The Advertising Business in India
Does Advertising Work?
How economists and marketers measure whether ads increase sales, why it's hard to prove, and what large experiments have found.
Businesses spend huge sums on ads. Do they work?
The measurement problem
- Ads often run when sales would rise anyway, like during festivals.
- Correlation between ads and sales doesn’t prove causation.
Experiments
- Companies run A/B tests, showing ads to some users and not others.
- A large study by economists at eBay (published 2015) found that paid search ads for its brand name had little effect, since people searching “eBay” would visit anyway.
- Studies of TV ads in the US found many brands’ ads had small effects on sales.
Attribution
Digital ads claim credit for sales through attribution models, which can overstate impact.
When ads work
- New products that people don’t know about.
- Informative ads about prices and features.
- Brand building over the long term.
Economic theories
- Informative view: ads provide useful information.
- Persuasive view: ads shift preferences.
- Signalling view: costly ads signal a firm’s confidence in quality.
The brand search test
A company stops buying ads for its own brand name on a search engine. Sales barely change, because customers find it through free results anyway.
Thinking every ad pays for itself
Rigorous tests often find smaller effects than assumed.
Key takeaways
- Proving ads cause sales is hard.
- Experiments often find smaller effects than expected.
- eBay's brand search ads had little effect.
- Ads work best for new products and information.
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