AEM 4550: ECONOMICS OF ADVERTISING

1. AEM 4550:ECONOMICS OF ADVERTISING Prof. Jura Liaukonyte

2. My Research • Mostly focusing on quantitative analysis of Advertising • Comparative Advertising

3. Motivation

4. Product Positions in Characteristics Space What could advertising do to change these positions? Are perceived and real characteristics the same thing?

5. My Teaching • AEM 4160: Strategic Pricing • AEM 4550: Economics of Advertising

6. Myths and Truths about Advertising

7. 1. Advertising is a powerful force that usually increases brand and product sales. MYTH OR TRUTH?

8. 2. Advertising’s effects persist for decades. MYTH OR TRUTH?

9. 3. Advertising’s effects are instantaneous. MYTH OR TRUTH?

10. 4. If advertising is not effective right away, repetition will ensure ultimate success. MYTH OR TRUTH?

11. 5. Effective ads are effective forever. MYTH OR TRUTH?

12. 6. Advertising tends to be profitable. MYTH OR TRUTH?

13. 7. The most effective ad appeal is clear information with strong arguments. MYTH OR TRUTH?

14. 8. Sex sells MYTH OR TRUTH?

15. 9. Humor Sells MYTH OR TRUTH?

16. 10. For an ad to be really successful, it has to be totally unique. MYTH OR TRUTH?

17. 1. Advertising is a powerful force that usually increases brand and product sales. MYTH OR TRUTH?

18. Mostly Myth • Advertising successes can be dramatic, but they are rare. • Why? • Noise level from competitors’ campaigns is high. • Competition for scarce creative talent. • Successful appeals are quickly copied. • Example: after Apple’s 1984 Macintosh introduction, dramatic creative techniques became de riguer for new product intro ads.

19. 2. Advertising’s effects persist for decades. MYTH OR TRUTH?

20. Myth. • Hysteresis: when the effects of advertising persist long after the duration of the campaign. • Hysteresis: extremely rare. • Examples: • Apple • Wendy’s: Where’s the Beef?

21. 3. Advertising’s effects are instantaneous MYTH OR TRUTH?

22. Myth. • Advertising carryover: effects of advertising at time t that are not realized until time t+1 or later. • Very, very common. Why? • Takes time to convince; WOM; distribution; shopping trips. • Carryover tends to be short. Weeks or months, not years.

23. Advertising Goodwill • The effect of advertising on sales is often largely depreciated within a year (if not less). • Latest studies: beyond 3 months = miniscule effect

24. 4. If advertising is not effective right away, repetition will ensure ultimate success. MYTH OR TRUTH?

25. Myth. • Advertising is effective either early on, or never. • Some managers believe that advertising needs time to work itself into consumers’ subconscious. • In fact, research shows that if advertising does not produce any positive results in the short run, it is unlikely to ever do so.

26. 5. Effective ads are effective forever. MYTH OR TRUTH?

27. Myth. • Wearin: the amount of time or the number of exposures required for consumers to accept and understand an ad’s message • Wearout: the amount of time or the number of exposures before consumers get tired of an ad • Every ad wears in and wears out • Wearin tends to be rapid • Wearout varies across people and ads

28. 6. Advertising tends to be profitable. MYTH OR TRUTH?

29. Myth • Fact: Companies often persist with ineffective ads. • Research: average sales elasticity of advertising is 0.1 (!!!) • Why? • Prisoner’s Dilemma • Failure to define advertising success • Difficulty in measuring advertising success • Agencies’, executives’ incentives • Other reasons…

30. Advertising Elasticity • Measures the sensitivity of demand given a change in advertising

31. Combative advertising • Combative advertising, a characteristic of mature markets, is defined as advertising that shifts consumer preferences towards the advertising firm, but does not expand the category demand. • Basis of Prisoner’s Dilemma in advertising.

32. 1964 1970 Cigarette Advertising on TV • All US tobacco companies advertised heavily on TV • Surgeon General issues official warning • Cigarette smoking may be hazardous • Cigarette companies fear lawsuits • Government may recover healthcare costs • Companies strike agreement • Carry the warning label and cease TV advertising in exchange for immunity from federal lawsuits.

33. Cigarette Advertising • After the 1970 agreement: • Cigarette advertising decreased by $63 million • Industry Profits rose by $91 million

34. 7. The most effective ad appeal is clear information with strong arguments. MYTH OR TRUTH?

35. Myth. • Three most common types of ad appeals: • arguments (logical appeals) ex: antidrug • emotion (dramatic appeals) ex: hummer • endorsements (associative appeals) ex: gatorade, Heineken • Emotion tends to be most effective. Why? • More interesting • Require less concentration • More vivid, easily remembered • Harder to counterargue • Lead more directly to action

36. 8. Sex sells MYTH OR TRUTH?

37. Usually true. • Sex certainly breaks through the clutter. • Using sex is risky: • Sex can engender negative reactions in many consumers. • Risk can be mitigated through effective targeting • When does sex sell? • When it’s appropriate to the product or category • When it helps establish the brand image • It can help break through the clutter. • There’s not much good research on sex.

38. 9. Humor Sells MYTH OR TRUTH?

39. True. • Ex: Bud • How does humor help? • Positive framing lowers resistance • Distracts an audience from counterarguments • Helps attract attention • Combines with nearly every form of persuasion (we’ll get into this later) • Quick to the point

40. 10. For an ad to be really successful, it has to be totally unique. MYTH OR TRUTH?

41. Myth. • Research has shown that use of templates in advertising can be very effective. • Persuasion is a complex process. Templates have been developed to maximize consumer acceptance of a message. • Ads that break completely with tradition risk ignoring scientific knowledge about persuasion. • Uniqueness certainly helps draw attention, but does not guarantee a successful creative.