Does advertising increase consumer prices?

Does Advertising Increase Consumer Prices? (Update) – Laurence Green

When the Advertising Association first reviewed the relationship between advertising and consumer pricing in 2016, the world (or at least the UK economy) was a very different place.

Price inflation was low and was presumed to be staying that way. Interest rates had long been low also, fuel for the rapid rise of a new class of advertiser, the direct-to-consumer (D2C) businesses on the right side (at the time) of discounted cash flow calculations by investors. Fast-forward six years and the economic climate – and indeed policy climate – is much changed. At the time of writing, the war in Ukraine, energy market price inflation and post-pandemic supply shortages have conspired to nudge the annual rate of consumer price rises into double digits: a forty-year high. And mortgage rates are rising steeply too. It is no wonder that 93% of British adults reported an increase in their cost of living in August-September 2022, according to the Office for National Statistics.

Perhaps it was inevitable, then, that a government scrabbling for electoral favour should moot a taxpayer-funded campaign earlier this year to encourage brands to divert their marketing spend into cost cutting. ‘Less adverts, lower prices’ the (misplaced) policy shorthand. It was a proposal that was quickly scuttled by informed industry opinion but had served meanwhile to prove one of our prior observations correct: that advertising’s relationship with pricing is under-explored, under-explained and thus misunderstood to such a degree that…

“The prosaic conclusion of ‘the man in the street’ and of many commentators and even policymakers – that advertising puts prices up, if only to pay for the cost of the activity itself – is accepted without argument.”

Advertising Association, 2016

That simplistic conclusion, as we explained six years ago, neglects the various ways in which advertising impacts on consumer pricing, at both a brand and category level (and beyond).

Summarising our previous findings, we concluded that there were four major components to advertising’s overall contribution to consumer prices. On one side of the ledger, yes: advertising can be an upward force on an individual market player’s pricing if the brand in question successfully uses it to ‘add value’, thus accruing a sense of ‘worth paying more for’. As we noted, this kind of de-commoditisation, or price resilience, is not commonly cited as an advertising objective but is a frequent advertising outcome, nonetheless. For the advertiser, it is a highly desirable outcome, of course, with price effects cascading onto the bottom line.

Downward influences

On the other side of the ledger, we highlighted three ways in which advertising’s influence on pricing is, conversely, downward:

1. Firstly, and perhaps most obviously, by providing a public forum for price competition (for example by the nation’s supermarkets). Put simply, without advertising, there is no competitive incentive to lower prices as this will just serve to reduce take from existing customers rather than lure new or floating custom.
2. Secondly, and more subtly, is advertising’s role as an ongoing guarantor of demand for a brand, whether from consumers or from retailers on their behalf (think of those big rolling manufacturer franchises, from Andrex to Coca-Cola and Gillette). This effect means that their owners can enjoy economies of scale and provide better products at competitive prices.
3. Lastly, by co-funding or completely funding media players, advertising subsidises our media consumption. Historically, this has reduced the price we pay for the content we consume, but now also of the platforms we (from commercial TV and radio, newspapers and magazines to online services such as Google, Facebook, Twitter and TikTok: advertising businesses all.)

Bearing all these forces in mind, our conclusion was that:

“The overall effect of advertising in most markets and the economy as a whole is likely to be to reduce prices, even if it can advance an individual advertiser’s price point or resilience.”

Advertising Association, 2016

So, why revisit these arguments? Apart from the shifting economic and political landscape, advertising has changed across the period, also. A straw poll of practitioners suggests that the rise of those new D2C businesses and the ongoing drift of budgets more generally from ‘brand’ towards ‘activation’ might be the two most significant ways in which advertising’s relationship with pricing may have changed. (And, of course, we have the benefit of a further six years of data points, and some more recent examples to inspect.)

At the time of writing, some online media models are changing also, either away from a pure subscription, advertising-free model (e.g., Netflix offering a lower-priced tariff co-funded by advertising) or away from models wholly funded by advertising on the other (e.g., Twitter’s introduction of an $8 monthly fee for verified accounts.) Below, we look at how those trends might impact our earlier analysis, before updating our summary of advertising’s myriad – and competing – influences on consumer pricing.

A changing landscape

First of all: the rise of D2C businesses. From used car aggregators like Cazoo and Cinch to recipe box brands like Gousto and Hello Fresh (not to mention the elephant in the room, Amazon, the UK’s biggest advertiser in 2021), D2C brands are often heavy investors in advertising as they look to substitute mental availability for physical (retail) availability, while commonly finding their way to cheaper price points as a result of their business model.

Advertising therefore enables lower pricing by being a critical component of the way brands like these go to market. Another way of putting this is that advertising has enabled new players to disrupt old markets, with benign impacts on prices in favour of the consumer. Plausible as this theory is, we are only able to support it anecdotally for now as we are unaware of any study that comprehensively inspects the pricing impacts of D2C players on their respective markets and to what degree advertising is responsible for this.

For now, though, we would advance as a likelihood that advertising’s role in this kind of disintermediation constitutes another way in which it has a downward influence on consumer prices (as well as being a macro example of how advertising drives product innovation.) The Advertising Association would welcome any data, case study or other evidence that supports or discredits this hypothesis.

