440. Does Advertising Actually Work? (Part 1: TV)
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It's amazing it's a puzzle about something you encounter all the time every day. We're each exposed to hundreds even thousands of advertisements every day the number that's grown exponentially thanks to the internet service in the us. More than two hundred fifty billion dollars. A year is spent on advertising globally more than half a trillion dollars thirty. So it would seem. There's basic question worth asking. Does advertising actually work end from stitcher and productions. This is freakonomics radio. The podcast explores the hidden side of everything. Here's your host. Stephen duffner steve levin my economic expanding co author is an economist at the university of chicago. Occasionally he will get a call from a company that wants his help solving a problem exactly he wants got such a call from a big box retailer. I ended up flying to headquarters of this company and sitting down with them. I said okay. So what's the problem. And they said the problem is that we spend almost a billion dollars a year on advertising. And we know whether it works or not. I said okay. What do you know and they put up these powerpoint slides and there were some of the most beautiful powerpoint slides you've ever seen. These slides seem to show the value of the firm's advertising but levitt was skeptical. I had bought a fair amount and fail the number of times academic studies to really understand a causal impact of ads on sales. Because typically there's nothing like a randomized experiment going on so teasing the causal part. The sales that wouldn't have happened absent advertising. It's just really hard problem. The executives told that there was one thing they knew to be true that the tv ads they ran. We're much more effective dollar for dollar than their newspaper ads. They also said they'd been advertising in every big sunday newspaper in the us every week for the past fifteen years. And i said. I suppose you advertise every day of the year on national. Tv as well. Oh no no. We've really only advertised three times a year. Tv that's because tv. Advertising is much more expensive than newspaper advertising. We have a really big push right before father's day and then we advertise a bunch wreck friday right after thanksgiving and then in the lead up to christmas. Of course we're doing an enormous blitz. So of course. There was a correlation between the tv advertising and store sales but it's not necessarily even primarily because of the ad it's because the company knows when the big selling days are and they target the ads around it ll. It 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. I went back to this company. And i said i'm really sorry to say with the data you have with nothing like randomized experiment. It's just possible that the return on investment could be anywhere from zero to infinity live. It did offer to help. The company run a randomized experiment. Their newspaper advertise 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 and they said to be. Are you crazy. We can't turn off the newspaper ads one time. We hired the summer intern in 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 ceo found out he said if you ever do that again you're fired the pittsburgh blackout lasted an entire month. 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 in pittsburgh and we saw no impact on sales when they didn't do any shirts for a month so i said oh my god that amazing okay. So when can we get started started. That is with a wide scale experiment to replicate the pittsburgh accident. They said are you. Crazy 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 they had to explain why for the last fifteen years they had been wasting two hundred million dollars a year so they were happy to just live in a world which as long as they were ads in every market every sunday. Life was good. So economists like you were always telling the rest of us that firms are if nothing else profit maximizing animals that they really know how to spend money. It's going to help make more money and to not spend money that's wasted so any economist tells you that firms are profit maximizing is not ever worked with firms that simple model we used whom we teach begin 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. Now why should any of us care that. A company like was spending so much money on something that was apparently ineffective after all. It helps support all those newspapers and goodness knows they need every ad dollar they can get these days but if you are say a retiree who owns stock in this company well. You can't be very happy about this and if you are a customer who buys stuff from this company. You probably aren't very happy either. Because who do you think ultimately pays for all this advertising. That's right you do. Don't get me wrong. 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. So let's try to figure out how well advertising does work. Let's start with the most generous assumption. Possible that it's one hundred percent effective when he called me one hundred percent effective with anything. I'd like you to meet keith weed. But companies would not be spending the money. They spend advertising if they didn't first of all believe it worked and certainly could quantify it's measure we'd sits on the board of several companies including w. the world's largest advertising and communication agency and until last year. I was the chief mocking of a of unilever. The second largest advertiser in the world. Even if you're not familiar with unilever per se you're surely familiar with their products every day. Two point five billion people use a unilever product and they'd about one hundred and ninety seven countries they mass market because even good business with brands like dove soap. Lipton tea ben. And jerry's ice cream. And i see you're also the president of something called the advertising association. Yes oh yes. I'm as well yes. I'm presently appetizing station. Which some credibility to be talking to you today. So not much of a spoiler alert here but keith weed is unabashedly pro advertising 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 the fact that some companies have been around a long time and spend a lot of money on advertising may suggest