CLEAR SIGNAL

Advertising and brand-building can save us from economic collapse, writes Leo Burnett’s Ahmad Abu Zannad

“Advertising may convey no information other than that the firm can afford to advertise, but that may be all a consumer needs to know to have confidence in it.” THE ECONOMIST, OCTOBER 2001

Advertising and brandbuilding can play an essential role in salvaging economies and protecting entire markets from collapsing. I will demonstrate this by showcasing how creative advertising and brand-building are also part of evolutions in economics.

Our economic systems and free markets are all based in part on Adam Smith’s ‘invisible hand’ theory. The theory states that if governments leave buyers and sellers to freely make their own decisions, buyers will only pay the price they see fit for products or services, while, in turn, sellers will only sell for the prices they see fit. With free trade and open competition, and the push and pull of the invisible hand, the market will, theoretically, reach its optimal price.

However, there are abnormalities and exceptions that, in practice, have proven the theory to be less than 100 per cent accurate. In some circumstances, this could be addressed by falling back on government interventions, such as in the case of a specific seller having a monopoly over a market, or when a third party is being affected. For instance, the government may need to intervene if a transaction has a negative environmental consequence, or, in simpler terms, if a neighbour is unable to sleep as the result of a transaction between a loud DJ and a late-night partier next door.

Another exception to the invisible hand theory is what economists refer to as asymmetry of information. This is when either the seller or the buyer possesses information about the product or service being sold that the other party does not. Such an exception has the potential to push markets to fail.

Nobel Memorial Prize in Economic Sciences recipient George Akerlof was the first to discuss the negative consequences of information asymmetry in his 1970 paper, “The Market for Lemons: Quality Uncertainty and the Market Mechanism”. Using the example of the used car market, the premise of Akerlof’s paper was based on a situation where only the seller has the information necessary to tell the difference between a lemon (slang for a defective used car) and a peach (a good quality car). The hypothesis was that buyers who cannot tell the difference between a lemon and a peach will be unwilling to pay the full price of a peach, as they are unsure of its value. As a result, sellers would come to the conclusion that selling a peach would no longer be in their best interest, as there would be no buyers willing to pay its full price. Accordingly, the used car market would only offer defective cars, leading to its eventual collapse.

Let’s get out of the world of economic theories and their hypotheses, and discuss the real world. How often does information asymmetry actually occur, provided that, in this day and age, consumers have instant access to so much information, including user reviews? Recently, neuro-marketer Martin Lindstrom summarised a massive functional MRI study to showcase that, in reality, 90 percent of purchase decisions are made subconsciously. As he explains, we make almost 10,000 decisions a day, a big portion of which have to do with buying a product or a service. Accordingly, there’s almost no way for us to have the capacity to be well informed about every single purchase decision we make.

How well informed a potential buyer may be depends on two factors. The first is whether the product falls in a low involvement category, such as chewing gum, or a high involvement category, such as an expensive new home. The second factor is the nature of the potential buyers themselves, and their motivation and ability to

process information on the product’s qualities. The buyer could, for instance, be a chewing gum fanatic who is, for some reason, motivated and fully aware of what makes a good quality chewing gum; or they could be a carefree home buyer who would not go into details when purchasing a new house.

Within this spectrum, and thanks to neuro-marketing, we now know for a fact that 90 per cent of such purchase decisions are made by a mix of potential buyers who are demotivated and unable to process information on the quality of the product, despite the fact that such information is available to them in abundance.

Accepting that 90 per cent of purchase decisions are made with asymmetry of information, if we were to apply Akerlof’s “market for lemons” hypothesis, then an assumption could be made that 90 per cent of the marketplace is made up of goods and services of defective quality. Based on all this, 90 per cent of industries would be doomed to collapse. Yet they have not – and guess what? Their survival is mainly due to a specific evolution in economics: the need for advertising and brand-building.

It hasn’t taken long for economists to realise that advertising and brand-building make the world easier and less stressful to navigate. For instance, from anywhere in the world, the choice to purchase an iconic product from a major brand, such as a Coke or Big Mac, is not only an easier and less stressful decision, but also a joyful experience (provided that both advertising and brand-building have been done purposefully). As such, it is safe to state that advertising and brand-building play a crucial role in ensuring that markets do not fail in the presence of information asymmetry, which, according to Lindstrom, is almost 90 per cent of the time.

What we are referring to as advertising and brand-building is what other Economics Nobel Prize recipients have referred to as “signalling’. Michael Spence of Stanford University and Joseph Stiglitz of Columbia University, who were awarded the Prize in 2001, collaborated to showcase the applications of signalling in the job market. According to them, employers looking to hire have asymmetry of information in regards to the capabilities and skillsets of applicants. Accordingly, job applicants invest heavily in signals that will help them stand out from competition, particularly in the form of attending prestigious universities that have established themselves as highly admired brands. The more difficult it is to attend such universities (and the higher their tuition fees), the more attractive these applicants become to employers – even though such an education is often irrelevant to the position they are applying for.

Be it signalling, advertising or brand-building, the advertising industry makes these creative efforts to give uninformed consumers the reassurance they need to pay full-price for the product or service they are about to buy. This, accordingly, empowers suppliers to fully invest in providing high-quality products and services. From car manufacturers, FMCG distributors and technology innovators, to service providers such as airlines, banks and telecom operators, no sellers would be able to justify spending more on the quality of their products and services if consumers were unwilling to pay full-price for their offerings.

In order to overcome the challenge of asymmetry of information, advertisers and brand builders create signals of reassurance, inspiring people’s trust and love for brands like Apple, Samsung , Cadillac, Emirates, McDonald’s, Ferrero and Dove. These signals ensure that people who lack the ability or motivation to assess the quality of these products and services will still be willing to pay full price for them. Advertising has also encouraged sellers to invest in the quality of what they are providing, ultimately salvaging these markets from their potential collapse.

The efforts and the creative ideas behind such advertising activities have contributed to the establishment of brands that are now worth billions of dollars. Apple’s brand value is estimated at $235bn, Emirates airline at $6.6bn and Samsung at $66.2bn. As once stated by Coca Cola executives, A. Rangaswamy, R.E. Burke, and T.A. Olivia, “If Coca-Cola were to lose all of its production-related assets in a disaster, the company would survive. By contrast, if all consumers were to have a sudden lapse of memory and forget everything related to Coca-Cola, the company would go out of business.”

This could be perceived as an extremely idealistic explanation of the role of advertising and brand-building, especially considering that, very often, these very same brands abuse people’s love and trust, counting on consumers’ inability to identify the fair price for what is being sold in order to overcharge them. Yet it is a fact that, on a positive note, advertising and brand-building have massively contributed to the success of markets and the elevation of high-quality goods over their defective counterparts. Ahmad Abu Zannad is regional strategy director of Leo Burnett MENA