Secondly, the ongoing shift of budgets from brand to activation, as reported by the IPA and others. Online media – and ever shorter corporate horizons – have quickly tilted overall advertising market share from predominantly brand-based activity to predominantly activation-led. Despite evidence that the optimal mix of brand to activation spend for any individual advertiser in fact remains 60/40, businesses are increasingly chasing short returns from advertising at the expense of long, with recession likely to quicken rather than arrest the drift. Other things being equal, we would expect this shift to dampen advertising’s upward influence on consumer prices (via the long mechanism of a stronger brand) and exaggerate its downward influence (via the short mechanism of a better deal, in order to close the sale).

It stands to reason that more advertising spent on converting today’s custom rather than building tomorrow’s will drive more price promotion (and lower prices), especially during a cost-of-living crisis.

Sadly, although this theory holds water, we are currently unable to corroborate it to our satisfaction. One of the methodological problems in this area is that advertising copy has now splintered into so many fragments that it is increasingly to code correctly as the basis for statistical examination. Again, the Advertising Association encourages further investigation of what we will, for now, assume is a new downward pricing force.

The story so far, then. It is likely, but not yet proven, that the two macro shifts in advertising in recent years – namely, the composition of both its advertiser base (now incorporating all those D2C players) and of its copy (now skewed towards activation rather than brand), spurred by the rise and rise of online media – have added to the case that advertising at a general level has a downward influence on consumer pricing.

Reviewing past conclusions

Let’s now briefly review and update the other conclusions we drew six years ago.

Firstly, advertising’s upwards influence on price at an individual advertiser level. As we noted at the time, the industry can be strangely reticent about this, despite it being one of the most important returns on advertising investment. In most case studies – including those recently published as this year’s IPA Effectiveness Awards winners – brands and agencies prefer to report sales value growth and/or share gain: both of which may spring from (less profitable) volume gains rather than price improvement.

Perhaps the industry and its agency players find the narrative of shifting brand allegiances more comfortable (or compelling) than brand advertising’s quotidian role in securing some degree of brand preference at a higher price than competitors can command. Or perhaps the malaise runs deeper into client organisations, as suggested in a recent overview from Kantar (whose research evidences that even price-driven consumers will pay 14% more for a brand they perceive to be meaningfully different):

“Over the years the belief that a strong brand helps justify that brand’s price seems to have become dominated by the belief that the role of a strong brand is only to drive more sales. Price, it seems, has become a demand factor considered independent of the power of the brand.”

“Why pricing power is a brand’s greatest asset.”

Nigel Hollis, Chief Global Analyst, Kantar, September 2020.

The econometrics consultancy Magic Numbers’ recent overview of price elasticity reunites advertising and pricing. Its case study of the tonic water market shows how the consistent brand-builder Fever-Tree commands a premium over promotionally-led Schweppes (and Schweppes in turn over own label). Describing the commercial upside of the reduced responsiveness to changes in price that brand advertising can achieve, the author notes:

“It’s not an easy win. Even with great creative and a good budget, willingness to pay might only change to some extent, and only with some people. Even so, the money magnitudes involved mean that this effect may well be the biggest business benefit of advertising.”

‘Sensitivity to price is a marketing outcome’
Dr. Grace Kite, Magic Numbers

So even if it is still rarely spoken about, and arguably hard to do, it would seem that advertising’s ability to support premium pricing is alive and well. The latest food price inflation data shows inflation on branded goods running higher than non-branded: good news for brand-owners, if less so for their customers.

Of the downward pricing influences we established six years ago, we report little or no change. Advertising’s informational role as a forum for price competition has in no way diminished and, as we have established, the opposite may even be true: Channel 4’s recent ‘cost of living’ ad break an anecdotal broadcast case in point.

Advertising’s underlying ‘demand creation’ role seems most likely unaltered, whilst its role in reducing the price we pay for media has, if anything, increased. As noted earlier, previously ad-free services like Netflix have introduced lower-priced tariffs for viewers happy to consume ads as part of the deal, the very presence of advertising lowering the price they pay. It’s quite possible, however, that the looming ‘digital correction’ may see some swing back in the other direction: with ads no longer the sole source of revenue for tech platforms, and less ‘free stuff’ in our lives.

Conclusion

Drawing all these strands together, and incorporating our new observations, we again conclude that advertising impacts consumer pricing in many and various ways, at brand and category level.

On the one hand, advertising helps to reduce absolute prices by oiling the wheels of price competition (especially now that it is used primarily against short-term activation objectives); by making demand more predictable and encouraging innovation (especially evident amongst D2C players, whose business model advertising makes possible); and by co-funding (or completely funding) our media habits.

On the other hand, well-executed advertising helps individual market players to improve their relative price position versus competitors. In feverish economic and political times, it’s crucial that practitioners and policymakers alike understand the full gamut of advertising’s pricing effects, whether they are lobbying for more advertising investment in the boardroom or contemplating market intervention.

After starting, growing and selling two creative agencies (Fallon London, to Publicis; and 101, to MullenLowe/IPG), Laurence is now an independent adviser to creative businesses of all stripes. He works with agencies, brand owners and media owners on tasks ranging from strategy and storytelling to growth and exit.

A serial IPA Effectiveness Awards winner and board member, Laurence has edited two books on marketing best practice. He was the only agency strategist named in the Financial Times’ Creative Business Top 50, a founding member of c&binet (the Department for Culture, Media & Sport’s creative industries think tank) and a founding trustee of the Marketing Academy (the not-for-profit marketing leadership mentoring organisation).

A columnist for Campaign magazine for many years, and brand and advertising columnist at the Sunday Telegraph for three, he now writes monthly for The Media Leader.