that advertising works but does that constitute proof i asked. We'd what share of advertising dollars currently go to tv. Advertising wants to do is engage with people where they're spending time at a huge difference in countries around the world. So in the us you would find more than half of advertising dollars going on digital. But i took it to another market around the world. It would still find your tvs being very strong so things are changing but tv is still hugely important. In building board mass reach for positions. Can you give an example of a brand product that let's say it's brand new rate now. That tv is a must if yo- going off to a very targeted audience let's say you have a premium wax for surfboards. Going on television. That would be a waste of money because you'll be advertising your premium wax to a whole load of people who aren't at all interested in surfing what digital enables you to do. Of course he's not only go after surfers but go after people who are interested in a premium wax on your surfboard. The suda products. The tv is still very helpful for our d. consumer goods and things things that everyone uses exactly 'cause and soft drinks and foods etc so it's where you're looking for broad engagement. There's a famous old quote that. I'm sure you've heard attributed to john. Wanamaker department store merchant. Who maybe said half the money i spend on. Advertising is wasted. The trouble is. I don't know which half i'm guessing. That's not the kind of message at you as the chief marketing officer of unilever would've wanted your ceo to think about well. I think the time when that rates said there probably a lot more truth to it with the amount of money in advertising the quality of measuring advertising has gone up every single year is that measurement usually done internally or externally in other words. If i see that do i feel oh. That's an audited estimate of efficacy. Or is this the chief marketing officer telling me that. His crew has analysed this and determined that the efficacy is relatively high. Both the things that you can get full panel data and measures that are accepted by the industry. Having said that what every company would like is a level of differentiation which makes them a little bit more competitive and there's been a lot of science being put into that over the years now. One of the things that i spent a lot of time developing was hold air about brands with purpose brands that matter whether that be dove real beauty and challenging the beauty industry or bene- jerry's and the work done around social justice and climate justice and building brand with purpose. We believe gave us a competitive advantage against other brands. So if i were to say to you keith. That 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 could increase profits by reducing their advertising spending. If i were to say that to you you would then say what. Well i would say that. I'm sure you've got executive group of people because i think everyone loves to have a theory about advertising. We do have exactly that group of people one at least her name is anna tuchman knife. Yeah i hear you. Great tuchman is an associate professor of marketing at northwestern university's kellogg school of management and. I studied the effect of television advertising as well as research questions that lie at the intersection of marketing and public policy. Considering how long advertising has been around you would think we would know pretty much everything about advertising. There is to know how wrong. I i mean. You're exactly right. Advertising has been around for a long time and researchers have been interested in studying the effects of advertising for a long time. There's actually some really nice work on the psychology side of how advertisements work but in terms of linking adds to actual purchases. That's going to require data. When a researcher like anna tuchman talks about using data to answer a question. She doesn't mean the same thing that advertisers mean when they talk about data and she ran into the same measurement problem that steve levitt ran into with the big box chain he worked with. Let's say that we're thinking of like a lotion manufacturer. Okay so this firm may know that demand for lotion just naturally happens to be higher during winter months so this firm they say well that seems like the best time for me to advertise. So what are we going to find. Now we're going to see that. We sell more lotion in the winter. When we also advertise more so yes. There is a correlation between advertising an increased sales but to what degree is the advertising causing the increased sales. Isn't that what you really want to know exactly. So one of the challenges with measuring the effects of advertising is that firms are out there signing their advertising randomly across geographies and across time periods. Since an outside researcher like anna tuchman would have a hard time getting a bunch of firms to sudden. We embrace this kind of experimentation. She thought about another method to measure advertising. What's called a border strategy. The way that advertising is purchased there are about two hundred television markets in the us on these local markets that tend to be centered around large cities in the ad industry. These are known as designated market areas or delays. So what we want to do is think about neighboring television market. As almost like a natural experiment where we get to see to markets that may be quite similar on observables similar on observables. Meaning that people living on one side of the dna border aren't very different from the people on the other side. In terms of social economic and demographic markers because individuals living on the borders are exposed to potentially different levels of advertising that is the two populations are different ads on their tv stations. then we get to see similar. People exposed to different amounts of advertising and then trace out the variation in the purchases. They make over time and how that relates the variation adds that they're exposed to this was the strategy tuchman used in the study last year to investigate the impact of tv advertising for e cigarettes. This was particularly interesting product to choose tv advertising. Traditional cigarettes has been banned since nineteen seventy-one