What are the economics of high-dollar advertising?

Factual Questions
1

Commercial time at the last Superbowl cost $3 million for a thirty second ad. Added to that is the cost of producing the commercial and delivering it to the TV network. I would imagine there are various brokerage fees and other overhead costs as well. Let’s say that this thirty second ad costs the company $10 million in total outlay.

So, does that mean that the company must move $10 million in product that it would not have sold otherwise in order to justify the cost of the ad? Is that a reasonable expectation? Suppose that our $10M ad is for Coca-Cola, a ubiquitous and fairly inexpensive product. After an unusually large number of eyeballs see the commercial (since it is the Superbowl, after all), does Coke really see an uptick in sales after the commercial? How is this measured?

Obviously, advertisers must feel that this investment is worth the effort. I just don’t understand how an advertisement for a product such as Coke works. No matter how much money they spend, they are unlikely to tell me something about the product that I do not already know. A Superbowl ad for Coke is not going to help me decide if I want to buy a Coke, Pepsi, or some other beverage.

I can see an expensive ad like that being useful in launching a new product or a new feature of a product.

2

No one answer here. It depends on the company and its needs.

The Super Bowl has the most eyeballs of any event in America. Ad costs are not measured in total dollars spent. The industry measure is something called Cost Per Thousand or CPM (the M is mille, the Latin for thousand). Obviously, the lower the better. A Super Bowl gets, say, 100,000,000 viewers. That 100,000 thousands. So a $3,000,000 ad is only $30 per thousand. But the ad isn’t run only once (unless you’re Apple in 1984) but will be shown over and over and over again. That reduces the CPM even farther. And it will be discussed in every paper, and every news site, and every blog, and get millions of hits online. Could it be seen 1,000,000,000 times total? Sure. That’s now down to $3 per thousand. Incredibly cheap.

So say you’re a small or new company and need to get attention fast. Do you go to a regularly scheduled show that gets 10,000,000 viewers and costs $300,000 per slot? That’s also a CPM of $30. The long-term impact is bound to be lower, though, and the long-term CPM higher. That’s why there is always so much competition for ad space for the Super Bowl and for similar high-profile, high-viewership, high-media discussion slots.

The ad situation for an established company is similar in some ways. High-profile, high-media discussion is obviously helpful for any company. But the ad isn’t there to tell you that the company exists. It’s there to a) remind you of how wonderful the product is; b) associate the product with good times and good memories; and c) prevent a rival for getting all that wonderful attention without competition. Coke and Pepsi are always competing, fiercely, for tiny slices of the beverage market. A one percentage point swing means tens of millions of new profits. You may think that everybody has decided on a cola (or a beer or a car or a delivery company or whatever is being advertised) but many people - a significant percentage - are persuadable. And people have short memories. Not advertising is death. Without those constant reminders people will drift away from products. The core buyers are never enough. And even they change over time. They move, they die, they shift tastes, they get families, their incomes vary - life is always pushing them in new directions. If the advertising isn’t there, the products will get abandoned. It’s a cycle almost impossible to get off in certain industries.

There’s more to it than a Super Bowl ad, of course. Properly done - and many firms don’t do it properly and die - a Super Bowl ad is a tiny part of an overall package of ads, promotions, marketing, charities, tie-ins, websites, videos, contests, all the million ways that companies try to reach out to you. I’m sure the overall budget for such things for Coke is in the hundreds of millions, maybe billions worldwide. Does $3 million still sound like a lot of money? It’s a drop in the bucket.

The fact that you thought of Coke as an example shows that it works. You can argue that everybody knows about Coke and that it was obvious. But they made it so by over 100 years of relentless advertising and promotion. That’s how it works and why they keep doing it.

3

The Super Bowl is an event over and above the game itself. There’s a week of constant buzz before it, and a day or two of analysis afterward. That includes segments on the morning shows of what new and unique ads viewers will see, and the day-after analysis of which ads were successful.

Another factor, which you don’t see unless you work in the industry, is the months of discussion about which companies are buying Super Bowl ads, which directors have been hired to do the commercials, and on and on. Even the annual debate over whether Coke or Pepsi will advertise during the game, while the other one takes the pre- and postgame slots and buys every competing show on every other network, gets scrutinized.

