March 2020 (Vol. 60, Issue 1): CREATIVITY
The Impact of Advertising on Market Share: Controlling for Clutter, Familiarity and Goodwill Decay
How much advertising across media is wasted due to inefficiencies related to advertising expenditure? Authors Nicholas De Canha (C2 Group, South Africa), Michael Ewing (Deakin Business School and University of Pretoria), and Ali Tamaddoni (Deakin Business School) point to 2014 research in which the top 100 advertisers in the U.S. showed an average efficiency of just 66%. “Despite these known inefficiencies, firms continue to advertise and escalate expenditure to boost those campaigns without acquiring an understanding of the optimal strategy to allocate resources across different channels,” they write. Without optimal media allocation strategies, advertisers are in the dark on how to maximize returns and maintain market share and advertising goodwill.
De Canha and his research team analyzed multiple factors, using complex modeling and building on earlier work, to dig deeply into this area. To date, for example, only a “limited number of studies have focused on maximizing advertising effectiveness through optimization of intermedia allocation, taking into account sales-response factors such as thresholds and ceilings,” they write. Ceilings are the level of expenditure within a medium where the marginal return on advertising expenditure has declined to near zero. Conversely, thresholds are the minimum expenditure levels in a given medium, below which the response to that medium, or return, is zero.
DeCanha et al. went even deeper. They analyzed factors that affect those ceilings and thresholds—such as advertisement clutter, as well as brand and product familiarity. “The impact of clutter, familiarity and sales percentage difference on thresholds and ceilings … generally has been overlooked, as has the dependency on advertising goodwill and market share on such factors.”
In what is believed to be the largest study focusing on automotive sales advertising, the authors take into account the decay rate of advertising goodwill—the effect of a company’s current and past advertising on consumer recall and purchase intention. The study considered more than 12 vehicle brands—a high-involvement product category—in South Africa. It spanned eight years of sales, with more than 10,000 data points that reflected sales and media expenditure. “Such a sample is able to demonstrate the complex relationship among advertising, sales, clutter and familiarity,” the authors explain.
“The study also employed several novel modeling characteristics to isolate the impact of the independent variables on market share.” It analyzed market-share decay during periods of no advertising—the first time that a model of this type has been used to assess the decay of market share in a market with a high-involvement product. It also introduced an important variable for the first time in a study of this nature (i.e. that simultaneously considers both clutter and familiarity): the difference between share of voice and share of market. Share of voice acts as a gauge for brand visibility in advertising.
In sum, advertisers need to look at a much bigger picture to understand whether they are making the right media allocation and ad-budget decisions.
Among the takeaways:
- A significant portion of advertising is wasted because of suboptimal media allocation that overlooks the impact of clutter, familiarity and sales percentage difference on thresholds, ceilings, advertising goodwill and market share.
- Clutter was a significant and large-scale determinant of sales rate of decay.
- At high levels of clutter, almost no level of advertising affected market share.
- In a highly competitive environment, even when clutter is distributed throughout other media, all media returns are reduced significantly and materially.
- In the absence of advertising, goodwill decays, and the vehicle model market share decays reasonably rapidly.
- A high share of voice, which implies high expenditure, not only is subject to declining returns as a feature of expenditure, but is also increasingly ineffective at acquiring market share.
- As share of voice exceeds market share, the effect of advertising is reduced strongly, and vice versa.
Read the full article.