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1 - What is effective advertising?

Given its omnipresence in entertainment media as well as its high level of visibility in everyday life, it is fair to suggest that advertising has become part of popular culture. It stands to reason that in a society that respects individual freedom of choice, there is a great deal of attention placed on being chosen - much like there is great interest in dating in cultures in which marriage is not arranged by others.

However, there never has been a clear and universal indication of what makes advertising effective. Worldwide, nearly half a trillion dollars is spent each year on advertising, which is the equivalent of the entire GDP of Belgium.

(EN: This raised my suspicion, because Belgium isn't really much of a county. To put it into perspective, the world production is estimated at $71.8 trillion, advertising is around half a percent, which is far less than I expected.)

The advertising paradox

Advertising has one purpose only: to influence consumers' buying behavior. Whether the advertising is a sales promotion that encourages immediate action, or softer "image" advertising that results in a more positive impression of the company to influence a decision in the distant future, it is all about getting customers to purchase the brand.

Promotions are more comfortable for the accounting mind, because their cost and return are more easily evidenced by results that can be measured over the short term. Other advertising defines quantification because the relationship is indirect and happens over a longer period of time, so it tends to get less attention from executives looking to show dramatic short-term improvements.

But this longer-term advertising's affects are purported to be:

Unfortunately, this is not an easy story to tell, and the assumption seems to be that customers who receive advertising were likely to have purchased the product anyway - though even those who claim this is the case are loath to discontinue their advertising programs.

The importance of the light buyer

Sales promotion focuses overmuch on the "light buyer," an individual who is inclined to make a purchase but feels no sense of urgency in doing so, and has no preference for a given brand. The target market is generally customers who are deemed likely to buy in the coming week or month.

The "heavy buyer" is an individual who purchases a brand "several times a week" or each time a need arises for them to have a product. Too often, these individuals are taken for granted and it is assumed no money needs to be spent to ensure getting their business the next time.

The author uses the Pareto principle: 80% of a company's revenue is provided by 20% of its customer base - and yet the majority of the marketing budget is spent on those whose purchases constitute a minority of the firm's revenue.

It is also assumed that the first-time buyer will be inclined to purchase again with no further incentive, though this also assumes that he will be completely satisfied with the buying experience and find that the product adequately satisfies the need for which it is purchased.

However, it can be seen that the effects of sales promotion are short-term - sales increase during a promotion but drop back to normal levels very soon afterward. This is a clear indication that the buyers attracted by a promotional campaign do not become regular customers in any appreciable number.

The drawback of sales promotion is that they are expensive, and their cost is ultimately visited upon the regular customers (in the sense that the cost of the product provides the margin needed to pay for advertising to attract other customers). And done regularly, it discourages customers from paying full price - but instead wait for the next coupon or sales event to purchase. This also coaches customers to respond to sales promotion - including those of competitors. Whomever offers the best coupon wins the business for a day.

At the same time, the light buyer and potential buyer are the only source of brand growth - as heavy buyers have limited capacity to purchase more, such that they can only be maintained. To ignore new business is to accept atrophy.

But prospecting for new customers should be handled with greater care, especially in an age in which the deal offered to new customers is discovered by existing customers, who may (rightly) feel that the firm has little gratitude for their loyalty.

Direct and indirect effects of advertising

While promotion seeks to generate a quick "bump" in sales by appealing to one-time buyers, marketing in general seeks to identify and establish ongoing relationships with those who will purchase a brand regularly and over a longer period of time. The loyal customers provide a dependable income for a firm, and effect growth through recommending the brand to others.

The author mentions the net promoter score (NPS), which asks how likely a person is to recommend a brand to a friend, and which is "by its own account" a reliable indicator of a company's ability to grow. The notion is that loyal customers will recommend the firm to others who are likely to be loyal, rather than the one-time buyer looking for a deal. This is particularly valuable in a market in which people trust the opinions of friends more than the claims of advertising. Some claim that companies with a high NPS do not need to advertise to grow, and there is statistical evidence that firms with a higher rating do tend to grow and prosper more than those with lower ratings.

An older model of word-of-mouth is the two-step-flow model of communication (Lazarsfeld 1955), which suggested that 90% of people are influenced by the other 10%, and that these "opinion leaders" are in turn influenced by the media. Classic advertising is said to be primarily important for making influential individuals aware of the brand, so that they can then refer others, provided they are convinced. There are a number of research studies that support this model, which suggests that advertising is the source for word-of-mouth.

A more recent study (Keller 2009) also considers the digital channel, and finds it to be somewhat less effective: word-of-mouth delivered in person was found to be correlated to an actual purchase four times more often, and it's suggested that 90% of all conversations about brands are still taking place in the real world rather than on Facebook, Twitter, or other social channels. Moreover, the number of people who claim to regularly ask for or give advice regarding brands to others is at 11% - which is the same proportion noted in 1955. As such, "social media is not the mass-marketing tool that brands hoped."

There's a bit of speculation on this matter - which considers the power of nonverbal communication. A face-to-face encounter is richer, more meaningful, and more influential than mere words. It has long been recognized that personal selling is considerably more effective than television, which is more effective than print.

Another interesting note is that word-of-month may seem to be highly effective because it reaches an audience of people who are already inclined to make a purchase. That is, people do not ask of offer advice to one another unless there is a reason to do so - and when it comes to brand recommendations, these generally occur when someone is already contemplating making a purchase. Advertising is not that tightly targeted, and generally reaches most people when it is not relevant, in hope that it will be remembered in future.

What are Facebook fans really worth?

There was for a time quite some hubbub about the value of being "liked" by people on Facebook and desperate attempts to quantify this, given the vast sums of money firms were paying to develop their social media presence and get prospects and customers to sign up to receive a steady stream of product promotions. Unfortunately, this has been impossible to quantify by any reliable means, and there remains only a vague sense of its value.

Some anecdotes are presented from a consumer brand:

These figures paint a dim view of the value of social media as a means to reach new customers, but suggests a good opportunity to maintain relationships with existing customers - who are unlikely to increase their personal consumption of a brand, but most likely to be influential to others.

Sidebar: determinants of consumer loyalty?

A few factoids from a survey among US internet users (Garcia 2012):

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