In Defence of Liberty

Driven by data; ridden with liberty.

The Purposes of Advertising

It is commonly held that advertising has a great effect on its viewers. (Edited: Wikimedia Commons)

It is commonly held that advertising has a great effect on its viewers. (Edited: Wikimedia Commons)

Advertising serves three main purposes: direct response, usually a purchase; brand awareness and customer loyalty.

At the height of the wrenching anti-globalist movement, polemics against consumerism and advertising prospered, such as Naomi Klein’s No Logo. The idea that advertising induces Pavlovian responses from its viewership is not new. The revised edition’s back cover of J. K. Galbraith’s book The Affluent Society poses the following question:

Why worship work and productivity if many of the goods we produce are superfluous – artificial ‘needs’ created by high pressure advertising?

There are numerous academic studies that stand opposed to this idea. R. Ashley, C. W. J. Granger and R. Schmalensee’s 1980 Econometrica paper, entitled Advertising and Aggregate Consumption: An Analysis of Causality, states: “The null hypothesis that advertising does not cause consumption cannot be rejected, but some evidence suggesting that consumption may cause advertising is presented.”

Looking at United States studies from the 1970s to the mid-1990s, the Democracy Institute found the econometric literature on tobacco advertising and consumption “have for most part found that aggregate cigarette advertising has little or no influence on total consumption.” Martyn Duffy’s 1995 paper on advertising for alcoholic drinks and tobacco products found:

In an empirical application to data for the alcoholic drinks and tobacco markets in the United Kingdom, it is concluded that aggregate advertising appears to have had little or no effect upon product demand in this sector over the past three decades.

Alyse Lancaster and Kent Lancaster co-wrote a paper in 2003, entitled The economics of tobacco advertising: spending, demand, and the effect of bans. They found 66.8% of 350 coefficients for advertising demand were not positive and statistically significant. The paper concludes: “the evidence indicates that full or partial bans on advertising are likely to have little or no effect on aggregate cigarette or tobacco demand because the banned advertising itself apparently has little or no effect on aggregate demand.”

More Focused, More Precise

These three purposes of advertising are not necessarily dichotomous: Jaguar’s ‘It’s Good to be Bad’ advertising campaign was heavily focussed on the Jaguar brand, with the particular car’s name only shown briefly at the end.

(Video: Jaguar USA)

Despite claims of advertising’s ugly influence, the response rates can be surprisingly small. An online banner advertisement may be served to 5 million people, and lead to 10,000 unique visits to the website. These users buy 100 products. That advertising campaign had a direct response rate of 0.002%. This means that 99.8% of users did not click through to the website, and 99.998% of users did not directly purchase the product. However, the advertisement may have other effects, such as the presented ad leading customers to search more online for that product, and buying at a later date.

It may be the third purpose – customer loyalty – that is advertising’s most important function. The effect of keeping customers from deserting your company’s product is difficult to measure.

Advertising is simply another form of communication, from the corporation to the potential customer. The academic literature suggests that advertising is not overbearingly influential.



This entry was posted on July 25, 2014 by in Economics and tagged .
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