Should marketing be taxed?
Pete Lunn, author of Basic Instincts, suggests we should benefit from having to suffer sales messages
I am about to ask a question that will at first appear trivial, but contains the kernel of a debate that is changing our understanding of economics.
Discovering the right answer may also have profound effects for how we think about the role of marketing. Some answers to this trivial question even imply that marketing activity ought to be subject to a tax. Indeed, this is the argument I will make.
Here is the question: why is it that when I go to my local supermarket in Dublin, the plastic-wrapped chickens lined up in the meat section are stamped with an Irish flag and labelled “100% Irish”? Leaving aside the issue of how a chicken could possibly be 70% Irish, this phenomenon can only mean that marketing people in the meat trade have discovered that chickens sell better when they fly the flag. But why?
Perhaps consumers have a rational reason to prefer Irish chickens over British or French ones – traceability, traditional methods or something. But when I go to visit my parents in Britain, I discover the chickens in their local supermarket sport a union jack. And when on holiday in France, I see trussed and packaged birds emblazoned with the red, white and blue tricolour. Irish, British and French chickens can’t all be superior quality. Let’s try some alternative explanations.
Perhaps, in our greener age, people have become concerned about air miles and prefer to buy local. But this particular marketing trick predates concern about air miles, so that can’t be it. Maybe consumers think a local chicken is likely to be fresher. But freshness is more dependent on storage and supply chain holds-ups than distance from origin, so that makes no sense either.
So why does the purchase of poultry display apparently naïve nationalism? Later in this article I will provide an explanation based on a relatively new school of thought in economics. “Behavioural economics”, as it is called, is shaking things up in my profession. And one of the areas it is most likely to rattle is marketing. But before revealing why behavioural economics is changing minds, it is useful to consider how marketing fits into the bigger economic picture.
For any individual company, marketing is an essential and important activity. No firm can be blamed for marketing its products as effectively as possible. But, for the economy as a whole, marketing can be a force for good or ill. On the one hand, it can provide useful information about products: availability, quality and market position.
From this perspective, marketing helps consumers to make better, more informed choices. On the other hand, marketing may persuade people to select products that are not the best value, but are merely the best marketed. This alternative perspective sees marketing as a more malign force; one which can distort markets, dupe consumers and add to costs and hence prices also. This second perspective arguably fits more easily with an irrational consumer bias towards chickens that carry the national flag.
Furthermore, the role of marketing in our society does not begin and end with its effect on what we choose to buy. We also have to put up with it. Surveys routinely show that the public has a negative attitude to marketing activity. We find junk mail an irritant, we think billboards blight and we switch stations to avoid boring and repetitious adverts. Even those few ads that are clever or funny struggle to be clever or funny on tenth viewing. We can’t go for a day in a modern economy without being exposed to marketing messages.
Adverts litter junctions and bus stops, cover packets and wrappers, clog all forms of media. Even if we don’t leave the house, brand names, logos and taglines are on products we already own. Short of stripping off and sitting naked in the middle of a desolate moor, marketing people are constantly communicating with us – a ubiquitous presence in modern life.
Put simply, marketing is a pollutant; an undesirable by-product that accompanies the production of the vast array of goods and services available to modern consumers. So why does society not treat it like other noxious by-products, such as waste, emissions or smoke, by taxing it?
The answer to this question is that, on balance, the view has been taken that the benefits outweigh the costs. The positive perspective on marketing activity has been adopted over the negative. Economists have played their part in this. It is no exaggeration to say that traditional economics is based on the idea that people are essentially rational, selfish and independent.
Applied to consumers, this means that the consumer knows what is best for them and that companies only succeed by satisfying consumer needs. In short, the consumer is sovereign. Indeed, these assumptions about economic behaviour are absolutely essential to the core belief of free-market economics: in the absence of impediments, markets efficiently deliver the goods and services people want. Because the idea that consumers take rational decisions is at the heart of so much traditional economic theory, economists have been inclined to reject the view that marketing persuades people to buy things that are not in their own best interests.
