CLEAR SIG­NAL

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

Campaign Middle East - - CONTENTS -

“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

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