Most companies overestimate the potential of advertisements to drive sales as they rely on market research that is biased and non-representative, suggests a new study
Whether it’s a cricket match or a movie, any TV-watching experience is almost always interrupted by advertisements. But how effective are these TV ads in improving product sales? A new study shows that brands might be overestimating ad effectiveness and spending more than what is required.
Bradley T. Shapiro and others examine the causal effect of TV ads on the sales of 288 generalized goods between 2010 and 2014, using market and sales data from market researcher Nielsen.
Their analysis shows that the responsiveness of product sales to incremental ad spending (advertising elasticity) is lower than what available market research suggests.
They found that for over 70% of the brands they studied, the average advertising elasticity and return on investment from incremental TV ad spending were less than what market research studies had predicted.
According to the authors, this discrepancy is a result of how market research is done. Companies use market research to make their advertisement plans and often rely on studies on products that are similar to their offering. However, most of these generalized market research studies are based on case studies and not representative of multiple products in the market. Market research studies also do not account for other factors that could impact ad effectiveness such as seasonality, demand shocks and local factors that affect demand for products.
Though the authors highlight over-investment in ad spending, they also warn of the other extreme—under-investing in TV ads. They note that not spending on TV ads could negatively impact profits, as over half of the products show positive returns from ad spending.
They conclude that brands need to re-evaluate their ad strategies by investing in robust market research.