Does advertising work

Abstract

Advertising's effectiveness is notoriously difficult to measure -- but accurately valuing its contribution is more important than ever DESPITE THEIR HEIGHTENED ATTENTION to advertising spend, managers still have a hard time getting it precisely right. This should occasion no surprise: the task is extremely -- perhaps even impossibly -- difficult. There are problems everywhere: data are often unreliable, internal accounting and control systems irrelevant, performance criteria inappropriate, budgets unpredictable, time horizons for decisions unclear or unreasonable, and managerial incentives unfocused. These problems do not remove the burden of getting it right. But they do redefine a bit the yardstick by which gets measured. Greater accuracy and precision are, of course, always welcome. But the primary merit of any new approach to making decisions about advertising spend is to embed throughout an organization a consistent, shared discipline for systematically thinking through the complex dynamics of value creation and capture. Such consistent discipline is especially important given the relatively fragile state of knowledge about the true economic value of advertising. There are, for example, a couple of facts about advertising that almost everyone knows. For much of the 1980s, ad spending boomed at a double-digit clip. Then, in the 1990s, expenditure began to decline in real terms. Among managers as well as students of advertising, two competing theories have developed to explain these conflicting trends: 1.Advertisers were overspending during the 1980s, or they are underspending today, or both. 2.Either (or both) rate of spending is right -- it is simply that the nature of competition, the overall performance of the economy, and the role of advertising have changed from one decade to the next. Both theories are plausible and popular. Both are wrong. In fact, there is a third explanation: ad spending has become so disconnected from economic reality and from an understanding of how best to evaluate an ad's quality -- that is, its creativity -- that these numbers do not reflect much other than management's willingness to open its wallet. New approaches to thinking about advertising that are anchored in effective metrics of creativity and in the economic reality of value creation are therefore needed. The one described here focuses on the economic half of this equation. Based on existing market research techniques and information technology, which have eased tremendously the execution of such approaches, it provides managers with a rational, dependable tool for setting advertising budgets and monitoring advertising effectiveness. It also allows them to see how their products deliver value to individual market segments and learn how advertising can communicate this value to the consumer. Most of all, it helps to clarify the relationship between a dollar of media spend and a dollar of economic value. Many companies are adopting bits and pieces of this approach, although to date no large advertisers use it systematically. They tend to direct their approach toward the market as a whole and not toward the multiple segments they want to reach. Even so, they have all found genuine benefit in the disciplined thought process it helps create and institutionalize. A different model In most companies, senior management gives each brand manager his or her ad budget for the year. The budget is generally based on last year's, plus or minus a few percent. The brand manager then works with ad agencies and is free to spend the budget more or less as he or she pleases -- within, of course, the sharp financial constraints imposed by the need to deliver against tough, year-to-year P&Ls. This new approach works differently. It should be familiar to senior managers because it resembles the standard capital budgeting process that operates outside advertising. …

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