Revisiting advertising effectiveness

Does advertising work? Few will deny that advertising plays an important role in building awareness. The idiom, “out of sight, out of mind,” speaks to the importance of being seen in order to even be thought of. Looking back over the years, however, there’s a strong case to be made that advertising as we know it has been a mixed bag financially. And while emerging forms of advertising improve our ability to target, modern channels are being questioned just as much as traditional media in terms of overall effectiveness. What appears to be certain is, as consumers have greater access to information, the link between an ad’s effectiveness and the intrinsic “compellingness” of what’s advertised is likely to increase.

Academic literature appears to validate the often-quoted dictum that half of advertising falls short financially. According to Leonard Lodish (Wharton School of Business), Ye Hu (Bauer College of Business), et al., there’s greater than a 50 percent chance that TV advertising won’t be profitable. Their analysis is based on roughly 30 years of data in which they estimate that a 1 percent increase in TV ad spend generates about a 0.1 percent increase in sales on average [1]. To put this in context, a $500,000 increase in ad expenditures for a $1 billion brand spending 5 percent of sales on advertising would create $1 million in extra sales. The extent to which this is profitable, of course, depends on underlying operating costs. However, a 2:1 sales lift to advertising expense ratio doesn’t seem great given that cost of goods or services sold still need to be accounted for.

Broader meta-analysis indicates that newer products and services are likely to benefit the most from advertising, but ad effectiveness in general has decreased over time. For example, Gerard Tellis (Marshall School of Business) together with Raj Sethuraman and Richard Briesch (Cox School of Business) reviewed studies including hundreds of advertising elasticity estimates and found levels for products in the growth stage of the lifecycle 45 percent greater than for those in the mature stage. However, they also found that average elasticities dropped by close to 25 percent for all products considered over the half century reviewed. Increasing clutter is claimed to be a key culprit [2].

Much of the publically available research on advertising effectiveness relates to traditional channels. But as digital receives greater attention, the story doesn’t appear to be any more positive. The infamous AT&T banner ad that appeared on HotWired in 1994 had a 44 percent click-through rate according to some involved at the time [3]. Today, Google’s Display Benchmarks Tool puts U.S. click-through rates at less than 0.2 percent on average. Dave Chaffey of Smart Insights provides a thought-provoking review of click-through rates by format and platform, illustrating how performance can be improved through effective targeting. However, even the highly targeted example he shares only had a click-through rate of 1.3 percent. Chaffey highlights the increasing challenges that digital faces, explaining that ad blockers now account for 35 percent of ads in some countries, and just 45 percent of digital ads are clickable due to poor visibility [4].

In 2014, The Atlantic published an article titled, “A Dangerous Question: Does Internet Advertising Work At All?” Writer Derek Thompson argues that the Internet has led to greater media fragmentation, reducing the impact of advertising. Thompson hypothesizes that by providing greater access to information, consumers are now able to make more informed decisions without advertising. He writes, “The Internet was supposed to tell us which ads work and which ads don’t. But instead it’s flooded consumers’ brains with reviews, comments and other digital data that has diluted the power of advertising altogether.” Thompson also puts paid search under the microscope, calling out how predispositions may exaggerate reported ad effectiveness (what he refers to as the “I was gonna buy it anyway” effect) [5].

Beyond “advertising” per se, perhaps there’s a deeper issue at play. Apple provides an interesting case in point. Apple’s 1984 Super Bowl commercial is widely recognized as one of the most successful ads of all time. What’s often forgotten is that one year later, Apple aired another commercial during the 1985 Super Bowl, “Lemmings,” considered by most to have been a flop. What’s the difference? The “1984” ad announced the launch of Macintosh, a milestone product that greatly increased the affordability, functionality and ease of personal computing. The 1985 commercial announced Macintosh Office, much of which was still under development and wouldn’t be available for one to two years later. As Owen Linzmayer writes in “Apple Confidential,” “Lemmings” might have been received differently had it introduced another breakthrough product like Macintosh. Quoting Steve Hayden, copywriter on both ads, Linzmayer sums it up with, “You can’t write a check with advertising that the product can’t cash” [6].

So, what does all this mean for marketers? As an investment, advertising brings with it the chance of both profit and loss. To improve the likelihood of positive results, never before have relevance and uniqueness, in terms of message and channel, been more important. Similarly, predicting the likely success of an ad and explaining its impact is ultimately tied to understanding the appeal of what’s being advertised, which creative elements can bring to life but can’t replace.