Indeed, when marketing methods are criticised, as regularly they are, this absolute consumer sovereignty espoused by economists is asserted by practitioners too. After one particular bout of criticism, the American Association of Advertising Agencies proclaimed that adverts don’t persuade us what to buy, because only we decide what to buy. Amusingly, and without a hint of irony, it chose to make its case by turning that very message into a series of adverts.
Nevertheless, for those inclined to believe the message, there is some explaining to do. For a start, the history of advertising is hard to square with the idea that it improves consumer decision making. Nineteenth century adverts tended to quote prices, describe goods and explain where to get them. An early advertiser in 1860s New York was B.T. Babbitt, supplier of household goods, or “articles of everyday use”, in Babbitt’s words. By today’s standards, Babbitt’s ads were like reading an essay, with about fifty lines of text and a dozen listed prices.
But, in a sign of things to come, Babbitt’s soap powder was “celebrated”, its unlikely promise was “washing without labor”, and above the text was the tagline “to meet the wants of families”. Nevertheless, the main emphasis was on supplying information, making consumers aware of products, prices and availability.
But as advertising evolved, it became clearer what worked. By the end of the nineteenth century, less priority was given to information and more to persuasion. Newspaper and poster ads honed in on methods that have changed remarkably little since. Images were bold, colourful and eye-catching. Text was kept to a minimum.
The aim was to deliver a crisp message with which the consumer might identify. Thus, posters for AutoMatic in the 1920s provided just one reason to buy their Model 20 washing machine: the working man should “Be a real Santa Claus to the wife”. With appropriate updates to image and sexual politics, the same ad could appear today.
Observing this evolution of the advert at the beginning of the twentieth century, some economists began to worry. It troubled the great English economist, Alfred Marshall, who arguably invented the concepts of supply and demand. Marshall thought billboards didn’t provide consumers with useful information but appeared instead to be straightforwardly persuasive.
He therefore considered advertising to be a competitive weapon, which transferred custom from one business to another, but was of no benefit generally. Once one firm in an industry spent on it, so must the rest, meaning higher costs, higher prices and tough times for new businesses trying to break into a market. Marshall concluded that advertising was wasteful.
Disinclined to believe that marketing produced irrational consumer choices, most economists in Marshall’s day clung to the view that marketing wasn’t really very effective. If this had turned out to be true, then the rather odd implication would have been that almost all the world’s major companies were routinely wasting vast sums of money.
Of course, we now know it is untrue. Marketing works – at least on average. Although campaigns vary greatly in effectiveness, marketing tends to increase sales, occasionally substantially. The amount a firm spends on marketing activity is one of the better predictors of company profits and survival. These are established empirical facts. Hence, any economist wanting to cling to the view that marketing does not persuade consumers to take irrational decisions needs to explain why marketing does not prioritise product information and why supposedly rational consumers respond to it.
The most common explanation my fellow economists cite is that the information exchanged between company and consumer is merely subtle. Two arguments predominate. First, simply by spending large amounts of money marketing their product, a company sends a signal that it sincerely believes the venture will be a success – it puts its money where its mouth is. Expensive marketing is code for: “Our product is good enough to get back the money this campaign cost and more”.
Thus, a rational consumer can infer from an expensive campaign that the product is likely to be good quality. Second, marketing can be used to convey market position. Imagery, characters, language and endorsements, can all signal that the product is aimed at a particular section of the population. This helps rational consumers to find the items most suitable from among the ever-expanding range of available products.
This is the way most economists have conceived of marketing for decades and there is, doubtless, some truth in it. But economics is changing. Indeed, for some, including myself, the change is nothing short of a revolution. Instead of assuming that people are rational and seeking to explain the world on that basis, behavioural economists have begun to conduct economic experiments and field studies that test whether people really are rational. The results, rapidly acquiring the status of classic studies, are revelatory.
