Advertising: far less ‘powerful’ than you think
7 January 2016
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Labour Market
Government and Institutions
Economic Theory
11 November 2024
‘If advertising doesn’t work, why do companies spend so much money on it?’ This is the zinger that is supposed to end all argument about whether marketing increases the consumption of certain products. The products under discussion are usually things that one side of the argument would prefer people did not buy and, to that end, think should not be advertised.
One can reply by saying that advertising is not coercive. One can point out that no amount of advertising can sell a bad product. One can argue that advertising is primarily aimed at making users of a product switch to a different brand. You can explain any of this, but the retort will always be the same. “Ah, but if advertising didn’t work, they wouldn’t do it!”
For example, an organisation called Alcohol Action Ireland currently wishes to ban alcohol sponsorship in sports. ‘Alcohol sponsorship of sports works in terms of increasing sales and, as a result, alcohol consumption,’ it asserts. ‘If it didn’t the alcohol industry simply would not spend so much money on it.’ They assume that the drinks industry hopes and expects advertising to increase consumption.
However, advertisers are not spending their money as an industry, but as rival firms trying to sell their own brands. Their battle for market share may or may not coincide with a growing market for alcohol as a whole, but an individual company does not need a growing market in order to become more profitable. There are plenty of heavily advertised products in markets that are static or declining. Imagine ‘Toilet Paper Action’ Ireland declaring that ‘Toilet paper advertising works in terms of increasing sales and, as a result, toilet paper consumption. If it didn’t Andrex simply wouldn’t spend so much money on it.’ Such a statement would be patently absurd.
Secondly, it is an empirical fact that advertising generally doesn’t increase the size of the market. The exception is if the entire product category is new. An advertisement for a T-model Ford in 1915, for instance, may have encouraged more people to buy a motor car, but an advert for a BMW today is unlikely to do so even if, as intended, it encourages more motorists to buy a BMW.
Earlier this year, another study confirmed what economists have always known. Looking at sales of alcoholic beverages in the US over 40 years, it found ‘changes significantly correlated to fluctuations in demography, taxation and income levels – not advertising. Despite other macro-level studies with consistent findings, the perception that advertising increases consumption exists. The findings here indicate that there is either no relationship or a weak one between advertising and aggregate category sales. Therefore, advertising restrictions or bans with the purpose of reducing consumption may not have the desired effect.’
The authors of the study found that the amount of money spent on alcohol advertising in the US has increased by almost 400 per cent since 1971. During that time, they noted, ‘per capita alcohol consumption has not changed much’. In the UK, it is estimated that £800 million is spend on alcohol marketing each year and yet per capita alcohol consumption has dropped by a fifth since 2004.
If the aim of advertising is to increase the size of the market, it doesn’t seem to be working very well. Instead of asking the supposedly rhetorical question ‘If it didn’t work, why would they spend so much money on it?’, single-issue campaigners should look at the evidence from alcohol and other markets and ask themselves the more searching question: ‘It doesn’t work (as we define “work”) so why are they spending so much money on it?’ Economists do have some answers to this.
Christopher Snowdon is the IEA’s Director of Lifestyle Economics. Recomended reading: Advertising in a Free Society.
One can reply by saying that advertising is not coercive. One can point out that no amount of advertising can sell a bad product. One can argue that advertising is primarily aimed at making users of a product switch to a different brand. You can explain any of this, but the retort will always be the same. “Ah, but if advertising didn’t work, they wouldn’t do it!”
For example, an organisation called Alcohol Action Ireland currently wishes to ban alcohol sponsorship in sports. ‘Alcohol sponsorship of sports works in terms of increasing sales and, as a result, alcohol consumption,’ it asserts. ‘If it didn’t the alcohol industry simply would not spend so much money on it.’ They assume that the drinks industry hopes and expects advertising to increase consumption.
However, advertisers are not spending their money as an industry, but as rival firms trying to sell their own brands. Their battle for market share may or may not coincide with a growing market for alcohol as a whole, but an individual company does not need a growing market in order to become more profitable. There are plenty of heavily advertised products in markets that are static or declining. Imagine ‘Toilet Paper Action’ Ireland declaring that ‘Toilet paper advertising works in terms of increasing sales and, as a result, toilet paper consumption. If it didn’t Andrex simply wouldn’t spend so much money on it.’ Such a statement would be patently absurd.
Secondly, it is an empirical fact that advertising generally doesn’t increase the size of the market. The exception is if the entire product category is new. An advertisement for a T-model Ford in 1915, for instance, may have encouraged more people to buy a motor car, but an advert for a BMW today is unlikely to do so even if, as intended, it encourages more motorists to buy a BMW.
Earlier this year, another study confirmed what economists have always known. Looking at sales of alcoholic beverages in the US over 40 years, it found ‘changes significantly correlated to fluctuations in demography, taxation and income levels – not advertising. Despite other macro-level studies with consistent findings, the perception that advertising increases consumption exists. The findings here indicate that there is either no relationship or a weak one between advertising and aggregate category sales. Therefore, advertising restrictions or bans with the purpose of reducing consumption may not have the desired effect.’
