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Friday, August 27, 2004

Advertising - The Ultimate Miscalculation

Note - from June 24th 2009, this blog has migrated from Blogger to a self-hosted version. Click here to go straight there.

I almost forgot my undertaking to pen a few scattered thoughts on why advertising is a massive shell game.
It stems primarily from two things:
  • that senior managers tend not to be very numerate (particularly those with accounting backgrounds; a little knowledge can often be worse than none at all); amd
  • that senior management likes to be wined, dined, and made feel important by external people who dress real nice (don't we all?).
The first count of the indictment - innumeracy - is the core. Almost every study you see regarding advertising efficacy, is an exercise to attempt to correlate "Ad spend" with Sales. Usually in order to get the "right"result (that advertising generates additional sales), there has to be some distributed lag mechanism whereby "Ad spend" in one time period continues to have effects on sales in subsequent periods. Without that distributed lag mechanism, ad spend can't even be shown to help drive sales (which increase naturally as a result of population growth and inflation anyhow).
Think about that for a minute; that is just to show a net positive effect on sales. Is that the name of the game in business? Sales? Here was me, thinking it was profits.
Consider what happens when a company spends money on advertising. Each dollar spent on ads, is a dollar that would otherwise be profit. It would be free cash, distributable to shareholders.
So in order to "pay its way", a dollar spent on advertising has to generate enough sales so that the net profit of the company is improved.
If a company has net profit margins of, say, 16% (which is pretty high - 10% would be a better number), then a dollar spent on advertising breaks even as an investment only if it yields an additional SIX dollars in sales.
If a company spends a million dollars on advertising, it has to generate an additional 6-10 million in sales - just to have the P&L in the same situation as it would be if they had not bought a single ad.
Oddly, it is only as profit margins rise that advertising becomes a more sensible proposition; if a company has net profit margins of 25%, it needs to generate only an additional $4 in sales per dollar spent on ads.
And some of the "ad spend" is just ludicrous. Has anyone ever thought while in traffic "Hmmm... I must make my next printer a Canon" because of a neon sign over the expressway? Do women actually buy pots of face goo simply because they see a 20-something model in a white coat telling them that the Ponds Institute has "independently proven" the untold benefits of the stuff?
Imagine what would happen if tomorrow if managements woke up and realised that TV advertising reaches a miniscule proportion of viewers (namely, those without remote-control TV's), and that the preponderance of those ignore the ad anyhow. Imagine if they realised that everyone turns over from "Everybody Loves Raymond" the moment it goes to commercial.
The one thing that you can be assured of, is that distributions to shareholders would increase.
The other, is that it would be easier to get a table at decent Sydney restaurants, because former marketing wankers and ad agency folk would be eating Hungry Jacks between shifts as nightfill operators at Coles.
It annoys the crap out of me that a perfectly good medium for information (TV) has turned into a stream of dross which has a primary aim of trying to get people to watch ads - and on the whole, the ads aren't very informative... everyone who drives a Hilux is a weedy little dickhead, people who drive utes are bogans who like AC/DC, and women are utterly obsessed with reducing "the appearance of fine lines" (note: no claim to reduce their existence or number) and/or their hair colour and/or their makeup.
I already knew all of that, and I don't see why products should be more expensive - and returns to shareholders lower - simply to reinforce my extant stereotypes. I don't want a TV/Inernet browser in my fridge door, because I don't spent that much time in the bloody kitchen. but if I did, I would still turn it over when it went to an ad.
And if the advertising for the bajilli0n different "best ever" ab machines pays its way I would be very very surprised; otherwise the name of the company that does all the vending of those things wouldn't change every few years.