Advertising and signaling in the age of personalization
Why the Super Bowl continues to command high prices for commercials
Hi friends! On Sunday, commercials at the Super Bowl cost ~$5.5M for a 30-second slot. At an estimated 110M viewers, that works out to a cost per thousand impressions (CPM) of $50.
TV typically has CPMs in the ~$15 range, and most digital ad platforms have CPMs in the $5-10 range.
Even if you factor in earned media (i.e., organic media and reach generated as a result of the ad), Super Bowl ads probably still come out more expensive.
So is Super Bowl advertising a waste of money?
From the perspective of driving awareness or driving sales, most other mediums deliver better and cheaper results. So when viewed purely from a functional perspective, one might conclude that these ads are a waste of money.
However, adding in the signaling factor might explain why it still makes sense to advertise.
The signaling theory of advertising
The signaling theory of advertising posits that advertising helps signal product and firm quality. A benefit of ads isn’t necessarily the informational value contained in them, but the fact that the advertiser spent money to reach the potential consumer, which indicates to the potential consumer that the product is high quality.
The rationale for this is driven by the fact that high-quality and more profitable firms are more likely to be able to continue to advertise heavily in the long-term. Low-quality ones will find it difficult to mimic their behavior, and so advertising can serve as the signal which separates a high-quality firm from a low-quality one.
For signaling to work, it must be costly to signal. In other words, advertising works better as a signal when it is expensive to advertise.
One of the big benefits of digital media platforms is that they enabled any small business to be able to advertise. On television, advertising was typically gated to large firms given the minimum costs involved in advertising. But with the advent of Facebook, Youtube, Snap, and so on, any small business (or individual testing out an idea) can sign up themselves and spend as little as $25.
The downside of this, however, is that with the prominence of digital media platforms, advertising by itself has a bit less of a signal value. The ad you see for a DTC subscription toothbrush brand on Youtube could very well be from a brand that was started three days ago and is still testing concepts.
In this age, TV advertising still retains some of that signal value, and in particular the Super Bowl ad slots.
And so one additional benefit of Super Bowl ads is the signaling benefit, specifically:
The signal that the company intends to continue to operate in the foreseeable future.
The signal that the company has quality enough products and has enough money to be able to spend $5.5M on an ad.
The signal (in the case of companies with an existing brand/reputation) that the company is willing to put its reputation behind a specific new product/service they are promoting.
Products as signals and the third-person effect
But that’s not all. Consider that most products don’t have just functional value. Many products, especially high priced and luxury ones have aspirational value or value as a status symbol. After all, humans are just status-seeking monkeys looking for approval from others.
The goal when advertising these products (i.e., products that are signals themselves) is not just to convince potential buyers to want the product but to convince them that people who they want to impress want or view the product favorably.
The reason this is effective is also partly due to a phenomenon known as the third-person effect, where people believe that ads have a greater effect on others than the ads do on themselves.
Because of the third-person effect, if someone believes that ads influence a third-person (i.e., people they want to impress) it raises their overall perception of the product being advertised.
So when one sees an ad for a Rolex, they believe others see that ad and are influenced by it to think a Rolex is desirable. So they then believe that they can impress others by getting a Rolex. Wanting the product partly stems from knowing that others know about it and covet the product.
Geoffrey Miller noted similarly in his book Spent:
“Most BMW ads are not really aimed so much at potential BMW buyers as they are at potential BMW coveters.”
Now, in the age of personalized and targeted advertising, it has become really hard to create this third-person effect. To the extent that people know the ads they are seeing are personalized and targeted, they may rightly believe that others might not have seen the ad or similar ads for that product or brand. So if they’re not sure that others desire that product, the status utility of the product may be diminished.
But that is where TV advertising, and especially the Super Bowl shines. With over 100M people simultaneously watching the Super Bowl, the third-person effect is magnified, and it remains one of the best channels out there to communicate an aspiration or a lifestyle that people know other people are also seeing and believe it will affect.
In this way, especially for products that themselves are a signal, the Super Bowl continues to be a great avenue to increase the perception of the prestige or desirability of those products, by leveraging the third-person effect at scale.
Note that this works not just for luxury brands and products, but for any product trying to create aspirational value or associate itself as the default choice in a situation. Bud Light doesn’t just want you to want to choose Bud Light the next time you want a beer. It wants you to know that everyone thinks that Bud Light is the safe and obvious choice.
Factor in these benefits of Super Bowl ads, and perhaps it’s a bit more clear why brands still pay the exorbitant rates for them.
Further reading
Michael Spence’s theory of Signaling in the context of education and the job market
An interesting paper on Conspicuous Consumption
Paul Milgrom and John Roberts’s Price and Advertising Signals of Product Quality
Understanding the third-person effect by Joan L. Conners
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