The painful decline of the Advertising Industry (and what marketers should do about it)

Fernando Polo

7 September 2017

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Advertising is not dead, and I guess nobody, seriously, thinks it ever will be. But the once-shining star of the promotional mix is certainly in trouble. Some feel the crisis is temporary, but many others have noticed clear symptoms of hard structural change taking place within the industry.

Mass advertising has been languishing for a long time. Magazines and newspapers have been suffering for years, and the all mighty TV is following suit. Advertising doesn’t work now as it did when TV was bright and shiny and emotional commercial spots proved themselves the biggest sales machine humankind had ever invented. Not only did the rise of the Internet steal eyeballs away from traditional media as well as fragment media consumption, but it also made us smarter. Although it has always played an important role, word of mouth has now become our most trusted source of information and online review production and use is at an all time high. People trust their peers more than brands or business spokespersons. Fifty years of abuse at the hands of advertisers has made us savvier and less permeable to shiny, corporate messages. In an era of transparency, selling snake oil has become an impossible feat. Of course, human beings can still be manipulated by fake news and misleading advertorials, as the post truth era might reveal -but brands are less able to induce us to buy with ads.

Advertising heyday is gone, and digital advertising, despite their ability to personalise content through big or small data, will never bring it back. The rise of ad blockers, employed in order to resist colonisation of hyperpersonal spaces, and people paying for streaming content platforms like Spotify or Netflix, are all signs we don’t really love ads.


The GDP test: does advertising convert into sales?

The only reason for advertising to exist, is to sell. And the only possible reason for an overall decline in ad sales would be a decrease in effectiveness. If it was growing, the % of GDP brought in by advertising expenditure should be outgrowing other industries. The effort to gather such data goes back to 1924 and research demonstrates that advertising expenditure in the US accounts for about 2% of US GDP and has remained mostly flat for nearly a century, with a sharp decline during and after World War II. But recent years show a slight decrease on this percentage which might become a trend.  Some attribute this to increased efficiency in digital advertising. But other theories could fit as well.

In any case, Google AdWords, the most efficient advertising platform ever built, can teach us a big lesson in regards to sales conversion. Professionals working in online advertising performance for an industry like travel or hospitality know well that consumer attention is a scarce and limited resource, and that this nearly flawless advertising market involves bidding for the best positions – and that once you start bidding, there’s a threshold price above which, even if ads could translate into sales, the cost of acquisition is no longer worth what you pay. This could explain the fact that the GDP of the ad industry has remained flat over the years.


Does online advertising will do the trick?

AdWords is an outstanding invention but still, a small fraction of the advertising cake. The growth of intrusive formats provoked the rise of ad blockers, and digital advocates were surprised when Procter & Gamble and other prominent advertisers said they’d managed to cut their online advertising expenses without slashing sales. Online fraud and reputational risk were two explanations given, but one can’t help but think that as the flow of irrelevant (and annoying) ads continues to grow, a huge part of the ad budget will go on being wasted.


The rise of Customer Experience

But marketing is much more than just advertising, even though in popular culture both terms are used interchangeably. Advertising is just one element of the promotional mix: the one that specialises in crafting creative product and brand messages to be conveyed to an audience through paid formats. If we go by the book, things like influencer marketing or public relations fall outside the realms of advertising. But digitisation, technology and smartphones (in general, proliferation of screens) have fueled the growth of a “new” marketing discipline: Customer Experience. If word of mouth is the most trusted source of information for other “customers”, creating ‘wow moments’ and joyful experiences so that users cannot help but share products or services with others (by whatever means) makes sense.

Persuasion techniques are evolving and becoming more sophisticated, and more and more brands will shift (not kill) budget from advertising to product design and consumer experience. Product is king, and by innovating faster or by disrupting existing services or products, we can outgrow our competitors. On the other hand, digitisation and technology lower entry barriers transforming products into commodities, especially if they are not supported with a platform ecosystem (like the iPhone or AirBnB). So the push for differentiation through customer experience is likely to skyrocket. The product could be unoriginal, or even slightly inferior to another product on the market, but a ‘wow moment’ at a critical touchpoint will ensure the product sticks, using more of Kanehman’s famous system 1 or 2, to justify our hidden emotional decisions.


