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Economics of Advertising

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Presentation on theme: "Economics of Advertising"— Presentation transcript:

1 Economics of Advertising
Abe Wapner, Maclain Riccardi, Bradlee Palmquist, Alexandra Harenberg, Jimmy Carragher

2 Advertising 2 Types of Advertising (that we will discuss)
-Is a form of communication used to promote a business with the goal of attracting potential consumers. -Can have an impact on the economics of the firm itself, for better or for worse 2 Types of Advertising (that we will discuss) Informative Advertising Persuasive Advertising

3 Persuasive advertising follows the four P's of Marketing
Price Product Placement Promotion

4 Informative Advertising
A promotional effort at generating interest in a good, service, or organization by providing consumers with information. Often used to generate a good reputation for the business running the ads, or correct any mistaken impressions Create a brand image for the company. Allows the potential customer to feel in control to make their own informed decisions. Types of advertising: mobile, spam, digital signage, online display advertising, and unpaid advertising. Includes: Billboard Advertising Butters Model Diamond's Paradox

5 How the Auto Industry Uses Informative Advertising:
Car companies like Honda often create commercials that talk in detail about the safety features of their vehicles. Doing so may entice potential customers and allow them to make an informed decision when buying a car. If the advertising campaign is successful, this could increase the demand for Honda's vehicles.

6 Billboard Advertising
One of the simplest models of informative advertising in that supply is a function of open land and demand is derived from the demand for the product the advertisers are selling The economics of how roadside billboards are used to inform the public When the supply of billboards is higher, the greater the informative advertising there is. Comes in a variety of forms, including mobile billboards

7 Diamond's Paradox (1971) Steps: 1) Consumer assigns his value (V)
2) Consumer chooses whether to go to this store *this increases search cost (cost of travel time) 3) Firm chooses its price (P) 4) Consumer chooses whether or not to buy the product (search costs are now sunk costs) *the consumer will buy if V>P BUT V=P because once the consumer is at the store, price is observed. Paradox: Consumer would never go to the store, because including sunk costs, price is always greater than value.

8 Butters Model What is the probability that someone sees my letter?
Say there are a whole bunch of mailboxes. Let s = # of mailboxes. Everyone has his or her own mailbox. Now, I am going to send out advertisements in the form of letters, which will go into some random mailboxes. Let m = # of letters that I send out. What is the probability that someone sees my letter?

9 Butters Model

10 As m increases, you are more likely to see my letter!
Butters Model As m increases, you are more likely to see my letter! The probability of seeing a letter is function of the number of letters that I send out.

11 Search Advertising A form of Internet Marketing,
Search Advertising is the method of placing ads on websites that show results from search engine queries. Ads are paid announcements of goods or sales often in newspapers, magazines, on the radio or television, online, etc. So what is search marketing? Search marketing is basically the concept in which ads are placed on websites that show results from search engine queries. So what this basically is is that whenever you search something, say, in google, some of the results on the side will happen to be advertisements of some sort. Ads, which is short for advertisements, are basically paid announcements of goods and services or sales often in newspapers and magazines, on the radio or on tv, and more commonly, online and so forth.

12 How Search Advertising Works
Targeted to match specific Keywords Appealing to Advertisers Customers often use search engines to find and compare items for purchase Provides advertisers the opportunity to target these customers looking for specific products Non-Advertising results called Organic Results So, how does Search Advertising work? Search advertisements are set up in a way that matches them with certain keywords, or searched terms, entered in search engines such as Google or Bing. This concept is attractive to advertisers because it allows them to target specific kinds of customers. Often customers will look up certain products online to compare prices and find sales, which advertisers use to their advantage. Advertisers thus use search ads to attract customers, hoping they'll click the ad instead of regular, unpaid search results (called organic results), which can often be misleading or irrelevant.

13 By Jacob Hansen According to Jacob Hansen, who wrote The Economics of Search Engines, Search Engines provide a service as they sort relevant information of a person's interest for them. The attention people pay to search results are valuable, then, to advertisers as, like I said earlier, they can purchase keyword advertising abilities that target certain consumers who search for those keywords.

14 According to Hansen, and this is a quote, "The primary goal for the user is that the search engine generates a good organic search result. The goal of the advertiser is to maximize the number of users that click on the ad and get directed to their web page. Lastly the search engine seeks to satisfy the users so they will return to the search engine, and also seeks to satisfy the advertisers so they will continue to advertise." Now before I go more in depth with this, I want to mention some important information regarding personalization and search engine use.

