Disclaimer before we get started: I own stock in Facebook and Google. Also, this article turned out longer than usual. If you don’t want to read the whole thing, you can read the summary, or hear me read it out on Apple Podcasts and Spotify.
Summary
* I listened to a Freakonomics podcast that talked about why digital ads might not be effective as people think. It was really misleading.
* Ads from Facebook and Google provide better audience targeting than what existed in the past.
* While big brands like eBay might not benefit from paid ads, Freakonomics should’ve tried to look at small businesses and startups.
* Despite what an expert quoted on this podcast says, Facebook and Google make it really easy for businesses to track the results they get from ads.
* The same expert acts like he’s smarter than the entire marketing industry while he cites facts that everyone in the marketing industry knows.
Does advertising really work?
The other day, a friend sent me an episode of the Freakonomics podcast titled “Does Advertising Actually Work?” It talked about how digital ads on Facebook and Google might not be as effective at helping businesses attract new customers as people think.
If the premise of this podcast is right, there are big implications. It means a lot of businesses are wasting their time trying to optimize ads that have 0 impact on anything. It also means that Facebook and Google are probably hugely overvalued since the vast majority of their revenue comes from advertising.
I listened to the podcast and thought it was well-produced and definitely made some interesting points. But I also thought it was incredibly misleading.
So today, I’m going to talk about what the Freakonomics podcast got wrong about the digital ad market. We’ll also discuss how digital ads work and how they’re used to help businesses attract customers.
How digital ads work
Before the Internet, businesses might have advertised themselves in newspapers or billboards, because those were the best way to reach potential customers. But Facebook and Google offered something that these mediums didn’t have: targeting.
For a better idea of how targeting works, imagine that you’re a UFC gym who’s looking for new customers. You could buy newspaper ads, but chances are that most people who see them probably have 0 interest in your product anyway. But digital ads can make sure that you’re reaching potential customers who would be most likely to actually come to your gym. You can use Facebook Ads to target males 18-25 in your area who like MMA. The ads will then show up in the News Feeds of these users.
Google Ads also help businesses reach targeted audiences, but they work slightly differently. For example, if someone in your area is searching for “UFC gyms near me”, you can buy an ad to show up on the top of Google’s results. Since most people don’t go past the first page of search, it’s an easy way to make sure that your business is immediately visible to interested customers.
The shitty ad company that worked with eBay
The podcast starts off with a story of a UC Berkeley Economics professor, Steve Tadelis, who did some work with eBay. He talks about a time when he was on a call with a paid search consulting firm that worked with eBay. He eventually figured out that the consultants were just using jargon to hide the fact they had no idea what they were talking about. When he tried asking them questions about some of the terms they were using, they pretended that the call was breaking up to avoid answering.
This is a pretty hilarious story. Without a doubt, there are definitely scam artists in the paid search game. Almost all the YouTube ads that I get are some random dudes telling me that I can be a millionaire if I just take their course on Facebook Ads.
But beginning the podcast with this story makes it seem as if the entire paid search industry is made of scammers. There are lots of people who’ve used paid ads to drive real results for businesses. It’s no different than me making a podcast called “Can music festivals be trusted?” and starting it off with a story about Fyre Festival while providing no counterexamples. It’s pretty misleading for someone who doesn’t know about the industry.
The eBay study on digital ads
After Tadelis shares his story about the scam consulting company, he talks about a study that eBay did to measure the performance of their search ads. The company turned off all their keyword-search ads on Bing and saw that there was a very low effect on overall sales.
With no context, this seems like solid evidence that paid ads might not work at all.
Why the eBay study isn’t solid evidence that paid ads might not work at all
The podcast ignores a very important fact: everyone already knows eBay. It’s an established and trusted website for buying and selling products. Search engines like Google and Bing recognize this, which means that eBay is more likely to show up in organic search results. So if eBay doesn’t pay for Google Ads, there’s still a good chance they’ll be on the first page of search anyway.
Ranking high on search might be easy for a company like eBay, but for the vast majority of startups and small businesses out there, it’s incredibly hard. It takes a lot of time and effort to optimize your website for Google. That’s why many small businesses instead buy Google Ads, which puts them on the top of search results right away.
Tadelis himself talks about how the ads actually did work well for people who weren’t frequent eBay shoppers and probably weren’t going to the site anyway. That naturally implies that ads actually do have a lot of value for startups and small businesses, since most people probably haven’t heard of them and probably aren’t going to these businesses on their own.
But for some unexplained reason, Freakonomics doesn’t take any time to interview any startup employee who works with ads or any small business owner.
It’s not as if these companies only make up a small part of the digital ads market. Facebook’s top 100 advertisers only make up 16% of the company’s ad revenue, so the vast majority of advertisers on the platform are small businesses. I really have no idea why Freakonomics’s producers overlooked something this simple.
The digital ad bubble guy
Instead of interviewing anyone who regularly works with ads, the podcast interviews a former Google employee named Tim Hwang, who claims that the digital ad market is a bubble that’s about to pop. Before we go any further, I do want to say that Tim didn’t work in the ads department at Google, he worked in Public Policy. He drops this quote:
“When I started to do research, I very naturally started to talk to a couple of friends who work at these big tech companies… they would be like, “Oh, ads definitely work. But we can’t tell you how or why or give you any evidence for it.”
This is totally false. If you buy Facebook ads, you’ll be able to see the demographics that were targeted. You can see how many people saw the ad and how many people clicked on it. If you have the right tracking set up, you’ll be able to see how many of those clicks turned into actual purchases. From there, you can easily calculate your return on investment for your ads. I’m not sure what else this guy wants.
Maybe people at companies like Facebook or Google are secretive about the exact mechanisms they use to identify target audiences. Maybe they don’t want to give away results that businesses have seen. Maybe there are some businesses out there that don’t have tracking set up and haven’t done the math on the return on investment they’re getting from ads. But it’s fucking nonsensical to claim that there’s no evidence how and why ads work.
More top-secret knowledge from the same guy
Hwang goes on to talk about some other reasons why ads don’t work: most customers don’t click on ads, more customers are using AdBlocker, and some ads aren’t even seen because they’re on weird parts of the page. Again, all of this is supposed to be proof that we’re in a digital ad bubble that’s going to pop at any second as if this is secret knowledge that most marketers aren’t paying attention to.
Let’s be clear: literally all of this is common knowledge for marketers.
Every marketing team in the world constantly looks for ways to build organic traffic to their website and reduce their dependence on paid ads. Everyone knows that ideally, you shouldn’t be reliant on Google and Facebook to reach your customers, but businesses do it anyway because it’s the easiest way to reach target audiences fast. I’m not sure how the digital ads market is supposed to be a bubble when most of the people who participate are aware of all of the weaknesses that paid ads have. But again, for some unexplained reason, Freakonomics doesn’t try to talk to anyone who actually works with Facebook and Google Ads to clarify this.
In conclusion
Now look, the podcast did bring up some interesting points. It’s definitely an open question how useful paid ads are for big brands. But it seems like the producers of Freakonomics were trying so hard to prove how much smarter they are than the entire marketing industry and every stockholder of Google and Facebook that they forgot to do some basic research.
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