Saturday, June 11, 2011

The Value of Marketing

Latest in health care debate is this opinion in the Economist proclaiming the private sector waste from marketing expenses. Let's ignore that this is just guesswork. Yes, we know private companies spend more on marketing than public companies. But the data on this kind of thing isn't public and many other explanations for the cost difference (private companies spend much more on fraud protection, for example). Moreover these are the same century-old arguments which condemned the waste from competition without considering the waste from monopoly. But that's not what I want to talk about.

It's true that advertising has zero-sum components and when a lot of people think of the most honest ad, this is it. Some ads, notably ones for product about conveying style (I'm cool because I buy this) are just about one side trying to be cooler than the other. We'd all be better off if everyone halved their advertising costs. But ads are more than Coke yelling "Coke!" and Pepsi yelling "Pepsi!" For more practical products, for the ones where there is virtually no cool factor (air conditioners, cleaning supplies, and insurance), ads have to do something different: they have to inform you.

Yes, lots of ads are repetition (that's how we learn) but with each repetition, there's information on a new product or deal. People save money, learn what they like, and discover a product which suits them best. Save the post office, federal agencies don't advertise. That's not just because they get their revenue from taxes, but they don't have any reason to come up with anything new. It's very confusion why some think stagnation is the answer to health care costs.

Update: Administration and advertising (fund raising) expenses positively correlated with effectiveness (for charities).