Does digital advertising create demand?

What role does digital advertising play in the adoption of mobile digital products? Does advertising motivate people to download apps that they otherwise wouldn’t have without an inducement, or does it simply serve as a demand fulfillment mechanism, surfacing the most relevant products to people on the basis of targeting?

David Ogilvy, in his seminal book Ogilvy on Advertising, published in 1985, writes:

It is often charged that advertising can persuade people to buy inferior products. So it can – once. But the consumer perceives that the product is inferior and never buys it again. This causes grave financial loss to the manufacturer, whose profits come from repeat purchases.

The best way to increase the sale of a product is to improve the product.
This is particularly true of food products; the consumer is amazingly
quick to notice an improvement in taste and buy the product more often.
I have always been irritated by the lack of interest brand managers take
in improving their products. One client warned me, ‘You are too prone
to criticize our products. We could find it easier to accept criticism of
our wives.’

The question about demand creation is germane in the context of iOS 14 and the broader platform momentum within digital marketing towards a privacy-centric, de-personalized ad serving environment. If efficiency is lost in the forced abandonment of ads personalization, will a concomitant — potentially even disproportionate — decrease in consumer spending result? Put another way: if ads are no longer as effectively driving mobile install and in-app purchases, does the consumer spend that is precipitated by personalized ads evaporate, or is it simply routed elsewhere?

Some people argued after WWDC 2020 that privacy controls would not be strictly implemented into iOS14 because any harm inflicted on advertising efficiency would proportionately be inflicted onto App Store revenues, which would in turn harm Apple. Socrates posited that no one would intentionally harm themselves; self harm is committed out of ignorance, not intent. Would Apple undercut its own App Store revenues — part of its increasingly-important services revenue — for the sake of increased user privacy?

It’s important here to consider the dynamics at play when Apple’s new privacy controls go into effect and how they impact Apple’s revenue:

  • Mobile advertising becomes less efficient, meaning App Store revenues decrease (most advertising is done at very thin margins: if efficiency drops, not much profit exists to absorb that drop, and so spend must decrease. I describe this phenomenon in this article). Apple takes less from its 30% platform fee for apps that grow through advertising in this case, meaning its App Store services revenue drops;
  • Apple’s own ad network potentially becomes more attractive, since it offers contextual (versus behavioral) targeting, meaning its ad network services revenue increases. This is supported by the fact that Apple exempted its own ad network from iOS14 privacy controls;
  • Apple regains editorial control over the App Store, meaning it better curates the App Store experience and decides which apps become successful. Apple likely believes it can hand-craft a better App Store experience than what is being delivered now through paid advertising, potentially increasing brand loyalty and adoption, meaning its hardware sales potentially increase. This is a little tenuous, and it is certainly more abstract of a benefit than ad network revenues, but I think it played a major role in Apple’s decision to deprecate the IDFA.

I added a qualifier to the first bullet that must be unpacked:

Apple takes less from its 30% platform fee for apps that grow through advertising in this case, meaning its App Store services revenue drops.

The qualifier is important because it highlights what Facebook, Google et al have become very adept at over the past few years: not creating demand, but routing demand based on monetization potential. Facebook’s auction takes a user’s historical behavior into account when evaluating whether an ad should be exposed to them. If historical behavior didn’t play a part in Facebook’s (and Google’s, and other networks’) auction mechanics, then the deprecation of the IDFA would be immaterial.

What the IDFA facilitates is a real-time events stream from every mobile app back to Facebook, where Facebook uses its visibility into in-app behavior to build monetization and engagement profiles on its users for the purposes of ad targeting. That data helps Facebook connect users to ads for the products they are most likely to spend money in. All of Facebook’s advertising machinery is designed around matching previously-exhibited demand with relevant products.

Obviously new products get launched all the time, and those products are advertised for, but Facebook’s bread and butter is providing advertisers that have built very effective monetization machines (apps, DTC products, etc.) with an avenue to relevant users that have a proven affinity for some type of product. Facebook is able to reach these users with the right messaging, using real-time creative testing against sub-groups of the target audience, at a price dictated by the monetization potential of the destination product. This process effectively front-runs organic discovery: users don’t need to search for products on the App Store because they are exposed to relevant products on Facebook and elsewhere before they perceive any sort of need for what they’re ultimately looking for.

Because Facebook connects users with the products with which they’re most likely to monetize to the greatest possible extent, Apple will lose some platform revenue with the IDFA deprecation, because those optimal connections won’t be made and organic search might produce a lower level of overall monetization.

But monetization won’t go to 0. If ad efficiency drops by 50%, it’s not as if everyone spends 50% less going forward: they might end up organically searching for apps in which they only spend 70%, or 80%, or 90% of what they potentially could.

Because ads aren’t creating demand but optimally routing demand, install activity likely won’t change, it’ll just be driven by an increased amount of organic search. And while that organic search may not link users with the apps in which they’ll monetize most, users will continue to monetize. Demand won’t dissipate with the deprecation of the IDFA and the deterioration of ad efficiency, it will just be served by different fulfillment mechanisms.

Photo by Jess Bailey on Unsplash