e. Cigarettes were considered at least by some people to be a safer alternative. Although that is a complicated issue. If you wanna learn more about that you can check out our episode number three ninety eight. It's called the truth about the vaping crisis anyway. Tuchman looked at e cigarette advertising data from two thousand and ten two thousand fifteen in more than two hundred border markets across the us. What you find. So i find as we would expect that you. Cigarette advertising is leading to an increase in sales of e cigarettes. We should say e cigarettes still relatively new at the time. We might think that for a variety of reasons. Advertising for new products may have larger effects than advertising for products. Okay that seems pretty clear. But the less clear question was how e cigarette advertising would affect demand for tobacco cigarettes to there's some debate as to whether these e cigarette ads could lead to increase in sales of tobacco cigarettes if maybe people misinterpret the ads to be ads for cigarettes or nicotine products general or if they remind smokers about their desire to consume nicotine and then smokers go out and buy more cigarettes and what i find is the opposite effect that really the substitution between products so we see a decrease in sales of tobacco cigarettes when east greenwich sales increase. So that sounds like an argument in favor of the efficacy of tv advertising. But what's the magnitude. So i carry out a counterfactual analysis which basically is what if we were to implement a ban on isa advertising like some policy. Groups are calling for what would be the impact on sales of tobacco cigarettes. And so i find that approximately one hundred thirty million more packs of cigarettes would have been sold in the us in the absence of e cigarette advertising and that's each year so again that's an argument that advertising does quote work at least to some degree it accomplished is sounds like two goals. Area is sold more e cigarettes and fewer combustible cigarettes right. Yes but what. Can you tell us about the return on investment of that advertising for e cigarettes. How much did it cost. Was it quote worth it so unfortunately in this paper i didn't have information on advertising costs so i am not able to measure the are wise and when presenting the research. I get a lot of questions like well do. These adifax makes sense. Is this within the realm of reason of how large or small we expected. These affects to be so looking for there to be a benchmark to evaluate the efficacy of your analysis. Are you are missing something. Tuchman east cigarette study response to it. Gave her an appetite to go. Find a general benchmark for the effectiveness of tv advertising coming up after the break. You will hear how she did it and what she learned the first. We are working on an episode about asking sensitive questions. And we need your help. Is there a question that you would really like to ask a co worker or friend or family member. But you just can't bring yourself to ask if so use your phone and make a voice memo send it to radio at freakonomics dot com. Maybe we will use your question in our episode. We usually ask. People do include their name and where they're from but in this case. If that'll get you in too much trouble you can leave it out again. Send your voice memo to radio at freakonomics dot com. You are listening to freakonomics radio. I'm steven dubner. And we'll be right back after what i am. 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You need to do even more amazing things in a way that only you can do so whatever you do make it you with windows see how at windows dot com slash ten. That's windows dot com slash the number ten in tuchman who has the marketing and teaches at northwestern university. Her done one empirical study on e cigarette advertising. It suggested that the conventional wisdom about the effectiveness of advertising might be exaggerated men. She learned that. A pair of economists at the university of chicago had been thinking the same thing. Yeah so i started chatting with brad shapiro. Guenter hitch an independently. We had all worked on different projects related to advertising and encountered similar sorts of questions shapiro and hitch had done studies similar to tuck men's on e cigarettes but their topics were respectively antidepressants and frozen entrees. Like lean cuisine and stouffer pizza and this led us to start discussing. Hey it'd be really nice. If we had a good source that we could use as a benchmark for the effectiveness of television advertisements. There was in fact an existing benchmark in the marketing literature based on a series of earlier. Papers yeah some of these papers come back with benchmarks of around like the average addie last to see his point. One five or point to an average ed. Ls city meaning. What exactly an addy last. Two city measures the percent change in quantity sales result from a given percent change in advertising. Let's assume the percent change in. Advertising is one hundred percent in other words. You double your ad spending an ad elasticity of point one five or point two indicates that sales would increase by fifteen or twenty percent which is pretty substantial increase. Which would suggest that advertising spending is quite effective at least that's what the existing benchmark said but when tuchman shapiro and hitch calculated the ad elasticity in their own research. They found a much smaller number. Point zero one. That would mean if you were to increase your ad spending by percent or double your ad spending. This would lead to an increase in sales of one percent. So you're saying that your experience with e cigarettes and your colleagues with frozen pizza. Anti-depressants was seeming to make the argument that tv advertising is about fifteen to twenty times less effective than the literature. Said yes. that's right was most of the research that had made claims about. Roi in advertising was done by the advertising and marketing industries themselves. Not necessarily so. There's plenty of independent akkad amac research. That's been done on advertising effectiveness over the years. Many of these earlier research projects were individual case studies that measured just a single product but the effects for a single product may not generalize to