Capital Ideas Blog

Where ad dollars are going, and where they've been

By Pradeep K. Chintagunta

From: Blog

This post originally appeared on the Kilts Center Faculty Blog.

In the movie The Social Network, Marylin Delpy (played by Rashida Jones) is amazed when Mark Zuckerberg (played by Jesse Eisenberg) tells her that his social networking website received 22,000 and not 2,200 hits in two hours. Last week, 10 years after Facebook was founded, Arthur Lafley, the newly returned CEO of Procter & Gamble (P&G) announced that the company was spending close to 35 percent of its marketing budget on digital media – including online ads, social media, etc. As one of the largest advertisers in the world, the company is a bellwether for developments in the marketing and advertising arena. Most published reports suggest that firms in the US allocate roughly 20 percent of their advertising budgets to online media pursuits, outing P&G’s number as well above that range.

Phase of skepticism
Firms have gone through several phases before ramping up their investments in the online medium. The first was the phase of skepticism where there was hesitancy in investing because of how different the “medium” (if it could even be called that!) was compared to the dominant medium of the time – television. TV advertising was viewed as being a vastly superior platform for communicating a brand’s positioning and its values to a large swath of the potential market. Display ads, after all, were fleetingly viewed patches of pixels quickly dismissed by the click of a button. From the perspective of the consumer, TV advertising was particularly useful at the top of the purchase funnel (which can be thought of as the steps that the consumer goes through in the journey from not being aware of a product or service; to awareness, interest in and consideration of the product; the decision to purchase; the actual purchase; loyalty and repurchase; and the advocacy of the product to others) by creating awareness among large groups of potential customers (via network advertising for example). In the phase of skepticism, what was important to the firm was a sound marketing strategy coupled with creativity to produce the best way to articulate the firm’s positioning to the marketplace.

The advent of broadband, richer media online as well as online videos gradually lowered the advantage of television as the dominant medium for such communication – both as a means of generating awareness as well as for reminding customers in the post-purchase and repurchase steps of the purchase funnel. Meanwhile, the internet led to the birth of new business models such as search advertising and social networks. This opened up the possibility of informing consumers and potentially convincing them at the actual purchase stage of the funnel, i.e., at the point these consumers were to buy the product or service. Such advertising at or near the point of sale (especially for products that were also sold online) helped expand the marketer’s arsenal in the ability to influence behavior at various stages of the purchase funnel. The advent of social networks such as Facebook and LinkedIn added another dimension to online media by laying bare to the advertiser a consumer’s network of friends – i.e., potential influencers in purchase decisions – as well as their likes. While marketers such as P&G have long recognized the power of word-of-mouth effects and have tried to use it as an influencer in the offline world (with services such as Vocalpoint and Tremor), online social networks afforded them with considerably more transparency into friends’ networks and how they evolved. Firms could now target an ad at a consumer whose friend recently expressed their approval for the firm’s product by “liking” it on Facebook.

Phase of experimentation
One other aspect of the online medium that became attractive to marketers was the relatively younger demographic that spent more time online than it did in front of the TV set. The coveted 18-49 demographic was seen as increasingly drawn to the internet; consequently, it made sense for firms to be where their potential customers hung out. Thus broadband, new business models and the nature of the audience collectively contributed to the phase of experimentation where marketers started dipping their toes into the sea of online media alternatives available to them. Many firms are still in this phase – allocating small amounts from their advertising budgets to a variety of online media and then looking at outcomes to see signs of improvement over their traditional media allocations. Such experimentation, for example, led to the high profile departure from Facebook advertising of General Motors, which has since returned to the social media fold when allocating its media budget. For firms in the experimentation phase, marketers need to have not only a sound marketing strategy, creativity to embody the positioning, but also technology skills to understand the various online platforms and statistical skills to design appropriate experiments. (An excerpt in Fast Company from Gary Vaynerchuk’s recent book discusses the need for these skills in the context of the Old Spice “I am the man your man can smell like” campaign.)

Phase of adoption and “measurement rules-of-thumb”
Firms – specifically, the ones that came through the experimentation phase convinced that the online medium had potential to help them target and market their products to potential customers – have gradually started increasing their allocation to the digital medium.

With this “adoption” of the medium has come the quest for metrics that can help the marketer better allocate budgets across traditional and digital media. This I refer to as the phase of adoption and “measurement rules-of-thumb.” Marketers now have access to vast amounts of data to try and “attribute” the outcomes of interest in the marketplace (e.g., trial and repeat behavior of customers) to the various media that they are allocating their budgets to. This has led to an interest in “big data” and “big data analytics.”

Allocating credit for the desired outcome to the vast array of media outlets being used is a non-trivial task. Why is this the case? First, consumers are exposed not to a single medium or message but to multiple media and channels. Next, they can be exposed multiple times and different numbers of times to various media. Given social interactions, they are also exposed to multiple individuals who themselves are being exposed. Another complication is that the order of exposure to different media can differ across individuals – while some might view the TV campaign prior to the online ad the opposite might be true for a different individual. Outcomes such as purchased can also occur in different channels – online, in a company store, at a mass merchandiser, a specialty store, etc. And, the ability to target advertising to individuals online leads to a “selection problem” where a person more likely to make a purchase is also more likely to be served an online ad.

These complications had pushed marketers to adopt “rules of thumb” when measuring the effects of various media. One such rule is that of “last touch attribution” – if a customer is exposed to a number of marketing messages en route to the final purchase – then credit for causing the purchase goes to the medium that immediately preceded the purchase.

Challenges to measuring the effects of marketing messages online have been investigated recently by my colleagues at Booth (see, for example, research by Chris Nosko and Dan Nguyen’s work in this WSJ article), who also suggest approaches to better measure these effects. For firms in the adoption phase, marketers need to have a sound marketing strategy, creativity to embody the positioning, technology skills to understand the various online platforms, big data and computer science skills to appropriately parse the data, and statistical skills to analyze the data. As an advertising executive interviewed in a recent WSJ article (“Old School Ad Execs Sweat as Data Geeks Flex Muscle”) laments the lack of digital experience “I’m 37 years old and extinct.”

Phase of reasoned allocation and understanding
As marketers get a better sense of the relative effectiveness of alternative media vehicles in leading to desired customer outcomes, we will likely move into the phase of reasoned allocation and understanding. In this phase, as firms get a better understanding of the effects of advertising through the various media, there will be a move to get closer to a more optimal allocation of effort across the different media. That is the stage that firms such as P&G are striving to get to.

As we have seen, though, the skills required to navigate the various phases keep escalating which means that firms need to invest in acquiring these skills over time to be successful marketers. Witness the recent merger of advertising giants Omnicom and Publicis: as many observers noted a key motivation of the merger was to fight off competition from Silicon Valley where a number of these digital innovations and business models are originating.

So while we might still be far away from the digital world of Tron, where people like Kevin Flynn (the character played by Jeff Bridges) pictures “clusters of information as they moved through the computer” and eventually becomes part of that world himself, as marketers we are increasingly capable of harnessing these “clusters of information” to better communicate the value of products we create.


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