To the extent advertising is aimed at raising the name recognition and thus market share of one product over its similar rivals, it is zero or negative sum
I want to push back a little on this point. In this scenario, the advertisement does actually provide a useful costly signal to the consumer: it makes sense for a firm to buy advertising when they expect that it will induce enough sales to earn back the initial cost in profits. Inversewise, when a firm is not confident enough in their product, they will not buy advertising. While there may be different factors that go into this, a large part of that is whether or not other existing / potential customers have a positive opinion of the brand, which is generally correlated with the quality (per price) of the brand’s product. This means that if I see substantially more advertising for Brand X than for superficially-similar Brand Q, I can reasonably assume that Brand X is likely to have a better product than Brand Q.
This effect creates value for both me and the superior brand, even in a situation that seems superficially zero-sum. Of course, if the two products are literally identical, then this is irrelevant. But most products you see advertised are not perfectly identical to their competition. There are also other factors, such that companies with more pre-existing resources can buy more advertising than a less-resourced company—but even then, if the underdog’s product is good enough, their investments in advertisements will have a better payoff, allowing them to bootstrap to the point where they can afford a similar amount of advertising.
This means that if I see substantially more advertising for Brand X than for superficially-similar Brand Q, I can reasonably assume that Brand X is likely to have a better product than Brand Q.
I have the opposite reaction. Example: two products sell for the same price, Brand X spends 50% on manufacturing the product and 50% on advertising, Brand Q spends 80% on the product and 20% on advertising. If I buy Brand Q, I am getting more product and less advertising.
Another example: Diet Coke is twice as expensive as Sam’s Diet Cola (Walmart’s house brand). Let’s see, flavored caffeine water plus advertising, or flavored caffeine water without advertising? Which is the better deal?
Inversewise, when a firm is not confident enough in their product, they will not buy advertising.
Elon Musk is confident enough that he can sell all the Tesla’s he produces without buying advertising. On the other hand there are car companies who don’t believe that they can sell as much cars as they produce without advertising and thus buy advertising. Confidence in a product being able to succeed without advertising seem to me a good signal for product quality in the case of Tesla.
I think Scott Alexander’s Why Real Men Wear Pink provides a useful lens here. Indeed, in the case of Tesla, you are correct that Tesla sends a signal by not advertising—they know they can sell cars without doing any advertising, because they know you know that their product is just that good—and when you see they don’t advertise, you know that they know that you know their product is just that good.
But consider the case of just about any other mainstream car company today (well, aside from Ferrari and Porsche, maybe a few others)- their product may be great, or it might be below par, but either way, they can’t be sure that you know that. The below par company might be able to sell a few cars through advertising, but buying a new car is a big enough deal for most consumers, that they will do their research before buying the car, and will know to avoid the subpar brand, so even with a lot of advertising, they won’t earn back what they spend. On the other hand the company with a very solid product, but who doesn’t have Tesla’s reputation, will find that their profits will be very closely proportional to how much they advertise, and so will advertise as much as they can.
In short:
S-tier: Tesla: No advertising
A-tier: Solid car company: A lot of advertising
C-tier: Subpar car company: Minimal advertising
Neither the S-tier nor the C-tier does heavy advertising, but the important thing is, you already know who’s S-tier and who isn’t. When a company isn’t S-tier, a lack of advertising can be interpretted as a lack of confidence in the product
I’m not sure what “as much as they can” means. A company can choose to spend more or less on advertising. They can spend less on product quality and take that money to spent on advertising
Cars are not either solid or subpar but they provide value for a given price.
Company A might say: Our strategy is to run a lot of advertising and then charge a lot of money for our cars to make a huge profit.
Company B might say: Our strategy is to provide customers with a cheap car and that means we won’t have a budget for a lot of advertising.
In many cases it can make sense to buy from company B and get a car that’s better value for money. Cars are however a special case. Value conscious car buyers don’t buy new cars but used cars
The fact that Coca Cola spends so much money on advertising doesn’t indicate that their product is better then any other. It just reflect that they believe that they have a brand that allows them to charge a surplus.
This is a bizarre example, sort of like using Bill Gates to show why nobody needs to work for a living. It ignores the extreme inequality of fame.
Tesla doesn’t need advertising because they get huge amounts of free publicity already, partly due to having interesting, newsworthy products, partly due to having a compelling story, and partly due to publicity stunts.
However, this free publicity is mostly unavailable for products that are merely useful without being newsworthy. There are millions of products like this. An exciting product might not need advertising but exciting isn’t the same as useful.
So It seems like the confidence to advertise a boring product might be a signal of sorts? However, given that many people in business are often unreasonably optimistic, it doesn’t seem like a particularly strong one. Faking confidence happens quite a lot.
There are many reasons why a customer might buy a product. I might buy one kind of product because it’s cheaper then the next. I might buy one kind of product because of publicity stunts. I might buy a product because a friend recommended it to me because they had great experiences with it. I might by a product because it has good reviews. I might buy a product because it has good advertising.
On the other side an executive is thinking “What’s my core strategy for aquiring customers?” If the core strategy is advertising and not producing products with good value propositions, that’s to me a bad signal.
