Does advertising increase prices and grow markets?

A room filled with several hundred brand and agency folks was split in opinion when asked: “Does advertising grow markets?” and “Does advertising increase prices?” The vote for both questions was a near-on 50:50 split. These big questions were the topic of the opening discussion for the AA (Advertising Association) Lead event in the Queen Elizabeth II Centre earlier this month. The session was inspired by a collection of essays curated by industry think tank Credos, which tried to answer the public’s most frequently Googled questions about advertising. Some of these questions included: Does advertising directly affect consumer prices? And how can the industry work effectively to encourage responsible and sustainable consumption and growth?

Stephen Woodford, the AA’s chief executive, sat down to explore these questions with Laurence Green, director of effectiveness, IPA (Institute of Practitioners in Advertising); Bridget Angear, founding partner, craig+bridget and Enyi Nwosu, chief strategy officer, UM London.

Following is the edited transcript of the discussion.

Does advertising grow markets?

Bridget Angear: The feeling that advertising does help markets grow is an assumption that is made quite a lot. We ran an industry poll a few years ago with experts and two thirds of them said they thought advertising did in fact grow markets. 

Using the IPA Effectiveness Awards database - which was started in 1980 and has hundreds of effectiveness cases - we wanted to uncover the real answer. These examples in the database are the very best cases - the creme de la creme - that prove the effects of advertising. We looked at over 682 cases over 42 years and only 12 per cent of those cases reported a market effect. 

Laurence Green: This is both a surprising and unsurprising finding. We instinctively feel that advertising does grow markets at a micro and macro level. 

Bridget Angear: The important nuance is the definition of a market category. As marketers we quite often define the category quite narrowly whereas consumers do not. With holidays for example, consumers think about this category as “Do I go on holiday? Do I buy a sofa? Do I put money into a pension?” Their definition of how they choose to spend their money is different to ours. It’s very hard to see growth at a macro category level because of the substitution that’s happening all the time with consumer behaviour.

Stephen Woodford: At market level, most brands are competing for market share. Markets tend to grow in line with things like population, fashion and other big trends and shifts from one sector to another. They also grow in line with the overall economy. 

Notably there are also new categories of advertising, like online apps for food delivery, which have huge amounts of growth and are displacing other markets like shopping and energy (used to cook).

Enyi Nwosu: When we are talking to clients and brands, we always encourage them to think about what market there is first. Finding the market you are in then defines the role that advertising plays in growing that market. A lot of the growth of the wellness category has been driven by advertising, as has digital clothing. If we have this conversation in five years time, a lot of the next gen markets will almost be entirely driven by advertising in some form. It’s down to the definition of the market.

Bridget Angear: Of the 12 per cent that did report growth as an effect of advertising, six exceptions were identified, where market growth was achieved. The two exceptions that stood out the most were brands that were dominant in a category, like Amazon or Google, and markets that had a high number of trialists, like rapid grocery delivery - lots of consumers are experimenting with this new behaviour.

Does advertising increase prices?

Laurence Green: The disparity of what people think the answer is to this question fascinates me because I don't think our industry has a definitive answer to this question. And you’d expect it to. I think this is partly because even though the question is simple, it really is more nuanced than it first appears. I have been fighting with people who have said yes and no for a while. I personally feel that advertising is a very powerful macro factor in keeping prices low and price competition, and it depresses overall pricing levels. Within this picture, individual brands use advertising quite deliberately to support their prices. 

The obvious upward impact on prices is brand owners using advertising to support their prices and the vast majority of them do it consciously or unconsciously. We don't talk about pricing effects that much in the advertising industry because we love volume effects. Talking more about pricing may be an unlock for a different world of consumption. There are plenty of examples of advertisers using advertising to support their prices. 

On the other side of the ledger, there are plenty of downward impacts on prices. The first one is discounters being the obvious advertisers dragging prices down. The second obvious one is that advertising dramatically reduces the price of the media we consume. We get our information and entertainment at a lower price. It's even more true with the tech platforms - search and social. We get both of those products for free because they’re advertising businesses. 

There are also two invisible things that we neglect to think about. The first is that advertising has a massive informational role in creating what economists call ‘perfect information’. As an example, supermarket wars will run forever because there is a competitive incentive for them to advertise their prices. Despite the rumours, our supermarkets have pretty low margins and deliver food to the nation at pretty competitive prices - because there's a competitive incentive provided by advertising to communicate those low prices. In the absence of advertising, they're better off just milking their existing shoppers. I think we sometimes forget that at market level advertising is doing good things. 

If you talk to big and small brands, they'll also tell you that advertising is a guarantor of demand. Because you can go to market with confidence that you have a customer base of a certain size, you can produce at scale, you can enjoy economies of scale and you can pass those on in the form of lower prices. The further you travel from the stuff that's right in front of you, the more confidence you can take that advertising is a force for good in terms of consumer pricing.

Enyi Nwosu: The answer to the question is yes and no. If you think about it from a behavioural economic perspective, and connect the questions around markets and prices, one of the things that we all suffer from as human beings is myopic behaviour - we forget things very quickly and have short memories. One of the brilliant things advertising does is remind people about products because if you don’t do that markets shrink and prices go up. Competition is good for everybody as it allows us to be able to give products and services for free to audiences which means that they are better off. Fundamentally, advertising does both jobs in terms of pricing and it’s down to us to work out with our clients and brands which job we want to do.

Bringing the two questions together to focus on sustainable growth

Stephen Woodford: Agencies are myopically focused on clients and their brands and beating their competition. We look at the market in terms of: “Are we winning or losing?” As an industry we very rarely think about that macroeconomic impact. Bringing questions of markets and pricing together and thinking about sustainable growth is so important. We are part of a system that doesn't yet work on a sustainable basis. Our job is to get our house in order and reflect on our role within the system.

Laurence Green: Pricing could enable sustainable consumption. More and more businesses are transitioning to pump out less volume of stuff and capture more value. They can not only meet shareholder requirements but make the planet a better place. There are a number of fast and slow fashion brands - Ralph Lauren is the one in the public domain - that are trying to move their whole businesses from mass volume and mid price points to lower volume and high price points. Pricing can be seen as the reward for advertising because companies can make more money and still be attending a conference in 10 years time rather than the world being on fire.

Enyi Nwosu: Consumers benefit from market competition. For the next generation of markets, whether it's recycling or the circular economy, advertising will play a big role in helping people make better sustainable living choices. Most importantly, people expect us as brands to make a difference in driving sustainable behaviour. As much as it’s about products and positioning them in the market, it’s also about behaviour and how we can take emissions out of the system with regards to delivering supply chains and digital advertising.