Why Companies Spend So Much on Advertising

Coca-Cola spent roughly five billion dollars on marketing in a recent year. Five billion. The company already sells more soda than almost anyone on Earth, in nearly every country, and most people walking past a vending machine already know exactly what Coke tastes like. So what is the money for?

The first answer is the obvious one: advertising tells people a product exists. A new energy drink, a new phone, a new streaming service — nobody can buy something they have never heard of. Economists call this an information problem. Until you fix it, your product might as well not exist. This is why a tiny startup with a great app will often spend its first real money on ads. The cost of being unknown is total.

But Coke is not unknown. So the second reason has to be different. Most large advertising is not telling you a product exists; it is keeping the product at the front of your mind. Think about how you actually choose a drink when you are thirsty and standing in front of a cooler with thirty options. You do not run a careful comparison. You grab the one that feels familiar. Advertisers call this brand recall, and they spend enormous sums to make sure their product is the one that surfaces first. Every commercial during a basketball game, every logo on a stadium wall, is a small deposit in that mental account.

There is a third reason, and it is the most interesting. Advertising shapes what a product means, not just whether you remember it. A pair of sneakers, considered as physical objects, is rubber and fabric. But a pair of Nikes carries something extra — an association with athletes, with effort, with a certain kind of cool. That extra layer is called brand equity, and companies build it deliberately, over decades, through ads that often barely mention the product at all. Brand equity is why people will pay sixty dollars more for the shoe with the swoosh on it. The shoe is not sixty dollars better. The meaning is.

There is also a defensive reason. If Pepsi advertises and Coke does not, Pepsi gains ground. So Coke advertises partly because Pepsi does, and Pepsi advertises partly because Coke does. Neither can stop without losing share to the other. Economists sometimes describe this as an arms race: the spending does not necessarily grow the market, but each company has to keep pace or fall behind.

Does all this spending actually work? Sometimes, clearly yes — a well-known brand can charge more and sell more than an unknown one with an identical product. But measuring the return on a specific ad is famously hard. A department store owner named John Wanamaker is supposed to have said, more than a century ago, "Half the money I spend on advertising is wasted; the trouble is, I don't know which half." That problem has not gone away. Companies now track clicks and views in detail, but separating ads that caused a sale from ads that just happened to run near one is still a genuine puzzle.

So the five billion dollars is buying several different things at once: awareness, recall, meaning, and defense against rivals. Some of it works. Some of it is wasted. The hard part, for any company, is that you usually cannot tell which is which until long after the check has cleared.