Learning, Sophistication, and the Returns to Advertising: Implications for Differences in Firm Performance

About this event

Why do establishments exhibit wide variation in their productivity and profitability? Can variation in returns to advertising help answer this question? We present results from a large field experiment on Facebook and Instagram that documents variance in advertisers’ ability to generate returns to advertising. We focus on campaigns aimed at boosting sales and tie advertising expenses to revenues for each advertiser. We find that spending on advertising led to significant increases in revenues, number of purchases, number of purchasers, and number of conversions. The heterogeneity in these results by expenditure, age, and engagement documents patterns consistent with learning by doing and variance in how sophisticated advertisers are. Advertisers who engage in more learning activities and more sophisticated data collection exhibit the highest returns and are more likely to continue their activities over time, suggesting that differences in advertising effectiveness may account for some of the variance in productivity across firms.