The authors of the study found that the amount of money spent on alcohol advertising in the US has increased by almost 400 per cent since 1971. During that time, they noted, ‘per capita alcohol consumption has not changed much’. In the UK, it is estimated that £800 million is spend on alcohol marketing each year and yet per capita alcohol consumption has dropped by a fifth since 2004.
If the aim of advertising is to increase the size of the market, it doesn’t seem to be working very well. Instead of asking the supposedly rhetorical question ‘If it didn’t work, why would they spend so much money on it?’, single-issue campaigners should look at the evidence from alcohol and other markets and ask themselves the more searching question: ‘It doesn’t work (as we define “work”) so why are they spending so much money on it?’ Economists do have some answers to this.
Christopher Snowdon is the IEA’s Director of Lifestyle Economics. Recomended reading: Advertising in a Free Society.
6 thoughts on “Advertising: far less ‘powerful’ than you think”
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A flip-side of course is that “if advertising works as well as [prohibitionists] think, why do they feel they have to resort to lobbying government to get their pet projects enabled instead of simply advertising it and brainwash the sheeple to stop drinking alcohol/smoking/using toilet paper.”
Two challenges to this article:
1) Just because increases in advertising in a mature markets does not result in increased sales, it does not mean that reducing or eliminating the advertising would not reduce sales. Ultimately, in a mature market, the marginal product of advertising is very low, which results in the lack of increase in aggregate consumption as a result of increases in aggregate advertising. Your T-model examples makes this point, the marginal product of the advertising was high. Eliminating the advertising of motor cars would not necessarily resulted in declining consumption, and plausibly as well eliminating advertising on alcohol might not have no aggregate effect.
2) If the theory holds, producers in monopolistic markets would not advertise. But yet we find a lot of advertising in monopolistic markets. Surely if brand market share was the only thing being affected then in monopolies we should not see any advertising?
Two challenges to this article:
1) Just because increases in advertising in a mature markets does not result in increased sales, it does not mean that reducing or eliminating the advertising would not reduce sales. Ultimately, in a mature market, the marginal product of advertising is very low, which results in the lack of increase in aggregate consumption as a result of increases in aggregate advertising. Your T-model examples makes this point, the marginal product of the advertising was high. Eliminating the advertising of motor cars would not necessarily resulted in declining consumption, and plausibly as well eliminating advertising on alcohol might not have no aggregate effect.
2) If the theory holds, producers in monopolistic markets would not advertise. But yet we find a lot of advertising in monopolistic markets. Surely if brand market share was the only thing being affected then in monopolies we should not see any advertising?
“If the aim of advertising is to increase the size of the market, it doesn’t seem to be working very well.”
“It is an empirical fact that advertising generally doesn’t increase the size of the market….”
Etc etc. Nothing to see here, gentlemen: move right along please.
Alas, Mr Snowdon’s clumsy attempts to disguise the real and powerful effects of advertising turn out to be even more smoky and mirrorry then the dark arts of adverting itself.
Try this for an “alternative” opinion:
Business doesn’t give money away, and they generally have worked out what to do with their resources in order to generate the best return on the funds that they spend.
From the point of view of the companies who initiate and pay for the exposure of individual ads, the aim of their advertising is clear and unarguable: it’s to make money (or, more rarely, to slow inevitable declines in some market categories).
Individual ads can do this in all sorts of ways, but the fact that the ads keep on being made proves that they are paying their way.
Which is why money keeps on being spent on (invested in) advertising.
It is just silly to think that anyone today can credibly argue that advertising doesn’t change the way the people behave in specific ways and that these changes bring benefits to the people who are paying for these advertisements. D’oh. Please give your readers credit for some intelligence.
That all this should be shopped to us by a man whose position (Director of Lifestyle Economics, ha!) is sponsored by an industry lobby group called the “Institute of Economic Affairs” is too good to be true.
Hello George Orwell?
People today pretty much know how marketing (advertising) works, and the fact many of them are prepared to go along with it doesn’t mean that they don’t resent what they know it is dong to them.
Oh, and another thing:
This quote from the book Advertising in a Free Society, by Ralph Harris and Arthur Seldon, recently published by the IPA with an introduction by the aforementioned Mr Snowdon.
Advertising is more likely to reduce, rather than
increase, costs and prices. Advertising increases the
extent of the markets in which companies are able
to operate, therefore leading to greater economies of
scale. This is confirmed by the empirical evidence.
Hmmm, empirical evidence in the social sciences is dubious enough. But in the smoke and mirror debate about the economic and social place of advertising, it’s usually nothing more than opinion dressed up with transparently partisan arguments.
And just how does Mr Snowdon presume to assume he knows how powerful I think advertising is anyhow?