Winners and losers of the advertising turmoil

Decline doesn’t mean collapse, and disruption within the industry has resulted in the arrival of new players fishing in troubled waters. The clear winners are social and digital platforms (mainly Google and Facebook) and software companies focused on data driven marketing (like Salesforce, IBM or Oracle).

The losers are traditional marketers, media and agencies. The tenure of CMOs is now half of CEOs. In a fast changing context where returns on important investments are so hard to demonstrate, to be a CMO is not easy task. And activist investors are worsening things by putting pressure on brands to deliver short term results. It has been predicted that by 2017, global ad sales growth will be half of what it was in  2016. Being a CMO was easier when commercial spots conveyed straight messages to the masses.

Big agency conglomerates seem to be also seriously impacted by disruption. Investment analysts have predicting a bleak future for them in 2017. The P/E ratio of the major holdings have been in decline since the beginning of the year.

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The following points are raised to explain this situation, and they doesn’t seem temporary:

  • Big holdings have traditionally benefited from aggregated media buying. Concentration of media spending in giants like Facebook or Google, and optimisation through programmatic buying software is hampering intermediary gains.
  • Consultancies are buying creative shops or expanding their own customer experience and digital capabilities. They’re business first, and they have strong skills in data and technology skills as well as better access to CEOs. It’s no wonder that many think they could win this battle.
  • CPG companies, a sector struggling with profits and under lots of pressure by retail giants, plus the Amazon effect, are key clients for most of these agencies, and cost cutting is hitting them hard.
  • Finally, other tech companies are also stealing a slice of the cake, providing customer data gathering and management capabilities to brands.

Data and tech threats aside, many think that the industry is having a hard time  retaining talent. Many ad professionals would tell you that one can now find more brilliant creative minds working outside of big agencies as freelances or starting their own agencies. Bogusky’s case was hotly debated, but he was not alone. Many  saw this turmoil coming. Like the case the of Wolf Ollins, who escaped the advertising industry and helped establish a new discipline of branding, many others have recently moved into product innovation, digital or the customer experience startup scene.


Will “Promotion” decline at some point too?

Many of these advertising behemoths have lots of cash coming in through other promotional activities. Promotion is critical in the awareness stage, and even though word of mouth is more effective, promotion gets the ball rolling. A creative method of  reaching new audiences will always be needed. In addition to this, customer experience is a discipline less relevant in some industries like CPG, where packaging and old school branding still have a lot to say.

But the demand for transparency will continue to grow, and trust could keep on declining too. The rise of Artificial Intelligence – though it might seem distant – could mean the advent of AI personal shoppers, and trusting an artificial agent to discover products on our behalf, will profoundly transform many of the current promotional techniques.


What companies can do

Of course, even if advertising disappeared (and it won’t) business will go on, and companies may also begin to think differently about this new reality:

  • Build amazing companies, not just brands. In a world more powered by people than ever before, the more human-centric companies will thrive. Think outside the consumer box, start building your citizen journey. Invest in your co-workers experience to radically improve your customer journey.
  • Think of advertising as an experience. Avoid intrusion and look for ‘wow moments’ in your communicational touch points. Paid media is not dead, but content and owned media are much better suited to foster engagement and maintain long term customer relationships.
  • Invest in customer service and product innovation. Don’t talk the walk, walk the walk.
  • Think word of mouth (but don’t get stuck on influencers). The most common influencer marketing approach makes the same mistakes as old celebrity and public relationship campaigns. The one who influences me the most, in deciding what to buy, is unlike to be an online celebrity.

Advertising might be declining, and a whole industry is certainly suffering, but we could all be better off by having better products and enjoy seamless experiences. Would it be that bad?