15 Personalization The more information an engine has about a person, the better the customized search results, recommendations, and ads. Example: Amazon, location results (ie: nearest restaurants) Demographics are important Personalization is simple, as well as a big topic regarding the internet today. Basically the idea is that the more information a search engine has about a person, including one's history, consumer patterns, past searches, and interests as a person, as well as the person's location, devices (like phones and laptop), and search goals, the better the engine is at providing customized search results, recommendations, and ads that match the individual person. An example of personalization would be Amazon. When you sign in, if you use it, Amazon will have recommendation on things you might be interested in purchasing since they track your purchases as well as things you've looked at. If a search engine knows your location, it can help find locations such as restaurants in your area. Most of this personalization will fit under the label of demographics, which basically covers age groups, ethnicities, religions, income, and location. Demographics are a useful tool in advertising as it helps advertisers target the specific demographics that they're trying to reach. For example, we're all in the college kid demographic, so we're considered young, still hip, and a pretty good market to sell to. So basically advertisers will take the information they have on a specific market and try to target their advertising around us (or at us) in hopes to influence or purchasing decisions.

16 The Supply and Demand of Keywords
In the realm of advertising in marketing, keywords become a product to be sold and purchased. As such, there is a demand market for keywords, and therefore some words which are higher in demand are more pricier than those that are low in demand. For example, the keyword "high mortgage refinancing" is more expensive than the keyword search "Population of University of Virginia." So here I decided just to go and show an example. Of course, I have adblock installed on both Firefox and Chrome, so I had to shut it off here in Chrome before I could actually see the ads (so if you hate ads, like me, make an online advertiser mad and get adblock). Here I searched the keyword High Mortgage Refinance, and as you can see, the top and righthand side have advertisements directly related to the search. If you look near the top of each, you see it says "Why these ads?" and allows you to click on it. Well, I did, and this is what it said. These ads are based on your current search terms. Visit Google’s Ads Preferences Manager to learn more, block specific advertisers, or opt out of personalized ads. So as you can see, these is just one example of how using search engines is contributing to this form of search marketing, giving you results based off of what you searched for.

17 How Are Ad Positions Determined?
With the use of Ad Auctions The system search engines use when pricing and determining the positions of ads amongst advertisers Ad Quality is a measure of the ads relevance. The way they determine where ads are placed in search results are via Ad auctions, which are the system that search engines use to price and allocate the different positions among advertisers. They thus use this formula when deciding placement. So Ad rank is thus determined by the advertisers' bid as well as the ad quality, which is a measure of the relevance of the advertisement itself. Basically, predicted click-through rate is very valuable here as it shows which advertisements are important depending on certain keywords, so Google, for instance, will use their knowledge and this formula to determine which ads get placed in a certain order following a search for a certain keyword or keywords.

18 Pricing So when Google, for example, figures out the ad rank of different ads and their positions, it has to figure out the price-per-click of each position. The price-per-click of the positions doesn't equal the advertisers bids, since in the ad auction they pay the minimum amount of funds necessary to maintain their ad rank. So thus the following equation is used to determine the price-per-click of the ads. From this, we see that the price of ad in position 1 becomes part of the function of the bid of the ad in position 2, and the ad quality of both advertiser one and two. So ranking isn't only a function of bids but also a multivariable of bids and ad quality. But if we assume that the ads have the same quality [draw on the board] (ad quantity 1=ad quantity 2), we see that the price for the advertisers of position 1 is equal to the bid of the advertiser in the second position.

19 Example Amount determined by: Price: $4 vs. 6 vs. 5
Ad Quality: 0.04 vs vs. 0.01 And then Price-per-click So using this example provided by Hansen's book, we can see here that advertiser 2 has the highest bid of six dollars. However, his ad didn't get position one, but rather position two. The reason is that advertiser one's ad quantity is higher than that of advertiser two, so his ad rank ends up higher. We also can see that the price-per-click isn't equal to the bid, but rather by the bid of the advertiser in the position below them as well as their ad quality. Since this example has only 3 advertisers, there's no competition for the third position, so advertiser 3 only has to pay the minimum price determined by Google or the search engine in question. If there were a fourth, the cost-per-click for advertiser three would've been calculated similarly to that of advertisers one and two. So really if advertisers really wanted to improve the position fo their ad, they could increase their bid amount, which would in turn improve the rank of their ad.