In other words, it isn’t just getting 100 million viewers, it’s being one of about a dozen companies that gets to be at the center of the universe for a week or two.

4

Previous thread on closely-related topic How Does Advertising Work? - Factual Questions - Straight Dope Message Board

5

One point to note is that advertising isn’t just designed to sell additional products in the short term. It’s not just a case of getting people to watch the ad and think, “I’ll go buy a Coke”. It’s also about creating a buzz for the company and increasing name recognition, which are benefits that are more long term, diffuse and harder to measure.

The best way of thinking about the difference between those two types of goals in advertising is internet advertising, where you can actually measure how many users “click through” to a website and go on to buy a product. Even if the number of people who click through isn’t that high, the advert might still have been worth it because even the users who didn’t click it will have seen it, and that helps create publicity and hype for the product.

6

And to relate that point to high-dollar ads like Superbowl commercials: even if they don’t have any noticeable difference on short-term sales, the companies might figure it’s worth spending $4 million for the type of buzz such a commercial can potentially generate - it’s a difficult thing to come by and it can be very beneficial for a brand.

7

(Former advertising guy here)

What he said. Particularly in a big-ticket event like the Super Bowl, advertisers rarely are looking at the “payout” of their advertising expenditure on a simple basis of “I spent $X, I better be able to attribute $X of sales to running that ad.” It’s at least as much about the intangibles (increased awareness of your brand, being associated with something big and successful, etc.)

This is particularly true of ads for categories such as soft drinks, beer, etc., in which the advertiser isn’t really attempting to tell you about a particular rational benefit of the product (compare that to an ad for, say, a cleaning product), or attempting to get you to make a purchase during a particular time period (compare that to an ad for, say, a retailer, telling you about a sale that’s only happening this weekend). Ads for these sorts of products are more about building a particular image of the brand in your mind, and making you feel that it’s a brand for you.

8

Parenthetically, the “additional costs” are probably not quite that big.

The splashiest Super Bowl ads might, indeed, cost several million dollars to produce, but very few ads are only run once. Most advertisers are going to reuse that ad (or recut it and use a different version of it), so those production costs are spread over many, many placements of the ad.

Yes, there are fees to the advertising agency (for producing the ad) and the media agency (for ad placement). Those are relatively small in comparison to the production cost.

In short, in all likelihood, the majority of an advertiser’s total expenditure for a Super Bowl ad will, probably, be spent on the actual air time, rather than the other costs.

9

Broadly speaking, there are two types of advertising. “Action ads” call for a specific result (Buy this! Send money now! Come on down!) while “image ads” (what Exapno was referring to) exist just to keep the company’s name and products in your mind.

I think it highly unlikely that the production cost of those ads exceeds the one-time cost of running it during the Superbowl. Production isn’t that expensive unless you’re hiring some high-cost celebrity talent. So your $10M is very high. You’d end up, as others commented, amortizing the cost of ad production over all of the times it runs anyway.

As for recovering costs on an action ad, you wouldn’t need to generate $3M in extra sales to pay for the ad; you’d have to generate $3M in extra profit. As an example, let’s say your company sells automatic wombat feeders. They cost $10 to produce. The company sells them wholesale for $15. WombatMart then sells them to you for $30. That means every $30 sale breaks down as $15 profit for WombatMart, $5 profit for you, and $10 to cover your costs. If you run a $3M action ad and you want to pay for it from that event, you’ll have to sell 600,000 automatic wombat feeders, which is $18 million in retail sales.

10

The argument can be made that the reason Coke is so ubiquitous is precisely that they do advertise so much. You don’t allocate sales to ads; you allocate the existence of the company as one of the Big Two soft drinks to the ads.

Of course, it’s extremely difficult to test whether this is actually true, since a big company like Coca-Cola is never going to risk the experiment of stopping the ads. But now we come to a different point: Advertising companies are good at selling things. More to the point, they’re good at selling their own services. If an ad company is genuinely any good, they can convince the executives of a company like Coca-Cola to spend big bucks on their ads.

11

There is history of a product that was once very popular, but which fell into relative obscurity after the company cut back on advertising: Moxie

I’m sure the Coca-Cola company doesn’t want to make the same mistake.