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    441. Does Advertising Actually Work? (Part 2: Digital)

    en-usNovember 26, 2020

    Podcast Summary

    • The Decline of TV AdvertisingRecent studies suggest that TV advertising may not be as effective as previously believed. The rise of digital advertising, with its precise targeting and audience tracking, has disrupted the industry. Segmentation and relevance are key factors in driving product sales.

      TV advertising may not be as effective as previously thought, according to recent studies. While companies continue to spend millions on TV ads, the data shows a 1% increase in sales for every doubling of advertising. The rise of digital giants such as Google and Facebook has disrupted the advertising industry, making digital advertising more promising for precise targeting of audiences. Digital advertising has made it easier to sell products to audiences by tracking their preferences through cookies, leading to $123 billion in internet ad spending in the U.S. alone last year. The former chief marketing officer of Unilever believes that segmentation and relevance to the audience are key factors to drive product sales.

    • The Tricky Problem with Measuring Advertising EfficacyIt's hard to measure the impact of advertising on sales, even with large amounts of money being spent on marketing. Companies often hire consulting firms to analyze efficacy, but there is still no clear evidence of effectiveness.

      Digital advertising, which brings in the vast majority of revenue for Facebook and Google, lacks clear evidence of efficacy according to economists like Steve Tadelis from UC Berkeley. Even with large amounts of money being spent on advertising, scholars can't say for sure how effective they are. Companies like eBay (who was spending over a billion dollars annually on marketing at the time) hire consulting firms to analyze the efficacy of those ads. Nevertheless, measuring advertising efficacy is a tricky problem. Retailers, for example, primarily advertise on big selling days, such as Father’s Day and Black Friday. While there is some correlation between advertising and increased sales, it's difficult to measure the actual advertising impact.

    • The Pitfall of Analyzing Correlation Instead of Causation in AdvertisingTo truly measure the impact of advertising, randomized experiments are needed to determine causation. Even experienced consultants can fall into the trap of analyzing correlation and using confusing jargon.

      Consultants can fall into the trap of analyzing correlation rather than causation when it comes to determining the effectiveness of ads. Academic economist Steve Tadelis recognized this while working with eBay, and proposed running randomized experiments to truly measure the impact of the online ads. However, the consultants hired by eBay attempted to out-jargon Tadelis, causing him to question their methodology. In the end, eBay ceased payments for brand-keyword advertising before renegotiating a deal with the Bing search engine. This provided a perfect opportunity for Tadelis to conduct randomized experiments and determine the true impact of the ads, which is the gold standard of research for determining causation.

    • How Bidding on Keywords Works for BusinessesCompanies bid on keywords to reach potential customers, but buying ads for your own brand keywords might not be cost-effective. A natural experiment at eBay showed that testing assumptions is important in marketing strategies.

      Companies bid on keywords to reach potential customers when they're searching online. Algorithms run auctions to determine which ads will appear, and the winner pays for the ad space. However, buying ads for your own brand keywords might not be cost-effective since users who search for your brand will likely find it organically anyway. A natural experiment at eBay showed that turning off brand-keyword ads resulted in no drop in clicks and purchases, as users directly went to eBay from organic search. This led to more sophisticated experiments, highlighting the importance of testing assumptions in marketing strategies.

    • Is Brand-Keyword Advertising a Waste of Money?Paid-search advertising may not have as big of an impact on sales as once believed. It's important to measure returns on advertising and avoid wasting money on customers who were already planning to make a purchase.

      Brand-keyword advertising is a waste of money as customers tend to ignore advertisements for competitor brands. Non-branded advertising can be more effective but it is still difficult to predict the returns. An experiment conducted by eBay, where they turned off all paid-search advertising, showed that the impact on average was almost zero. This challenges the existing belief that paid-search advertising drives 5% of sales. It is important to measure the returns on advertising and understand how many people would have come without it to ensure you are not wasting money on customers who were already going to make a purchase.

    • Ineffective Online Advertising and Why the Digital Ad Industry Needs to Prioritize ResearchMany companies are wasting money on online advertising, but the digital ad industry is not urgently addressing the issue. There is a disincentive to examine cost-effectiveness, and more research is needed to determine the true efficacy of digital advertising.

      Research reveals that companies may be wasting millions of dollars on ineffective online advertising, but the digital ad industry shows no urgency to remedy the issue. Despite eBay's experiment showing that for every dollar spent on advertising, they lost over 60 cents, other companies have not rushed to replicate the results or conduct their own research. The industry's structure creates disincentives for players to examine whether online ad spending is cost-effective. Additionally, even within companies buying ads, there is a reluctance to question the effectiveness of advertising. While micro-targeting shows potential, the industry needs to prioritize more research and analysis to determine the true efficacy of digital advertising.

    • Rethinking the Effectiveness of Paid-Search AdvertisingCompanies should experiment with different customer segments to optimize advertising returns, while customers buying keyword ads need to adopt a more sophisticated approach. Understanding the online ad ecosystem is crucial for making better-informed decisions.

      Paid-search advertising may be less effective than the conventional wisdom holds. Companies will benefit from engaging in experiments to focus on different customer segments to get the highest returns on advertising. However, customers buying keyword ads must become more sophisticated in their approach. Google, which has a market capitalization of $1.2 trillion, is heavily reliant on advertisements, with 83% of their revenue coming from advertising. Tim Hwang, a former global head of public policy for A.I. and machine learning at Google, recently published a book about how big tech monetizes our attention. To make better-informed decisions, we need to understand the online ad ecosystem better.

