Saturday, August 25, 2012

Don't you want to find out which half of your advertising is wasted?

Some time in the early 20th Century, John Wanamaker, one of the fathers of the U.S. department store business, said "Half the money I spend on advertising is wasted; the trouble is I don't know which half." Kantar Media Intelligence reports that $144 billion dollars was spent on advertising in the U.S. last year. If Wanamaker's Rule is still in effect, that means that $72 billion was wasted.

How much television advertising do you pay attention to? Do you mute your television when the ads come on? Do you prefer to watch television from your DVR and skip over the ads? How about radio--like me, have you given up on commercial broadcast radio because there are simply too many ads? Do you instead listen to satellite radio (which still has ads, but fewer of them), a service like Pandora, or music on your iPod or phone? How many print ads in magazines do you pay attention to? When was the last time that you paid attention to a newspaper ad, or looked through the classified ads? Do you read the flyers and other junk mail you receive, or do you throw them in the recycling bin as soon as they arrive? When you're browsing the web, do you use an ad blocker?

The fact is that, with a few exceptions, we really have no way of directly measuring advertising effectiveness--no way of knowing how much of our advertising is wasted. The only way to scientifically test is to not only compare one ad against another, but to also test against a control of no advertising whatsoever--and no company is going to risk the potential harm of eliminating all advertising in order to test the difference between some form of advertising and none at all. While you're testing, you'd better account for macroeconomic effects as well: A test in 2007 would have had very different results than the same test in 2009.

So, we're at the same place as the ancient Egyptians and Greeks were when they performed highly symbolic, but ultimately ineffective, animal sacrifices. We don't sacrifice animals anymore; instead, we waste tens of billions of dollars that could be used for other, more productive, activities. Could we do without it? If we did, what horrors would the gods rain down upon us?

I'd argue that most large advertisers could cut their advertising expenditures by 50% with little or no effect on sales, and a big positive effect on their bottom lines. And, I believe that we're heading in that direction. Marketers are finding success with approaches that look little or nothing like conventional advertising, such as product placement and social media.

Advertisers who do try to cut their expenditures on conventional media in half are going to face tremendous pushback. Ad agencies and media buyers will tell them that their plan is risky, if not insane. (Ad agencies and media buyers get a large portion of their income from purchase of advertising space.) Media companies will sow fear, uncertainty and doubt within advertisers' management. Even advertisers' managers may fear that cutting the expenditures in half may result in "turning the field over" to their competitors. Making such a decision is going to take enormous courage on the part of executives. However, if it causes earnings before advertising and promotion expenses to fall more than the savings from the decrease in ad expenditures, companies can always ramp advertising back up.

For their part, media companies have to prepare for a future where they get the majority of their revenues from subscriptions and other income instead of advertising. As for media startups, building your business plan solely, or even primarily, on advertising revenues is a fool's game.
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