The Innovation Deficit Tax: Advertising

By G. Michael Maddockand Raphael Louis VitónMay 26, 2010

Want an easy way to know whether your product or service qualifies as sufficiently innovative to get people talking about it? Look no further than your ad budget.“Advertising is the tax you pay for a bad idea.” — Robert Stephens, founder, Geek Squad

Here’s a startling fact: For what equals a rounding error in most big-brand ad budgets, companies could create a meaningful new product that would eliminate much of the required ad budget, thus saving themselves — while also earning — millions and millions of dollars.

In our experience, many leaders nod their heads in agreement when presented with this concept, then continue feeding a system that advertises too much and invents too little.

Answer this question: How many apps have you purchased? Since some one billion apps were reportedly downloaded worldwide in nine months, we’ll assume that you’re like us and the number exceeds a few. How many of those apps did you download because a friend told you about them or because you “heard” about them online? Conversely, how many did you purchase because you saw an ad? Come to think of it, how many ads for specific apps have you ever seen?

Therein lies our point. Great ideas are increasingly turning viral. We say increasingly because with the advent of techno-charged social media, people can tell each other about their favorite innovation in the blink of an eye, with a click of a mouse. If something qualifies as truly great, you likely will hear about it from your network, not from advertisements.

The flip side of this argument is that if you don’t have an idea that really meets a need in a distinctive fashion, you will need to pay more and more to get it noticed. People won’t do you the favor of passing on ideas that have little to no relevance to their lives. You will, in effect, be taxed in media dollars for what you failed to spend in research and development. We contend that the price of this tax will increase as your relevancy deficit increases.

Innovation Saves Marketing MoneyWhy do we care about how much companies spend on advertising? First, because we see a direct corollary between true innovation and marketing expenses. Truly innovative products typically require a smaller investment in marketing and advertising. Why? Because true innovation means a company has identified a:

1. Significant need

2. Product, service or business model that meets that need

3. Means of communication that connects the two

When you successfully meld these three variables, you don’t need to spend as much on marketing. As we said earlier, good news now travels really fast. Case in point: Have you noticed that the world knows about the next generation of iPads before Apple (AAPL) has made it available? This is similar to how the stock market reacts to “word on the street,” rather than actual company reports. People are sharing news that matters to them with their powerful, growing networks.

Mike Maddock, CEOmike@maddockdouglas.com630.563.6415

A final thought: Around this time for the past six years, we’ve reported the results of an annual research study about the impact of Super Bowl ads. Year after year we’ve shown that most of the ads have minimal impact, despite millions in spending. This year we decided the study wasn’t worth our time or yours.

We were right. Nobody on Madison Avenue is listening. Again this year, the majority of the money went toward ads for beer, diet soda and cars. In nearly every case, the ads trumpeted the benefits of products we already knew about, products that were imitations of something already in the market, or the promise of some upcoming innovation that would eventually, some day, blow us away.

The production values were superb. The gags were great and the budgets were freely spent. Now who wants to tell their friends about the new products? (Insert sound of crickets here.)

G. Michael Maddock is chief executive, and Raphael Louis Vitón is president of Maddock Douglas, an innovation consultancy that helps clients invent, brand and launch new products, services and business models. Maddock is author of the upcoming book Brand New: Solving the Innovation Paradox — How Great Brands Invent and Launch New Products, Services and Business Models (Wiley, April 2011).

The second reason we care is that advertising can be an unhealthy addiction that can often drive organizations out of business. Rather than address the true issue — undifferentiated products and services — companies spend to get the attention of consumers, rather than invest in reinvention. This results in shrinking margins and less differentiation while costing more and more to get noticed. Ad agencies often exacerbate this downward spiral by insisting that more media dollars will solve the problem. Let’s face it: Telling people that they need to buy insurance or else something bad will happen to them is far less desirable than having customers call you to order your new product. When you find yourself pushing a product instead of responding to requests, it often means your addiction has taken over.

Archimedes said: “Give me a lever long enough and I shall move the world.” We ask you to think of innovation as your lever. The bigger the need you are filling, the more novel the solution you create, and the more appropriate the communication, the longer your lever becomes. The longer the lever, the less weight — the less advertising — you need to move the world.

No Innovation? Save Your Ad MoneyWe started this article by saying that for a fraction of their ad budgets, most companies could create innova-tions that would then cut those budgets dramatically. It is absolutely true. And the solution is pretty simple: Don’t advertise until you have invested enough to create a product, service or business model innovative enough to go viral. If you don’t have anything innovative and don’t care to invest to create it, then for God’s sake, stop advertising. At least your business will last longer.

In the social media age, we encourage you to ask the question: “Why do they need to advertise so much?” We also suggest you reexamine your marketing budget to see if you’re spending so much money because your product, service or business model lacks innovative qualities.