I too used to believe that these tech giants were all-knowing entities. But while writing this story, I have come to realise that this belief is as wrong as it is popular. … The experiment continued for another eight weeks. What was the effect of pulling the ads? Almost none. For every dollar eBay spent on search advertising, they lost roughly 63 cents. …eBay was not alone in making this mistake. The benchmarks that advertising companies use – intended to measure the number of clicks, sales and downloads that occur after an ad is viewed – are fundamentally misleading. None of these benchmarks distinguish between the selection effect (clicks, purchases and downloads that are happening anyway) and the advertising effect (clicks, purchases and downloads that would not have happened without ads).
This seems a bit like a comment Richard Wagner once made in his Public Finance class regarding interpreting the waste, inefficiencies and over spending by government and politicians. The politicians are often blamed as stupid and uninformed (or corrupt but lets put that aside). However, it is also pretty clear on average successful politicians are not average or below average intelligence people.
Your post seems to look more to a status based type explanation. I have often wondered what we might find from more of a public choice analysis of big business and large corporation behavior. My sense is that internally the issues are at least as much about distribution as they are about allocation.
Yes of course we can distinguish different types of ads, and inefficiency can look different for the different types. But it seems you agree that overspending is a common pattern. You are tempted to explain it in terms of a lack of understanding; the point of my post is to suggest other explanations.
That's re sellers; the question is about buyers.
Ah. I didn’t read the link closely enough. Makes sense it was direct response.
Since I work in ad tech, I can maybe say a bit about this.
As Nathan mentions in his comment, brand awareness ad spend is different from direct response ad spend, and brand awareness ad spend is generally thought of as a zero-sum game where you need to spend to match with your competitors to keep your product or service as or more salient than your competitors because you don't want consumers to forget about you when they go to make a purchase. The reasoning behind this can get a bit complex at times and I'm not entirely sure it's right, but this is what marketers say they would do, even in the absence of pressure to show they are using their budgets.
It's also worth noting that diminishing returns are a major and general problem in marketing. For example, spending less than $10000/month on lead generation advertising as an small or medium business (SMB) usually nets 80% of the possible gains of advertising since the best leads are found quickly (with appropriate targeting) and you quickly run out of strong ad inventory (most ad inventory is junk that no one should buy, but it's sold in ways that make it hard to know when you are buying junk inventory vs. not). Alas, maybe you need more leads for your business to grow and you lack any other better ideas, so money gets thrown after advertising and other marketing efforts in a hope of getting that last bit of return, because it does produce some return, just not as much as the first dollar of ad spend did.
Alas not all marketers seem to understand this, so I've seen a lot of folks overspending because they fail to realize they could spend less and realize almost the same gains and get better ROI. Further, because marketing expenses are often thought of as a cost of doing business rather than as a cost center, it seems entirely reasonable to many people to spend more on ads and marketing in order to generate more revenue, and they expect future ad dollars to behave the way past ad dollars did, i.e. they expect customer acquisition cost to remain relatively fixed. This is wrong but it's what I've seen a lot of people do.
So in the end I think some amount of ad spend may be for prestige reasons, but the inside view suggests there's a lot of inefficiency.
The source article is about direct response ads, e.g. an ad for eBay that shows up when you search for "jewelry" that takes you to a page where you can see results on eBay for jewelry and then purchase the jewelry.
"It is difficult to get a man to understand something when his salary depends upon his not understanding it." - Upton Sinclair
You co-authored Elephant in the Brain with Kevin Simler, who wrote the best explanation of how ads work that I've come across, so I'd want to hear what he thinks of your theory.
Re ads, consider that in order for a CEO to be promoted to run a bigger firm, people at other firms need to hear about that CEO and his or her firm. Within firms, the ambitious are often told to “toot their horns” and let everyone know about their accomplishments; productive people who don’t toot tend to be overlooked. Similarly, CEOs may want to overspend on ads just to make sure others hear about their firm.That doesn't explain why they're paying for a Google keyword when anyone googling their company's name is getting the same link for free right below even without the keyword.
Have you considered the way tech companies are valued? The payoff in their market cap could be more than the direct payoff in terms of revenue and gross profit.
Great post. That first point especially.
While this is true, your post ignores the common distinction between brand advertising versus direct response advertising. For direct response, think of podcast ads for mattresses, where they give you a keyword for a discount. It's easy to get metrics, and correlate direct sales from that podcast ad against the keyword.
For brand marketing, think Coke ads that teach the world to sing. There is no expected bump in sales for brand marketing. Rather it is a direct appeal to prestige for the brand. Another classic (now somewhat out of date) is large energy companies doing massive ads on Sunday news TV shows such as meet the press.
My point here is if you had used marketing-speak language in your post, being more precise on direct response versus brand ads, it would help a lot. That is, do CEOs overspend for direct-response advertising? When I clicked through your links, it wasn't clear they were talking about direct response. Or is it just CEOs overspend for brand marketing (which is a fairly commonplace view), though of course still noteworthy.