yes, they are wasting money, they know it, but caveats:
famous saying 'i'd cut my ad budget in 1/2 if i knew which 1/2 to cut'
'attribution' is the holy grail of hard thing in marketing.
so they know for sure the channel spend is iffy.
but it's hard to measure, esp. for brand and indirect campaigns.
so as a 'starting point' - it's a very 'noisy channel problem'.
the next wild idea is that ads come from a marketing budget which has $X to spend, and they have to spend it.
this is where the ROI stuff is wildy upside down.
large companies with 'market power' have a lot of surplus. they put that towards relatively lucreative marketing. the $ must be spent.
the cmo makes a budget, allocates, the managers follow the campaign, front line staffers spend. they try to get the best results they can.
there is often an unbelievable lack of true roi concern in all of that.
sometimes it's very aggressive, aka for some keywords, for sure.
but a remarkable amount of $ is spent in very unnacountable way, over what are 'grey' channels anyhow.
the marketing ops person is going home at 5pm and does not care one bit about bots. they were paid to spend it, they did. Facebook is paid to 'show a chart of view' ... they did that. 'everyone is happy'.
im not saying the whole system works that way, but much of it does.
the wild part is - there is so much 'dumb big money' in ads, it makes the whole thing very inneficient.
companies like P&G have 'distribution monopolies' on so many packaged goods, they have to keep up brand awareness.
It's why so many commercials are for commodity products like home stuff - the market is huge, the market channels are locked, they pay $$$ for ads for 'toothpaste' - the least novel and least productive kind of thing imaginable.
so 'Colgate' costs $5 at the store, it costs 50 cents to manufacture - that $4.50 gross margin is stuffed into a system of relative inneficiency up and down the economy. much of it in 'nearly useless ads'.
it's a deep market inefficiency people dont want to recognized because people assume private capital is inherently efficient and that a dollar spent = GDP = value and that's it.
our lives could materially be improved if we banned ads for a lot of things - feels like 'socialism' but really it'd just be about a kind of 'regulated market efficiency'.
So the gigantic incumbents with retail distribution being inefficient makes sense to me. What about the long tail of D2C brands that live on Meta ads? AFAIK, they live and die by their ROAS. I would have to believe that these companies just don't really exist to buy that Meta ads are a "con".
the roi is better at smaller corps that pay attention, but you would still be surprised.
and where it is more efficient its where there is better attribution models aka direct sales.
note: there are certain kinds of products that are 100% 'click driven sales'. they zero brand awareness, they want to sell you that 'fleece hoodie' on the spot. those guys have their funnel math down solid.
but startups and other companies ... not the same.
well funded startups burn $ thinking it's productive - and hugely: buying fake customers, or, spending $2 to get $1 in revenue to either pad the books, show investors, make themselves feel good or 'strategic'. FYI 'strategic' is often rational. those are big pools of money.
but usually campaigns are mixed and attribution is hard, even for smaller companies.
the tighter the budget, the more 'direct purchase', the more 'nominally efficient' it is.
also note - most ad $ is big companies who ironically spend a smaller share of their revenue on ads <- this is the power of scale.
That does make sense, thanks
"that $4.50 gross margin is stuffed into a system of relative inefficiency up and down the economy. much of it in 'nearly useless ads'." is easy to disprove because we know how much these companies spend on advertising (and marketing more broadly) and how much product they sell.
It's more like 25% of their budget.
https://www.statista.com/topics/7725/cpg-industry-advertisin...
I didn't imply that all of their gross was going into ads.
I'm highlighting that the gross on commodity consumer goods is huge - and that it just pays for mounds of white collar bureaucracy, including advertising, and yes 25 points is about right.
Consider that companies pay more for advertising than COGS.
That should tell us something about 'productivity'
FB/Goog revenues could be cut by 60% and the good may very well flow just the same, aka they are not just capturing surplus but facilitate aggressive inefficient competition.
A western nation will post the $5.00 to the GDP when much of it is inefficient make-work.
This is why 'Pricing Parity' has to be used even to begin to compare relative wealth etc.
Toothpaste is a particularly high-margin product so it might not be the best example generally. COGS is generally the largest line item for CPG (or non-CPG products), and distribution isn't free either.
Toothpaste manufacturers can probably get away without advertising on FB/Goog, but I'm not sure that would work for other products or brands. It's not make-work to tell people about your product or service, although in markets with limited players you could see how a marketing arms race would drive prices up.
It's 'make work' because it's a unnecessarily competitive system wherein prices will by definition be driven up to absorb all of the surpluses of any given business.
Google and Facebook are in the business of 'economic rent' of people's attention.
25% of sales price going to Google might leave 5% for manufacturer and possibly even more for the Ad channel. Aka 'Google is where most of your profits are absorbed'.
You're not competing against product competitors - you're competing for attention of individuals, which is very narrow, through a very small number of pathways wherein there are quasi monopolists.
Your 'competitors' are actually 'value chain competitors' - Google and Meta - in this case, who require you to pay extraordinary amounts to access their captured audience.
Google is a massively 'high margin' business, which is an indication of their market power in the value chain, and they could be much more profitable if they wanted to be.
Whatever you make - you are bidding against McDonalds, Mondelez and Proctor & Gamble, not your just your competitor.
To realize this power, do a little 'thought experiment' and imagine of the 'ad layer' of the system would commoditized and extremely efficient, due to heavy competition and/or 'good' regulation (or socialization). Say for example, people were served ads with perfect efficiency, and accounting for some kind of community/regulatory guidance - which meant that 'local services and companies' were guaranteed a tranche of time, along with public services and community things - like School events, local street plays, art houses.
This could probably achieved for a fraction of the cost in the system now, and it would mean 1) the profits parked at G and Meta would be distributed to other layers of the value chain - aka the advertiser/maker, manufacturers, parts suppliers, and also to consumers. 2) likewise a system that defies the 'race to the bottom' competition of advertising (imagine very simple, relatively cheap and authentic ads) and 3) the hidden surplus of the benefit of community awareness, issue awareness, which is invisible on the GDP because 'money does not change hands'.
Another way to put it, is that the 25% spend on Ads is mostly spent on 'economic rent' not really on the cost and effort associated with that activity, in addition to that system being extremely optimized for certain outcomes (profits for private enterprise) and not others (aka 'financialization' of social and community aspects).
All of the extra money, time and effort people have to invest in fighting with each other over very limited attention, through captured attention, is inefficient 'make work'. It's the 'private economy' version of the government paying people to dig holes and fill them.
In almost all areas where there is heavy economic rent, there are inefficiencies; Advertising and Real Estate are huge ones there, there are a few others.
Obviously, Google and Meta do 'real things' - they're not fake businesses, but the massive profits are an indication of the oligarchic power and it's definitely sub optimal.