80⁄20 thinking does mean that many times there’s a core strategy on which a company focuses.
I want to push back a little on this point. In this scenario, the advertisement does actually provide a useful costly signal to the consumer: it makes sense for a firm to buy advertising when they expect that it will induce enough sales to earn back the initial cost in profits. Inversewise, when a firm is not confident enough in their product, they will not buy advertising. While there may be different factors that go into this, a large part of that is whether or not other existing / potential customers have a positive opinion of the brand, which is generally correlated with the quality (per price) of the brand’s product. This means that if I see substantially more advertising for Brand X than for superficially-similar Brand Q, I can reasonably assume that Brand X is likely to have a better product than Brand Q.
This effect creates value for both me and the superior brand, even in a situation that seems superficially zero-sum. Of course, if the two products are literally identical, then this is irrelevant. But most products you see advertised are not perfectly identical to their competition. There are also other factors, such that companies with more pre-existing resources can buy more advertising than a less-resourced company—but even then, if the underdog’s product is good enough, their investments in advertisements will have a better payoff, allowing them to bootstrap to the point where they can afford a similar amount of advertising.
I have the opposite reaction. Example: two products sell for the same price, Brand X spends 50% on manufacturing the product and 50% on advertising, Brand Q spends 80% on the product and 20% on advertising. If I buy Brand Q, I am getting more product and less advertising.
Another example: Diet Coke is twice as expensive as Sam’s Diet Cola (Walmart’s house brand). Let’s see, flavored caffeine water plus advertising, or flavored caffeine water without advertising? Which is the better deal?
I see advertising as a negative signal.
Elon Musk is confident enough that he can sell all the Tesla’s he produces without buying advertising. On the other hand there are car companies who don’t believe that they can sell as much cars as they produce without advertising and thus buy advertising. Confidence in a product being able to succeed without advertising seem to me a good signal for product quality in the case of Tesla.
I think Scott Alexander’s Why Real Men Wear Pink provides a useful lens here. Indeed, in the case of Tesla, you are correct that Tesla sends a signal by not advertising—they know they can sell cars without doing any advertising, because they know you know that their product is just that good—and when you see they don’t advertise, you know that they know that you know their product is just that good.
But consider the case of just about any other mainstream car company today (well, aside from Ferrari and Porsche, maybe a few others)- their product may be great, or it might be below par, but either way, they can’t be sure that you know that. The below par company might be able to sell a few cars through advertising, but buying a new car is a big enough deal for most consumers, that they will do their research before buying the car, and will know to avoid the subpar brand, so even with a lot of advertising, they won’t earn back what they spend. On the other hand the company with a very solid product, but who doesn’t have Tesla’s reputation, will find that their profits will be very closely proportional to how much they advertise, and so will advertise as much as they can.
In short: S-tier: Tesla: No advertising
A-tier: Solid car company: A lot of advertising
C-tier: Subpar car company: Minimal advertising
Neither the S-tier nor the C-tier does heavy advertising, but the important thing is, you already know who’s S-tier and who isn’t. When a company isn’t S-tier, a lack of advertising can be interpretted as a lack of confidence in the product
I’m not sure what “as much as they can” means. A company can choose to spend more or less on advertising. They can spend less on product quality and take that money to spent on advertising
Cars are not either solid or subpar but they provide value for a given price.
Company A might say: Our strategy is to run a lot of advertising and then charge a lot of money for our cars to make a huge profit.
Company B might say: Our strategy is to provide customers with a cheap car and that means we won’t have a budget for a lot of advertising.
In many cases it can make sense to buy from company B and get a car that’s better value for money. Cars are however a special case. Value conscious car buyers don’t buy new cars but used cars
The fact that Coca Cola spends so much money on advertising doesn’t indicate that their product is better then any other. It just reflect that they believe that they have a brand that allows them to charge a surplus.
This is a bizarre example, sort of like using Bill Gates to show why nobody needs to work for a living. It ignores the extreme inequality of fame.
Tesla doesn’t need advertising because they get huge amounts of free publicity already, partly due to having interesting, newsworthy products, partly due to having a compelling story, and partly due to publicity stunts.
However, this free publicity is mostly unavailable for products that are merely useful without being newsworthy. There are millions of products like this. An exciting product might not need advertising but exciting isn’t the same as useful.
So It seems like the confidence to advertise a boring product might be a signal of sorts? However, given that many people in business are often unreasonably optimistic, it doesn’t seem like a particularly strong one. Faking confidence happens quite a lot.
There are many reasons why a customer might buy a product. I might buy one kind of product because it’s cheaper then the next. I might buy one kind of product because of publicity stunts. I might buy a product because a friend recommended it to me because they had great experiences with it. I might by a product because it has good reviews. I might buy a product because it has good advertising.
On the other side an executive is thinking “What’s my core strategy for aquiring customers?” If the core strategy is advertising and not producing products with good value propositions, that’s to me a bad signal.
80⁄20 thinking does mean that many times there’s a core strategy on which a company focuses.