(Please read an expanded blog for additional information.)

Advertising has long been viewed with suspicion—not only by CFOs as an expense to minimize, but by critics like John Kenneth Galbraith and Vance Packard, who argued it persuades people to buy things they don’t need.

Economics principles point to a very different conclusion.

My economics professor at the University of Chicago, Nobel laureate Milton Friedman, wrote that voluntary exchange occurs only when both parties expect to benefit. Applied to marketing, advertising works only when consumers voluntarily let a message into their decision-making and change their behavior. Effective advertising is a handshake, not brainwashing; Becker and Murphy contend it adds utility that is just as real as anything to do with the product itself.

This perspective changes how we should think about advertising effectiveness.

Incrementality Is Evidence of Value Creation

When advertising produces incremental sales, economists see something very specific: an outward shift in the demand curve. Consumers are voluntarily buying more at the same price because the product now offers greater expected value.

That means incremental sales are more than a KPI. They are empirical evidence of something noble…that advertising created value for consumers. Conversely, if advertising produces no incremental sales—and no later sales effect from brand building—it has created no measurable economic value.

The Advertising Balance Sheet

Advertising does not create value equally across consumers.

Think of campaign ROI as a balance sheet.

–On the asset side are consumers whose brand decisions can still change. This is where advertising creates value for both consumer and firm.

–On the liability side are consumers whose decisions are unlikely to change.

The liability segments are:

• The Dead Zone: Consumers firmly committed to the set of competing brands (based on a Beta or Dirichlet distribution, most consumers are here for a typical brand).
• Die-Hard Loyalists: Consumers almost certain to buy your brand anyway.

In both cases, advertising generates little or no incremental value because behavior doesn’t change.

The planner’s job should therefore not be to maximize reach, but to maximize the share of impressions delivered to consumers whose decisions remain open (subject to diminishing returns).

Why the Movable Middle™ Matters

This isn’t just intuition.

Daniel McFadden’s Nobel Prize-winning work on consumer choice shows that advertising responsiveness is proportional to:

P × (1 − P)

where P is the probability a given consumer chooses your brand.

Responsiveness is greatest when purchase probability is around 50% and falls toward zero as consumers approach either extreme of certainty.

That’s exactly where the Movable Middle™ lives.

Across thirteen closed-loop MMA experiments, these consumers, those with a 20-80% probability of choosing your brand, consistently responded far more strongly than broadly targeted audiences.

The Bottom Line

I believe that my post grad study in economics at the University of Chicago is a big part of why I find marketing analytics intuitive. In fact, economics provides a framework that marketing analysts use today. The rough genealogy is…

 –Friedman…a purchase is a voluntary exchange where both derive value

 –McFadden…derived why logit modeling for preference share is best

 –Becker and Murphy…why utility from any source, including advertising is equally valid, no reason to isolate advertising and demonize it.

 –Rubinson…sales incrementality caused by advertising necessarily implies value creation and that value creation occurs with predictable heterogeneity across consumers, which is the basis of ad targeting.

Advertising is not primarily the business of maximizing reach, or mental availability, whatever that is. It is the business of creating consumer value through voluntary exchange. In fact, marketing in general wins by adding value to consumers’ everyday lives via efficient use of capital.

And the potential to create incremental value is concentrated among consumers whose decisions are still in play.

For a great graphic (Thanks ChatGPT) on value creation click here.