20 Conclusion of Pricing and Position
Advertisers submit keywords and bids to Google User searches, Google compiles matching ads to that search List of ads ordered based on bids and ad quality, measuring relevance to the user Highest ranked ad displayed in top position, second highest ad gets second, etc. If users click on an ad, the advertiser is charged a price depending on rank. To conclude the allocation and pricing of ad positions can be summarized in the following steps: To summarize the allocation and pricing of the ad position in search advertising, 1) Remember that first advertisers submit lists of the keywords they're targeting, their ads, and their bids to a search engine provider, or Google, in this instance. 2) When internet users, such as ourselves, try searching something with Google, Google will then compiles a list of advertisements it deems appropriate in terms of matching the search query. 3) The ad order is then based off the bids and ad quality, which measure the relevance of said ads to the user. 4) Then the highest ranked ad is displayed at the top of the list, with the second highest ranked ad following it and so on. 5) If a search user clicks on one of the ads, the advertisers is then charged a price depending on the bid given and the quality of the advertiser below him. The price charged represents the minimum amount necessary to continue holding the advertiser's position in the advertising results list.

21 Why It's Important Traditionally focused on making money as opposed to those that interest users Paid Search Advertising represents 4% of US expenditures and nearly 1/3 of online Advertising Traditionally, ads had a main goal of making money as opposed to this more modern idea that ads should be of interest to the user (of course ads still have the main priority of making money, but modern advertising realizes that there's more to it than just that). Also, paid search advertising represents 4 percent of all advertising expenditures across the US and approximately one third of all online advertising, so it's growing, which makes sense considering how big the internet has gotten and especially considering more people use to internet to research big purchases for the future or even how to purchase certain items without actually having to go to a store and do so. This pie graph shows the US Ad Spending in 2008 in billions of dollars. As you can see, online advertising represented about 14% of total advertising, costing the market about 37 billion dollars compared to offline advertising means which cost firms approximately billion dollars in total. Here is the projected US Ad spending for Expectations is that online advertising will have grown to 16% at 40.3 billion dollars, with offline advertising dropping slightly to 84% with billion dollars. So this just sort of provide a matter of perspective on how exactly advertising goes about being paid for in the US economy.

22 Means End Theory and Leverage Points
an advertisement should have a message or meaning that the consumers will intake and affect whether or not they will make the purchase. Leverage Points strategy where the advertiser will try to help the consumer realize the benefits of the product and apply these strategies to benefit themselves.

23 Persuasive advertising affects customer choice
Seeks to entice consumers into purchasing specific goods or services Appeals to consumers' emotions and general sensibilities Conveys the perception that the consumer will experience benefits similar to what is portrayed in the advertisement

24 Persuasive advertising singles out particular products as best
Assumes that the consumer already understands the basic nature of the product Convinces consumer of the benefits that set a particular product apart from the competition Marginal benefit of product A > Marginal benefit of product B Opportunity Cost

25 Persuasive advertising markets to particular groups
Targets particular demographics through niche marketing Tailors ads to be most effective for a particular group Places ads in locations where target demographic will most likely encounter them

26 Negative Aspects of Advertising
Advertising such as billboards spoil the aesthetic value of the countryside Commercials on television are extremely annoying for viewers. As stated earlier, the addition of DVR allows customers to skip through the advertisements on television, where in the end, the ads are not contributing to anything. Advertisements annoy people.

27 How Does Advertising Affect the Economy?
Makes jobs Reduces selling costs Increases company profits Increases company security Speeds up consumption. Demand for products Demand for advertising Leads to demand for jobs ...Advertising has had a positive effect on unemployment.

28 Advertising can help turn a small firm into a huge company and goods or services can be transformed into mass-market consumptions. Companies are able to reduce their selling costs and increase the margin and profits from their products! The increase in advertising has led to an increase in consumers' needs to buy new products and use new services.

29 Apple Successful advertising can increase a company's security as it develops a brand that can be trusted. Example: Apple Most recently, Apple has focused on television advertising, most notably with its Mac vs. PC ads. People want Apple products, therefore, Apple makes a lot of money. Apple is all about technology and being modern. Apple keeps its customers hooked on its products.

30 Apple Through its development in technology and advertising, Apple remains a top company and its products are highly demanded --> consumers keep spending money --> causes the economy to bring in more money --> helps the recession.

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