Does Advertising Really Work?

Googling the answer to this question generates several contradicting and confusing results. However, according to Statista, over $540 billion were spent in advertising in 2018. So, imagine other sectors of the same vicinity (e.g., hotel and semiconductor industries) who are wondering if their products are any good, to begin with. You, as an advertiser, want to make sure your money is well-spent and not wasted. We investigated for you, and the result may surprise you.

Rolls-Royce set a new record for sales in 2018. Zara outperformed its rival H&M by growing twice as fast. Costco increased its sales by 19% at a time when other retailers were struggling, and Spanx made Sara Blakely a billionaire in 2012. All these companies have two things in common: they all perform well financially. And none of them advertises. Therefore, it’s more than justifiable to ask whether using other instruments than advertising would be more efficient?

Moreover, several study results show that advertising is not just ineffective but maybe even detrimental. For example, Clancy and Stone refer to a study which found that a whopping 82% of television commercials generate zero effect or even negative returns, while the Accenture-based team claims that the figures were even worse: 82% of TV advertisements make negative returns. Other platforms of media have produced the same kind of results more recently: Nielsen found that radio advertising generates a negative ROI of 0.85. DMA found that only 48% of marketers see a return on investment when using social media. Manta survey echoes the finding by revealing that the 59% of the small business owners don’t see positive returns from their social media activities, and two years later still 49,7% of business owners consider that time invested on Facebook generated a negative ROI. In light of these results, spending Euros on advertising may look like a silly idea.

However, investigating extremely complex topics with multiple variables, like advertising effectiveness, cannot be comprehensively examined in a single study, but require numerous studies investigating the phenomenon from various standpoints. In search of the most reliable conclusion, the only way to reach the answer is to research with scientific principles. After all, science is the source of the most reliable knowledge on this planet for observing the world in a systematic, public and replicable way.

Consequently, would science provide knowledge on advertising effectiveness, and either confirm it as effective or ineffective? Fortunately, science has been assessing advertising and its effectiveness for decades and published a vast amount of study results. Therefore, summarizing over 1 700 independent scientific studies with an overall sample size of 2 400 000 people all over the world provided several fascinating findings.

Good and Bad News

 

Let’s start with the good news. The analysis confirmed advertising as effective. For example, you can change your customers’ attitudes, behavior and emotions, as well as make them see how convincing your company’s brand is. So far, so good.

Here comes the bad news. Although advertising is effective, an advertisement alone, whether a TV-commercial, magazine ad, web-banner or any other form of advertising, explains, on average, only suboptimal 1.3% of all variance. Therefore, it leaves a huge 98.7% for other variables to be explained. Though, by adding other characteristics for analysis, like the source of the message, customer characteristics and strategy, the explained variance triples to 3.6% but still leaves 96,4% unexplained.

Similarly, an analysis of over 1 150 scientifically studied elasticities show that while the advertising elasticity on average was .22 in the 1980s, nearly 30 years later it had decreased to .12, and the median elasticity went as low as .05. Moreover, based on the same analysis, back in the 1980s, if a company wanted to compensate for a profit decrease due to a price reduction, it had to increase its advertising expenditures by five percentage points for each one percentage point discount. As a result, a 10% discount required a 50% increase in the advertising budget. However, in 2010, the advertisers who, due to a price discount, had lost their revenue by one percentage point, had to raise their advertising budget with a 30 percentage points (i.e., ten-percentage discount needed an intense 300 percentage point increase in advertising budget)! Thus, the difference between the 1980s and 2010 was six-fold. You can only speculate how much more it is now a decade later*.

A Pinch of Realism

From good news to bad news – and finally to realism. Let’s start with the obvious: yes, generally, many things influence advertising effectiveness besides the advertisement itself. For example, pricing strategy, weather, competitors’ actions, past experiences and friends’ recommendations. However, regardless of these excuses, the marketer, payer for advertising, wants to know where she or he should invest the limited budget. Should the advertising be less effective than, for example, pricing strategy or word-of-mouth? After all, the marketer’s logic is quite simple: Put the money where the impact is maximal.

While a part of the small effect size can be explained with extraneous variables, the advertising industry cannot close their eyes to their error. It’s not exactly a state secret that a certain majority of advertising isn’t based on facts and science, but unlike many other disciplines in business, advertising is usually based on feelings and experiences instead. Base your work only on “art,” and too often, you will find a hard time explaining to your supervisor or customer why the advertising ROI is zero or negative. Therefore, if the unscientific approach resulted in such a low effect size, imagine what kind of competitive advantage the forerunner advertisers would gain by combining “art” and “creativity” with scientific facts and knowledge? But how exactly science can help create more effective advertising for your company?

Answers

There are many alternatives (see other Insights), but let’s start with those answers that the same analysis of over 1700 scientific studies has revealed. It discovered four characteristics – Source, Message, Strategy and Receiver – in advertising; these have the greatest influence on outcomes. Moreover, the effectiveness of these four characteristics depends on what the marketer wants to achieve. Let’s take an example and assume you want to build trust and credibility. In this case, the Source of the given Message is a more critical factor than, for instance, Strategic factors including Message reruns, advertising budget, media coverage etc. As the analysis discovered, the difference in effectiveness between these two characteristics on building trust is 2.5-fold, which means you could create 150% more trust within your customers if you invest your money in the right Source, instead of focusing on, for example, media coverage. In the end, you would save money and get a more effective campaign, because choosing the right Source is far more inexpensive than buying more media coverage. Thus, if you take Source, Message, Strategy and Receiver and consider how they interact with the desired outcomes (e.g., Attitudes, Behavior, Cognition, Credibility, Emotion, Memory, and Processing of the advertisement), it’s crucial to differentiate the effectiveness between the least and the most effective interactions – it’s a whopping 10 385%! So, how would you feel if you discovered later that you wasted money on the weak characteristics that didn’t meet your desired objective? Also, with the same budget, you could have produced 105x more revenues, if only you had known the outcome of these interactions.

Aligning advertising characteristics with desired outcomes is just one example. Use also other strategies to increase the effectiveness of advertising.

Source includes characteristics of the object that transmits the Message in advertising, such as, celebrity expertise, gender and source credibility.

Message includes characteristics of the communication content in advertising that is transmitted from the Source to the Receiver, e.g. comparisons, colors, typefaces and humor.

Strategy includes characteristics of the plan, process, and execution of transmitting the Message from the Source to the Receiver, such as, exposure, repetition, duration and spending.

Receiver includes characteristics of the customer who receives the Message, for example, former attitude, motives, cognitive capability and personality.

Takeaways

1. Based on over 1 700 scientific studies conducted globally with a sample of over 2 400 000 people, you can say advertising is effective.

2. However, the size of the effect is very small, explaining as little as 1.3 – 3.6% of all variance that influences the customer.

3. Smart marketers combine “art and creativity” in advertising with “science and knowledge,” which enables huge improvement for advertising effectiveness. Art and science do not confront each other– they merge.

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