other types of products or other product categories earlier. Researchers tried to address this problem by creating what's called a meta analysis that is pulling together hundreds of existing studies across a variety of categories. But as we started digging into those meta analyses we started to worry that the majority of data collection comes from published studies of advertising effectiveness and in our own experiences presenting our work on advertising. We experienced a lot of feedback that people expect. The advertising must be effective that it must be profitable because we observe firm spending billions of dollars on television advertising every year. And does that mean that. If you end up doing a study that shows the advertising not effective that it just gets put in a drawer instead. That's exactly are concerned that if you start analyzing data and find a no result you may be worried that it would just be really hard to get that published so you may stick it in the file drawer. That's called the file drawer problem or if you actually decide that you want to take on this battle and try to publish the paper you may face resistance in the review process academic journals of skepticism from others. Who say this isn't what we would expect. If we see these firms spending millions of dollars on ads must be profitable so there must be something wrong in your analysis in other words a conventional wisdom once established can be terribly hard to dislodge. Remember what keith weed told us earlier. The fact that companies like unilever spent billions suggests that maybe advertising does work so tuchman and her colleagues faced a dilemma except that the results they had gotten measuring the ad effectiveness of individual categories like e cigarettes and antidepressants and frozen entrees. Were outliers or maybe even wrong or they could try to do. 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. This is one of the benefits of being an academic researcher in such a data rich era. I mean it's not by chance the popularity of these individual case studies. It's hard enough to go out and collect data on one firm and their advertising and sales spending let alone do this for hundreds of products at once and so this was a challenge but we had a really great opportunity which was to work with nielsen. Data that's made available to academic researchers remember. You need two distinct sets of data to measure at efficacy. How much money advertisers spend. And they spend it as well as how much change there is in product sales and again when wear so the data that we work with is from two thousand and ten to two thousand fourteen. The sales data is collected by nielsen in partnership with many different retail chains. So this is going to be grocery. Stores drugstores can bian stores mass merchants stores etc so. The data contains sales for more than three hundred thousand different brands which are typically going to be consumer packaged goods that are sold at these more traditional retail outlets to narrow it down tuchman enter co-authors focused on the top five hundred brands as measured by dollar sales brands. Like coca cola and pampers and folders and bud light so these sales data represent half of the data equation but of course. We're interested in measuring at 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 two hundred. Eighty eight of those initial five hundred brands. Does this mean that. Two hundred and twelve of the top. Five hundred consumer packaged goods brands. Don't routinely advertised on tv. There are a few brands that advertise very few weeks where we wouldn't have enough variation in the data to measure anything so it's not all two hundred twelve but yes. There are many brands that are choosing not to advertise on tv brands. Like crisco and bumblebee tuna a 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 now keep in mind that tuchman analysis covered only consumer packaged goods. No automobile advertising no ads for insurance or financial services so how representative with this analysis. Be of the whole advertising picture. I don't want to say that it's representative of the whole picture. And as i described the selection of products we focus here on the top five hundred brands that advertise or the two hundred eight advertise. And so we're naturally going to be selecting more established products once they merged the gigantic data set of product sales with the gigantic data. Set of ad spending tuchman and her colleagues used an analytical method similar to the one she had used to study e cigarette sales that is they looked at bordering advertising markets that received different ads and then using a few different models they compared product sales. Would they find. This might sound familiar. We find that media brandon. Our data has an steve around point. Zero one out so this means that doubling the amount of advertising would lead to about a one percent increase in sales for these brands. I can hear marketing directors across the country having their brains implode and praying that their ceo's are not hearing this. I mean a one percent increase in sales on a huge base of sales could still be a meaningful increase. And so that's the next step in. Our analysis is to try to estimate the roi of this advertising once we take into account the cost of buying those ads. Okay so what did they find when they calculated the return on investment of advertising dollars across their entire sample. We find that almost all brands seem to be over advertising and that they are earning a negative. Roi from advertising in an average week and if they were to instead decided not to advertise in a given week they would earn higher profits things look slightly more rosy when we look at the overall roi calculation. They're a larger fraction of brands. Do seem to be better off with their observed level of advertising relative to the alternative of not advertising at all. Is there a lot of variance between different types of products or categories may be beer ads. Work great but ads for laundry detergent or a dud. So we try to look at this and we don't find any statistically significant differences across product categories. Okay you conclude in the paper that quote the vast majority of brands over invest in advertising and could increase profits by reducing their advertising