he immediately responded with the only and best answer he could give, which was, “Steve, are you driving now? Because I can’t hear you. You’re breaking up.”...
They turned off all their keyword-search ads, then measured actual sales:
TADELIS: And the impact on average was pretty much zero... When you did the return on investment for every dollar that eBay spends — eBay believed that for every dollar they’re spending, they’re getting roughly a dollar-and-a-half back, meaning 50 cents of net profits. And what we showed is that on average, they’re losing more than 60 cents on every dollar... the president of eBay, who later became the C.E.O., he cut the paid-search marketing budget immediately by $100 million a year.
So, what happened next? You might think — what with capitalism being the hyper-competitive, market-optimizing, perfect-information ecosystem it’s supposed to be — you might think that other companies, once they learned about this eBay research, would cut their online ad spending. Or at least commission their own research to test the theories. So, did they?
TADELIS: Excellent question. There was a lot of chatter online after our experiments became public, suggesting that folks at eBay don’t know what they’re doing. And paid-search advertising works wonderfully if you know how to do it. But of course, that was backed with no data and no analysis...
HWANG: Do people ever see ads at all. So, Google actually did a fascinating study not too long ago, which concluded that close to 60 percent of ads on the internet are never, ever even seen. The ad is delivered, but it just ends up in some dumb part of the page, right? It’s below the fold or it’s along a sideline...
When a user’s cookies were unavailable, ad revenues only dropped by around 4 percent. Why would cookies be so ineffective? Tim Hwang argues that people pay a lot less attention to online ads than they used to.
HWANG: People often forget that when banner ads were first launched on the internet, their click-through rate was like 50 percent, completely mind-bending, right? And it’s just continued to fall and fall and fall. And now, it’s like 0.01 to 0.03 percent... if you talk to people in the tech industry and you’re like, “Okay, level with me, Joe Engineer, how do ads work on the internet?” It’s kind of a rumor. Like, we know this is how the business model works. But no one can really explain how it works in detail. So, when I say advertising, a lot of people normally think of like “Mad Men,” right? But it really looks like what the Nasdaq looks like, which is a largely automated system that moves millions and millions and billions of pieces of ad inventory on a daily basis...
LEVITT: No chief marketing officer is ever going to say, “Hey, I don’t know, maybe ads don’t work. Let’s just not do them and see what happens.”
Or, as the author Upton Sinclair once wrote: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”...
HWANG: A few years back, Procter & Gamble, which is one of the largest advertisers in the world, decided that they would run a little experiment. They were going to take about $200 million of their digital-ad spending and just cut it out of their budget to see what happened... the end result was fascinating. Basically, they said that there was no noticeable impact on their bottom line...
WEED: The fact that Coke and Dove and Ford have been around for decades and the fact that companies like Unilever spend billions suggests that maybe advertising does work.
HWANG: Which is kind of this crazy circular mind maze, if you think about it. But I do think that, again, this is very parallel to the kinds of psychology that have driven market bubbles in the past.
One reason to suspect that ads do work well is the underlying assumption that firms like Unilever who buy so much advertising are — as Econ 101 textbooks tell us — profit-maximizers. So, why would they waste so much money?
LEVITT: Any economist who tells you that firms are profit-maximizing has not ever worked with firms."
