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Saturday, September 21, 2024
Limited future potential of advertising
This week a study by the U.S. Federal Trade Commission said that social media collect a lot more data about their customers than those customers are aware of, mostly for purposes of targeted advertising. The same story under a different angle tells of investors being excited about the possibilities of AI in better analyzing these data for targeted advertising. I think that the tech companies and investors are overestimating the potential, because they have been overlooking bigger socio-economic developments.
Advertising works by persuading people to spend money. It has been shown that this even works somewhat beyond the point where there is no money left, into credit card debt. But at some point the credit card is at its limit. A consumer with no money left, and with his credit card getting refused already, becomes more or less immune to advertising. He might still *want* to buy stuff, but he can't.
We have data for that. McDonald's sales have been falling, globally. In other news, Tupperware filed for bankruptcy. There have been a ton of stories like this in 2024. And if you zoom out a bit, you notice that a lot of the companies that aren't doing so great are those that are targeting low- to median-income households as customers. But after a spike on inflation, in which prices (and profits) grew a lot faster than wages, the financial situation of many average families is pretty bad.
Henry Ford, who admittedly did have a lot of bad up to downright nasty ideas, at least understood one aspect of capitalism a lot better than most capitalists of his time, and even today: If you want the product of your company to be sold to the type of people that are your employees, you need to pay your employees enough so that they can afford your product. It's a win-win situation: The workers got their wages more than doubled from $2.34 to $5, and Henry Ford solved his problem of too much employee turnover, and gained a bunch of customers. It wasn't altruism, it was business acumen. Modern companies have lost that insight, and are hell-bent on screwing both their employees and their customers out of their last cent. But if every company does that, who will they sell their products to? The problem with inequality, from a capitalistic point of view, is that the rich are a lot fewer than the poor, and they spend a lot less of every dollar they earn. Different countries have repeatedly shown that raising the minimum wage is good for the economy, no matter the complaints from the business owners. Strong unions are good for the economy too. Trickle-down economics don't work.
Advertising doesn't generate wealth, like manufacturing does. If people had vast piles of unused money, advertising could accelerate the velocity of money, the speed at which money flows through the economy. But once the reserves are gone, advertising becomes a zero sum game: A consumer persuaded to buy product A now can't afford product B as well. Advertising remains a necessity, because nobody wants to be company B here; but thinking that AI or other technology could have a huge positive impact on the economy by improving advertising is a pipe dream. Firing Don Draper and replacing him by AI might be good for the bottom line of the company in the short term, but is a net negative for the overall economy.
- posted by Tobold @ 2:38 PM Permanent Link
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There is probably some argument to be made along the lines of less waste with better targeted advertising. But it's still zero sum. If middle to low income people in the US and Europe can't afford a product, who in the hell is a company going to sell stuff to? The whole system will collapse in on itself at some point.
I feel very bad for anyone in their 30s or younger right now. Unless something changes drastically, most of them are not going to be able to afford houses or ever really be able to retire. The majority will likely have to work until they drop dead of old age on the job, or physically become incapable of doing anything that someone would be willing to pay them for (after that to die in of starvation a tent in a homeless camp or something along those lines I guess). Have to keep the stock prices going up constantly, nothing else in the world matters . . .
I feel very bad for anyone in their 30s or younger right now. Unless something changes drastically, most of them are not going to be able to afford houses or ever really be able to retire. The majority will likely have to work until they drop dead of old age on the job, or physically become incapable of doing anything that someone would be willing to pay them for (after that to die in of starvation a tent in a homeless camp or something along those lines I guess). Have to keep the stock prices going up constantly, nothing else in the world matters . . .
Tobold: "A consumer with no money left, and with his credit card getting refused already, becomes more or less immune to advertising. He might still *want* to buy stuff, but he can't."
I think the people who max out their limit are the least likely people to become immune. They would probably pawn off last week's fancy product or turn to illicit methods to chase the next big thing.
I don't know what is going on with McD or other fast food/eating out/delivery stuff as I'm not the target market but Tupperware being sold at those Tupperware parties is just not really popular and might even be seen as outdated when you could shill overpriced make-up on TikTok.
"If you want the product of your company to be sold to the type of people that are your employees, you need to pay your employees enough so that they can afford your product."
Henry Ford had the advantage of producing an in demand end product. So the employees overlapped with the target audience of the product.
Imagine working the assembly line for aircraft parts or sewage pipes.
How much do you need to be paid to go out and buy those things?
"Advertising doesn't generate wealth, like manufacturing does."
Neither generate wealth. Demand does or when was the last time you bought a VHS? Are those still produced?
"But once the reserves are gone, advertising becomes a zero sum game [...]."
It already is as it is bound to demand. Even if you have tons of money, you won't buy two cars if you only need one. Doesn't matter that there are twenty car manufacturers.
So the conclusion is that AI might be able to better target your product to customers and convince them that it ticks more boxes than the competition.
It might also allow the reverse in that you learn about specific demands and add those to your product.
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I think the people who max out their limit are the least likely people to become immune. They would probably pawn off last week's fancy product or turn to illicit methods to chase the next big thing.
I don't know what is going on with McD or other fast food/eating out/delivery stuff as I'm not the target market but Tupperware being sold at those Tupperware parties is just not really popular and might even be seen as outdated when you could shill overpriced make-up on TikTok.
"If you want the product of your company to be sold to the type of people that are your employees, you need to pay your employees enough so that they can afford your product."
Henry Ford had the advantage of producing an in demand end product. So the employees overlapped with the target audience of the product.
Imagine working the assembly line for aircraft parts or sewage pipes.
How much do you need to be paid to go out and buy those things?
"Advertising doesn't generate wealth, like manufacturing does."
Neither generate wealth. Demand does or when was the last time you bought a VHS? Are those still produced?
"But once the reserves are gone, advertising becomes a zero sum game [...]."
It already is as it is bound to demand. Even if you have tons of money, you won't buy two cars if you only need one. Doesn't matter that there are twenty car manufacturers.
So the conclusion is that AI might be able to better target your product to customers and convince them that it ticks more boxes than the competition.
It might also allow the reverse in that you learn about specific demands and add those to your product.
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