New light on how Advertising works (some of it)
By Mike Davidge
Wednesday, March 10, 2004
When you commit to spend a great chunk of the annual budget on advertising there is always the concern as to whether it is worth it. For a few advertisers, in the direct response business, the effects are clearly seen. Ineffective advertising brings no results and that means no business. But for most advertisers there is an ill defined link between advertising and the the sales results. It would be most helpful if there was a measure of just what role advertising is playing. Recent research in economics suggests a new way of understanding the link.
The 2002 Nobel prize winner for economics, Daniel Kahnemann, has developed over several decades a new approach to viewing peoples' buying decisions, based on extensive practical research. You may have heard of it, it is called "behavioural economics" which shows just how irrationally people behave in practice. The part that is important for advertising is what is called the "endowment effect".
That is that most people prefer to stay with what they know. Well, that is scarecely news. Not by itself, but applied to advertising decisions it has some interesting implications which can be measured. If your product or service is not bought everyday and costs more than a can of soft drink then it's probable that advertising does affect your sales volume, but in ways that are difficult to see directly. Current advertising theories cover such issues as the importance of "cross promotion" or integrated marketing communications. Much is made of the importance of the "brand image", is it really that important ?
Kahnemann and many others show that precedent is a key factor in purchase decision making. That is people by what they know or more importantly know of. So well advertised brands that are "known" are preferred to brands that are not. This may sound trite but the point is made that this "knowledge" may often override logic when a purchase is made. There are many examples of this from the research, but the point being made is that the claim that "any publicity is good publicity" seems to be true. This "knowledge" also is capable of overpowering factual evidence.
Without going through a catalogue of products and services there are some stunning examples of this effect in reverse. People will pay huge sums to avoid new dangers but are often unwilling to countenance spending on known risks.
Interesting stuff - and there is a lot more in a presentation we developed - if you would like to see it give us a call