spending. So my question is as much a philosophical. One is an empirical one. Why are so many modern capitalist companies which are theoretically devoted to optimizing their profits making such a fundamental economic mistake. This is very much the billion dollar question that we would love to have a great answer to unfortunately are empirical analysis can't fully explain why but we have a few different hypotheses as to what could be going on one. Hypothesis involves what economists call the principal agent problem. So the manager. That's in charge of setting the television. Advertising spending and with advertising agency there incentives may not be aligned with the profit maximizing goals of the firm. They don't wanna put themselves out of a job by doing a lot of digging and showing that oh it turns out our. Tv ads are unprofitable. Another reason firms may be spending more than they should on. Advertising is simply because as both tuchman and levitt found. It's really hard to measure at effectiveness. So it may be that. Advertising managers do want ensure that advertisers profitable but they may not be using a sophisticated methods or tools to properly account for this dodging eighty problem in dodge eighty meaning. It's hard to tease apart different. Variables that may travel together but may not be causally related like running tv ads for hand lotion. Only in winter. It may make sense to advertise more periods of high demand that doesn't have to arise because managers just trying to pad their numbers. It could actually be the right decision to do that. But if we don't account for the fact that demand would naturally be higher during certain periods when we tend to advertise more and we falsely attribute that increase in sales to the causal effective advertising. That could lead us to overstate the effect of ads. That said i'm still going to assume that you and your colleagues are not going to be invited to many advertising conferences in the near future. We'll have to see. I presented this work at an advertising conference back in january in australia when we can all still travel and folks from academia definitely had very different perspectives compared to the folks that were there from industry. Yes i'm a little bit skeptical as you can hear my voice. That again is the longtime advertising executive keith weed and i think it's great academics. Look at it. If they're found the magic about how all these companies could improve of it. I'm sure that love to see that solution. I could see consumers hearing that analysis and thinking. well a lot of the cost of advertising. Maybe all of it for all i know is passed on to consumers and in many instances generic products are shown to be demonstrably as good as or identical to brand name products. So would you say to those consumers who maybe feel like. They're being fleeced debate. So i will advertising funds a huge amount of things. We see around us so all i free payment. 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 the advertising does a lot of good the sensor may strike you as a moving of the goalposts that is when presented with evidence that advertising doesn't work as advertise the advertising executive counters with all the ancillary benefits of advertising. That said keith weed has another more practical objection to the research we've been discussing. No business wants to be wasteful in resources whether that be water or natural resources or indeed human or advertising so the hypothesis put forward is attractive. If you could reduce the cost. Why wouldn't you. yeah i mean. The conclusion in our paper is really that many firms are over advertising and this will hopefully serve as an incentive for them to more carefully estimate the effectiveness of their own advertising with the goals that they can optimize that ad budget and spend money on ads where it's effective but not spend that money that's not effective so we've been talking about advertising on tv which has been a wildly successful and remunerative industry for a long long time but of course the world has changed a lot and digital advertising is different in a number of ways the reason facebook and google or collectively worth nearly two trillion dollars is because they can easily target advertising because their consumers willingly tell them exactly what they like. And don't like so. I would think that digital advertising would be many times more effective than the tv advertising. You've been studying yes. If done effectively than yes. We might find that. On average certain types of online ads have the potential to be much more effective than tv advertising. They're also great examples of online ads that proved to be not super effective. I don't know if you've come across. That was looking at the effect of google search advertising by blake nosko into dallas. Yes name is steve to dallas. I'm a professor at berkeley's business. Just as anna tuchman told us today about the efficacy or lack thereof of tv advertising. Steve to dallas is dying to tell us what he's learned about the efficacy of digital advertising. And how the whole digital ad ecosystem works but that will have to wait till next week. The weight i assure you will be worth. Oh adds definitely work. But we can't tell you how or why or give you any evidence for it. That's next time on freakonomics radio until then take care of yourself and if you can someone else too radios produced by stitcher and w productions this episode was produced by daphne chen our staff also includes alison. Craig lowell greg. Rippin matt hickey zach. Lipinski and married to duke or intern is immaterial and help this week from james foster. Our theme song is mr fortune by the hitchhiker's all the other music was composed by louis. Scare you can get freakonomics radio on any podcast app. If you'd like to hear the entire ten year back catalogue use the stitcher app or go to freakonomics dot com freakonomics. Radio can also be heard on many. Npr stations around the country. as always. thanks for listening. How much money would you estimate that you personally have spent on golf over the past. Maybe five years. How much of that was driven by some form of advertising. Maybe twenty five thousand dollars. And i day. Advertising was very effective on me. 'cause i'm more or less bought one of everything over stitcher.