The old joke is that everyone knows that half of marketing spend is wasted, but no one knows which half. Recent data suggests that marketing waste may be high and increasing. With the continuing advances in technology and analytics, why is this?
A partial explanation may be due to the erosion of economies of scale in Marketing. The sources of Marketing economies of scale can by categorized as external (including customer behavior) or internal (operational/production factors). This post will focus on the external factors, especially marketing communications and consumer media consumption.
History of Marketing Scale
Studies of economies of scale in marketing date back at least to the 1950s, when it was found that smaller automakers like Studebaker were spending twice as much on advertising per car than GM or Ford. The scale advantages of market leaders like GM or Ford were partially due to mass media channels like television. With only a handful of networks, audiences were the definition of mass and brands with the broadest offering obtained the greatest benefit from their investment in television advertising. An upstart brand attempting to target a small segment of customers would be wasting a much bigger percentage of their television advertising spend on an audience outside of their target segments. This amounted to a major source of scale advantage for the market leaders of that era.
Disruption #1 – Explosion of cable channels
With the arrival of cable, television audiences fragmented across the hundreds of available channels. For upstart brands, this represented an opportunity to better reach their target demos without paying to reach everyone else. A major scale advantage of market leaders was eroded, but significant scale advantages remained. Market leaders could still take advantage of their creative investment. Creating a great spot still cost the same whether it ran in major markets during prime time or during late night on local cable access. The market leaders also had significant buying power in negotiating with agencies and ad buyers to get better pricing on the spots they ran.
Disruption #2 – Migration from paid to earned
Opportunities for earned marketing exploded with the internet and ultimately social networking. Marketers of leading brands could no longer rely on their buying power to dominate the primary channels where media was consumed. Not only did consumers have the power to share content with each other and break the long standing tradeoff of free content in exchange for viewing advertising, but consumers also had the tools to create their own content and distribute it at scale. Suddenly, leading Marketers’ ability to leverage their scale advantages in content creation and distribution were undermined as well.
Now the key question is if this is the end of the story. Are Marketing economies of scale dead due to the changes in Marketing communications that have resulted from these disruptions? In our next post, we will explore the implications for internal sources of economies of scale and assess whether those can continue to provide Marketers of leading brands a sustainable scale advantage.