    • The Dangers of Digital Advertising and Inaccurate DataDigital advertising may not be as effective as once thought due to inaccurate data and declining asset value, with close to 60% of online ads never seen. Beware of the similarities to financial bubbles.

      Digital advertising may be a bubble waiting to burst, with declining asset value and inaccurate data used in the industry. Tim Hwang grew skeptical of online advertising while at Google and learned from keynotes by marketing professor Nico Neumann that much of the data in the ad-tech industry was inaccurate and that machine learning was often finding people who would have bought the product anyway. Google's study concluded that close to 60 percent of online ads are never even seen. Hwang warns that the behavior occurring in digital advertising is similar to that of other financial bubbles, with the red lights flashing but everyone in the industry refusing to take a look at the real data.

    • The Ineffectiveness of Digital Advertising and Questioning its True WorthDespite the high valuations of companies like Google and Facebook, a 2019 study challenges the effectiveness of precise targeting in digital advertising, raising questions about its true value.

      Digital advertising may not be as effective as we think it is, with click-through rates falling significantly and people increasingly using ad blocking. According to a 2019 study, users' cookies have little impact on ad revenues, challenging the idea of precise targeting. Despite this, companies like Google and Facebook are still worth a lot of money, largely due to the opacity of the digital advertising marketplace and the difficulty in measuring its effectiveness. Many people in the tech industry cannot even explain how ads work in detail. This suggests that the perceived value of digital advertising may be grossly overestimated, and calls into question its true worth.

    • The Challenge of Brand Safety in Digital AdvertisingEnsuring your ad shows up on appropriate pages can be difficult in the opaque and incentive-driven online ad marketplace. Efforts to address transparency issues continue as the industry works towards better ad controls.

      Brand safety is a major challenge in the digital ad industry as it can be difficult to prevent ads from showing up on inappropriate pages. Despite efforts to eliminate the risk, the online ad marketplace remains opaque and susceptible to perverse incentives. Ad agencies and platforms have a strong incentive to push the effectiveness of online ads, which can compromise their objectivity. In response, the Global Alliance for Responsible Media was created to promote better ad controls. Facebook, Twitter, and YouTube have agreed to adopt common definitions for hate speech and give advertisers more control over where their ads show up. However, the ad industry remains plagued by transparency issues and hidden practices.

    • Online Advertising Bubble: Impending Burst?Advertising's effectiveness is questioned as its funding of research and industries creates potential danger in a bursting bubble. Change needs to be driven by buyers rather than industry players with too much incentive to sell.

      The online advertising industry is a bubble that may soon pop, with empirical evidence showing its ineffectiveness and the potential for advertisers to cut spending without notable impact on their bottom line. The widespread use of advertising in various industries and the funding of cutting-edge research through ads highlights the potential for a massive economic downturn if the bubble were to burst. While a slow and controlled deflation may be possible, it cannot be driven by industry players who have too much incentive to keep selling. It must be driven by the buyers who can push for change.

    • The Need for a Punk-Rock N.B.E.R in AdvertisingA dedicated research group can provide objective evaluation of ad efficacy and challenge the assumption that companies always act in a profit-maximizing way, reducing opacity in the marketplace and preventing market bubbles.

      Tim Hwang suggests the need for a punk-rock N.B.E.R, a research group that challenges the advertising industry and provides objective evaluation of claims about ad efficacy. While firms are assumed to be profit-maximizers, the reality is that people's foibles and shortcomings are brought to work with them, leading to non-profit-maximizing behavior. This challenges the circular argument that companies spending billions on advertising is proof that the ads work. Hwang draws parallels between this mindset and those that drive market bubbles. To reduce opacity in the marketplace, a dedicated group of people are needed to do good research on this front, to provide a handbrake that can slowly bring down momentum in the market so that it deflates without exploding.

    • The Need for Diverse Business Models in Modern AdvertisingAdvertising's effectiveness needs to be assessed beyond academic statistics, and there is a need for diverse business models beyond relying solely on ads. This will lead to better social outcomes and a healthier internet ecosystem.

      The power of modern technology companies, especially in digital advertising, is facing scrutiny from society and government. While bloggers use affiliate links, it is difficult to measure their effectiveness, making it hard for companies to trust academic statistics. Society deserves a better answer than just assuming advertising always works. The question is not whether we want an internet with or without ads, but whether we want an internet dominated by a monoculture of ads. The internet needs more diversity in business models that don't solely rely on ads. There are many different forms of advertising, and it is crucial to find more robust and stable markets that lead to better social outcomes.

    • Effective Advertising Through PodcastsEducating and engaging ads that provide valuable information are the most effective. Podcasts offer an intimate platform for advertising, allowing for more in-depth information about products and services. A balance of skepticism and belief is necessary for success.

      Advertising is a vast field with numerous channels, each with its own variations and objectives. These can include regional, national, or local ads; brand-building or calls to action; and ads that focus on quality, price, or inspiring content. However, ads that educate while being interesting and fun to listen to are most effective. Podcasts are an increasingly popular advertising medium due to their intimate nature, and they can provide a wealth of information about a product or service. It's important to maintain skepticism while also believing in what you are doing, as F. Scott Fitzgerald once said, in order to function as a first-rate intellect.

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