Commentary

Industry Study Concludes Advertising 'Supports' A Fraction Of Sales

by Joe Mandese , May 26, 2022

An economic analysis commissioned by a coalition of leading U.S ad trade organizations concludes that the combined direct and indirect effects of U.S. ad spending has a relatively minor impact on overall sales, and that the overwhelming majority happens without any advertising effect.

The analysis, which was released Wednesday by industry researcher IHS Markit, was commissioned by The Advertising Coalition, whose members include the Association of National Advertisers, the American Advertising Federation, the American Association of Advertising Agencies, the News Media Alliance, and the National Association of Broadcasters, utilizes economic models to tease how the percentage of sales directly attributable to ad spending (7.6%), as well as the gross sales including indirect effects of advertising (18.5%), but it does not actually make the case that any of it is incremental. In other words, that those sales would have occurred without any ad spending at all.

In fact, if you look at the inverse factor -- the 81.5% U.S. sales not supported by advertising (both directly and indirectly) -- it begs a much bigger question about the economic impact of advertising.

So I asked it, and while executives of IHS Markit and/or the coalition were not available to answer it directly, a spokesperson said IHS Markit's analysts "did not explicitly delve into the incremental impacts of advertising."

But even if you assume that all of the sales "supported by advertising" were actually attributable to its effects, the overall conclusion of the study shows that advertising's impact is a relatively small percentage of total U.S. sales.

That's quite an indictment for an industry that boasts about "stimulating demand," though presumably, even if it wasn't incremental sales, they arguably were stimulated for the brands that invested in the advertising. Though in a marketing world increasingly being disrupted by direct-to-consumer products and services, even that case isn't made by this study.

Advertising has also been described as "the art of persuasion," but based on the findings of this report, I for one was not persuaded by its economic conclusions.

The Advertising Coalition was originally created to develop economic analysis on the value advertising contributes to the U.S. economy in order to stave off negative federal tax legislation, and it has published at least one similar study in the past.

Ironically, when I went to the coalition's website to look up what else it may have contributed, its link -- http://www.theadvertisingcoalition.com -- generated the result depicted below.

4 comments about "Industry Study Concludes Advertising 'Supports' A Fraction Of Sales".

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Dan C. from MS Entertainment, May 26, 2022 at 11:45 a.m.
Well, I guess we should all quit our jobs now....brands just run themselves apparently :D
Reply

Ed Papazian from Media Dynamics Inc, May 26, 2022 at 12:53 p.m.

It's interesting to look at some other stats.

While the figures vary from marketer to marketer, the average expenditure on ads as a percentage of total sales is around 2-3%. Some categories---like cosmetics, for example go much higher ( 15-25% )as there is so little cost for actuually making the product; but others fall below the average---1-2%. OK so if one can really determine exactly what the contribution of advertising is and the average works out to, say, 10% of sales, that's a winning percentage as its four times the expenditure rate.

I have seen many attempts to come up with a credible norm for the industry---all with different findings and many questions unanswered. But so far, I have never seen a "study" which showed that the ROI on advertising was in negative territory---namely that you always seem to get less back than you spend.

Peter Bray from Bray and Co, May 28, 2022 at 10:08 a.m.

So I read the study. The problem is the premise is flawed. To say that around 25% of sales are directly or indirectly attributable to advertising is fine and valid, but this is because most advertising, around 70% in fact, SHOULD NOT be thought of as ties to sales generation, instead it is simply brand building which rightly so is not targeting the consumer currently in market.

In other words, most good advertising (read effective!) shoud not have sales attributed to it, in fact if a brand has most of its advertising directly creating short term sales growth then that brand will end up being low growth in the medium term as it isn't creating future demand.

Ed Papazian from Media Dynamics Inc, May 29, 2022 at 10:43 a.m.

Correct, Peter. Ask the UPC scanner panel folks and they will tell you that most ad dollars---and "impressions" ----go mainly to reinforce the existing convictions of current brand users-- often reminding them to stock up---while only 20-25% goes to enticing new brand buyers---who are often lost in the next go around if the product disappoints. Building ---or sustaining----brand equity is the key for many established brands as it results---indirectly---in many more sales than trying to gain converts from other brands---though I should add for very small brands---hind runners------ in many categories their ad campaigns are geared to snatch customers from the larger labels as they need to attain critical mass---before trying to maintain momentum.