How Advertising works
May 15, 2023
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How Advertising works

During times of the economic cycle, organisations will look at reducing costs where-ever they can. Typically the accountant takes a red pen to the advertising budget line then turns their attention to the head count.

The purpose of this paper is to assist marketing and brand managers in defending their budgets during a time of financial uncertainty and cost-cutting by providing them with valuable insights.

Part One

Consumer Behaviour & Media

John Wanamaker, department-store magnate famously claimed

“Half my advertising spend is wasted; the trouble is, I don't know which half.”

First to cut

During times of uncertainty, such as political unrest, declining buyer confidence, war, a shortage of talent to meet demand, high inflation, and increased finance costs, businesses often resort to cutting advertising spend as a primary cost-saving measure. Any budget that remains is under intense pressure to yield a return on investment, as evidenced by briefs that specify sales activation campaigns that must deliver an ROI of $5 for every $1 spent. It is crucial to understand how advertising truly works before the CFO resorts to slashing your advertising budget.

The job of advertising

The primary goal of advertising is to alter people's perceptions of a brand, which in turn leads to an improvement in attitude that ultimately results in a change in behaviour and purchase decisions that favours the advertiser. The primary purpose of investing in advertising is to safeguard and increase sales. While it is difficult to accurately measure the impact of advertising, it is evident that advertising does lead to increased sales. As such, marketers must approach advertising from a real-world perspective and devise methods to measure its effectiveness.

Buyer Behaviour

In the real world, people make purchasing decisions both consciously and unconsciously, depending on the significance of the purchase. They often have incomplete information and imperfect memory recall while being distracted by countless other thoughts, ultimately deciding on what appeals to them at the moment. Neuroscience and psychology provide valuable insights into how memories and brains function. Advertising works by creating and reinforcing memory pathways, as much decision-making is emotional and non-conscious. People often make purchases based on emotions and then attempt to rationalize their decisions using logic. As a result, the primary goal of advertising is to develop memories and relevant associations.

Measuring the effect of advertising

There are 2 key types of advertising:

  1. Sales Activation, such as offering a 30% discount with a deadline or running a recruitment ad, is an example of time/price advertising that aims to prompt an immediate purchase, and its impact can be quantified. However, some organizations and retailers rely heavily on this form of advertising. Immediate response advertising can lead to sales, but not everyone who sees the ad is interested in the brand at that moment. Typically, this type of advertising targets frequent customers who were already planning to make a purchase, which may bring forward future full-margin sales, negatively impacting the company's bottom line.
  2. Brand advertising is often criticised for not having a tangible impact on sales, but there is empirical evidence to suggest that it does affect sales, albeit in a way that is difficult to measure. This is because sales tend to increase when advertising begins and decrease when it stops. However, the impact of advertising on sales is not always dramatic, as the goal of advertising is often to protect or grow market share rather than generate a sudden surge in sales. Additionally, some advertising may not be effective enough to drive significant change.

    Furthermore, advertising can help protect sales over the long term, as it aims to prevent competing brands from taking future sales. This means that even if sales graphs appear flat or declining, advertising can still cause sales by ensuring that the brand wins sales over an extended period. The impact of advertising is spread thinly across the future, covering the entire brand and its products, and may take a considerable investment to be reflected in weekly sales reports.

    In many consumer categories, especially in FMCG, advertising budgets are relatively small compared to other activities like physical distribution, shelf space, and point-of-sale displays. For established big brands, the correlation between advertising spend and sales revenues may be weak, while for smaller brands or new entrants with lower levels of salience and shelf space, advertising can have a more significant impact. Despite overall sales results remaining unchanged, many studies show that advertising can influence buyers who had not previously purchased the brand, resulting in increased sales. Therefore, the impact of advertising on sales can be compared to the tip of an iceberg, with the actual size remaining uncertain. To use another analogy, advertising can be compared to an aircraft that reaches maximum altitude when the engines are fully fuelled and fired up, but experiences a slow but certain descent when the fuel is turned off.

    In many product categories, such as FMCG, most consumers make infrequent purchases of a specific brand. For instance, someone may only buy Coke once or twice a year, while a small group purchases it several times a week. Advertising aimed at these frequent purchasers is unlikely to increase sales, but it can encourage infrequent buyers to purchase more often. This is why established brands advertise - to maintain a strong presence in consumers' minds and prevent them from switching to a competitor's product. Through advertising, Coke reminds people of what they already know about the brand and its attributes, like it’s delicious taste and association with fun times. The advertising may only slightly increase the probability of purchase for each individual consumer, but if enough people are exposed to the ads and their probability increases, it can have a significant impact on overall sales. The impact is often too subtle to notice on an individual level, but it is still effective.

    Rather than introducing new information, Coca-Cola's advertising strategy focuses on reinforcing established assets such as its iconic red shade, logo, swirl, supporting fonts, photographic treatment, packaging design, and POS materials that portray young people having fun on beaches and in the sun during summer. This approach explains why the impact of brand advertising differs significantly from that of price promotions.

    Brand advertising works by increasing the likelihood of consumers purchasing a product, even if they previously had no intention to do so. The impact of advertising may only increase this probability by a small amount, but this subtle influence can still make a significant difference in overall sales.

Balance your spend

Based on the evidence, it is generally recommended to split the budget 60:40 in favour of brand advertising. However, this rule of thumb may not be appropriate for all brands as there is considerable variation. Brands willing to conduct research can determine their own optimal balance.

Media Planning

Successful advertising aims to reach a broad audience. The goal is not necessarily to target heavy regular customers but to capture the attention of those with a low probability of buying the brand in the near future or non-customers. By reaching this audience and reinforcing brand assets and associations, even a slight increase in purchase probability may lead to long-term sales growth. This task requires careful consideration and planning by media planners.

In contrast, type 1 sales activation advertising primarily targets high-frequency customers, resulting in a limited long-term impact. Long-term price promotions also have minimal impact on buyer loyalty, as the effect of the price discount only lasts as long as it is offered.

When selecting media, marketers should choose the best platform based on the specific strategy. For instance, radio and paid search are better suited to sales activation strategies, while TV and online video are more effective for longer-term brand strategies.

It is not advisable to quantify the economic benefit of combining price promotions with brand campaigns, as they serve different purposes and cannot be compared using the same metric.

In summary:

A marketing strategy that focuses on maximizing reach can be highly effective, with reach being more critical than frequency. While frequency may improve over time, continuous advertising is more effective than intermittent campaigns. It's essential to target the broadest possible audience to reinforce memory structures and consider the customer journey and experience. Investing for growth is key, as is balancing your media mix spend. Remember to measure and refine your approach continuously, as nothing stays static in marketing.


WRAC – The Anatomy of Effectiveness
How Brands Grow – Byron Sharp
Google – Consumer Behaviour
Fuel Agency – Jason Marra