Our economic decisions are, in fact, far from rational. For example, behavioural economists have uncovered a series of biases in our decisions that reveal a strong bias towards anything familiar. The most basic demonstration of this is the “mere exposure” effect. Experiments show that we will choose one product over another simply because we have heard of it, in the absence of any reason to think it good or bad.
Then there is the “endowment effect”: we value something we already own more something we don’t, even when it is apparently the same object. Similarly, “status quo bias” refers to a range of effects where we are biased towards the products we already consume, even though there is no rational reason to think them better than others. And we suffer from “belief perseverance”, whereby it takes a disproportionate amount of evidence to alter a preference once we have found reason to adopt it. In summary, when selecting what to buy, we choose what is familiar, will pay more for what is familiar and have to be compensated to accept anything unfamiliar.
Armed with these experimental results, it is not hard to relate them to tried and testing marketing techniques. “Three for two” offers are a compensation for switching to an unfamiliar brand. Endless repetition of logos, taglines and jingles, even though consumers find it irritating, makes a brand more familiar. Staff trained to use the customer’s name immediately increase familiarity. And have you ever played the game of trying to recognise the voice on an advert? Why do advertisers frequently use a celebrity voice but not identify the celebrity? What they are really after is not an endorsement, but the feeling of familiarity.
A systematic bias towards the familiar is just one apparently irrational consumer bias uncovered by behavioural economists. There are many others and, for each, there appear to be marketing techniques designed to exploit it.
Experiments show that we tend to use an initial price for something as an “anchor”, judging other prices relative to it. Marketers try to establish the recommended retail price as normal. Behavioural economists have shown that we have a disproportionate dislike of risk and uncertainty. Free trails and money back guarantees prompt consumers to be make more adventurous choices. Laboratory studies reveal that we are less rational when aroused. Sex sells. I could go on, but will limit myself to just one more.
Experiments show that our economic decisions are strongly influenced by group identity. We are more inclined to cooperate and trade with people we perceive to belong to the same group as us, even when we don’t know them at all. So there you have it: stamping a chicken with the national flag makes people more inclined to buy it.
Part of the revolution occurring in economics is abandonment of the assumption that we are rational in favour of the view that we display systematic irrationality. It is becoming impossible to conclude anything other than that marketing persuades makes us buy things we would not otherwise buy, for reasons that are frequently irrational. Maybe it sometimes helps consumers to reach better decisions. But a large volume of marketing exploits proven biases in the way we make choices.
These insights change the balance sheet. It is much easier to put up with the ugly billboards, the junk on the doormat, the cold calls, the “oh no not this one again” adverts, the distracting images, the insincere sponsorships, the logos, more logos and yet more logos, when the belief is that this humdrum mass of marketing makes the economy function better. But this belief is buckling under the weight of evidence.
Like other undesirable by-products of the production process, marketing should be subject to a tax. This would reduce its volume and compensate us for the fact that, while marketing is essential for individual companies, across society as a whole its balance sheet is in the red.
Furthermore, a marketing tax would not suffer from some of the negative things taxes tend to suffer from. It is almost impossible to have a black market – hidden marketing is pointless. Nor can the industry relocate overseas to avoid the tax, which could be levied where the communication takes place. New entrants in markets could be exempt for a period, to give them a chance to compete with established brands. Some of the revenue raised could fund objective information sources, such as research to test the quality and reliability of products, to verify marketing claims, or to protect consumer rights.
Thus, firms trying honestly to push good products would be happy to pay the tax.
It is in the nature of revolutions in thought that radical, previously inconceivable ideas emerge. Marketing professionals spend forty hours a week devising unsolicited messages that influence decisions we take in less than forty seconds. It is time to demand something in return.
Pete Lunn is an economist and the author of Basic Instincts: Human nature and the new economics (Marshall Cavendish, 2008).