There was an interesting little blurb in Tuesday’s Wall Street Journal on the increasing use of econometrics in advertising (subscription required).
Econometrics uses statistical analysis to measure the relationship between different sets of events, such as the effect of educational qualifications on wage levels. To determine an advertisement’s effectiveness, econometricians write an equation to measure the effect on sales of different factors, including the weather, price cuts and advertising. For the advertiser, the purpose is to help decide which ads to run.
I’ve often thought that such an approach would improve the returns to advertising, by providing a systematic tool to evaluate the effect of advertising on sales revenue, controlling for other factors that influence sales.
I wonder how they account for price cuts as an independent variable; the dependent variable is P*Q, so if you include anything to do with P on the right-hand side you have to take a fancier approach. Perhaps they measure price cuts as a percentage discount, or a dummy variable …
Not everyone is convinced this is a good thing:
For an ad industry that prides itself on its creative spirit, the idea of being judged by mathematical models is upsetting, if not heretical, to some. Some creative staff argue that it is impossible to measure the buzz generated by good advertising.
No it’s not: the buzz that matters is the buzz that leads to increased sales revenue. Easy to quantify. A firm’s objective is to maximize profit, not to maximize the creativity of advertising. The point is to use more systematic tools to figure out what resonates with consumers.