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By: Fernando Torres, MSc
The use of popular celebrities in advertising in general is typically an expensive proposition. Its widespread use bears examining from the perspective of the economics of intellectual property; why do firms engage in such large expenses? In our practice, we have kept a close eye on the topic as we consider forming our opinions on rights of publicity litigation, and the economic background of celebrity advertising and endorsement is an interesting one.

Potter to Her Majesty

In Western economies, the practice of associating well known personalities with companies for marketing purposes, to promote brands and products (referred to collectively as “celebrity endorsements”) has a long history spanning the last few centuries. An often quoted pioneer in this practice is the famous eighteen century British potter Josiah Wedgwood, capitalizing on the use of his products by royalty, namely by Queen Charlotte, by describing his business as “Potter to Her Majesty.”

This early use has the same core characteristics as today’s endorsements, such as Natalie Portman’s for Dior perfume.

One in Four

Today, celebrity endorsement is a widespread practice among consumer oriented companies. Research indicates that, at least in the United States, one out of every four marketing programs features some type of celebrity endorser according to Erdogan, Baker, and Tagg, who authored the article “Selecting celebrity endorsers: the practitioner’s perspective” published in the prestigious Journal of Advertising Research (Vol. 41 No. 3, pp. 39-49).

Analytically, it is acknowledged that celebrities are utilized in advertising because they have proven to be much more effective at enhancing a brand’s image and value than other types of advertising such as the use of such archetypical alternatives as:

• The “professional expert” who would have the perceived authority to recommend a product for its technical merits,
• The “company manager” that has prototypically dominated furniture and car sales ads in late night television, or
• The “typical consumer” who recommends a product based on the experience it delivered for him/her.

In the short amount of time a targeted consumer has to notice and consider an advertisement, the immediate recognition of a celebrity is a key attribute for the success of a campaign.  How easily recognizable the celebrity is, and how relevant to the target market demographic of the advertiser are the prime attributes of celebrity endorsements.

One of the most widely known companies using celebrity advertisers is sportswear and equipment supplier Nike®, which typically pays over $500 million annually to a roster of stars which have included Tiger Woods and Michael Jordan. The annual cost of celebrity endorsements represents nearly one-third of Nike’s advertising and promotional expenditures, and according to its SEC filings Nike currently has endorsement contract commitments for $3.8 billion over the next few years.

Cost Effectiveness

The high cost of national advertising campaigns, compounded with the high cost of engaging celebrity participation, raises the question as to how such expenses can be justified, even for well capitalized companies. One answer lies in the direct impact on sales that a celebrity endorsement brings, where higher advertising costs are compensated with higher sales volume. Another rests on the overall positive impact to the companies degree of public awareness and the transfer of goodwill from the endorser to the company’s image. Against the backdrop of the elevated costs of traditional advertising tactics, social media and viral campaigns clearly have signaled a new paradigm in celebrity endorsements, such as the soon-to-be-classic Old Spice YouTube and Twitter interactive campaign using Isaiah Mustafa.

As various researchers have pointed out, it is clear that advertisers generally believe that advertising messages delivered by celebrities provide a higher degree of appeal, attention and possibly message recall than those delivered by non-celebrities, as Menon, Boone, and Rogers, point out in their paper “Celebrity Advertising: An Assessment of its relative effectiveness” (University of Central Arkansas).

In this regard, various studies have established the positive impact of celebrity advertisements on companies’ expected future profits, which lends objective, market-level support to use celebrity endorsers in advertising. The statistical significance of the profit boost gained by companies from such ads has been demonstrated in empirical studies. In essence, publicly traded companies using or announcing endorsements have been shown to experience a boost in their share price performance above what the market and their current financial prospects warrant, i.e. they gain an abnormal market return boost.

Based on a study of 1980-1992 U.S. publicly traded companies announcing contracts with celebrity endorsers record, on average, a gain of 0.44% excess returns in their market value. This empirical study was reported by Agrawal and Kamamkura in the article: “The Economic Worth of Celebrity Endorsers: An event study analysis” published by the Journal of Marketing, (Vol. 59 – July 1995).

Take Away

Therefore, even when expensive, celebrity advertising and endorsements are used by advertisers because they are seen as a profitable investment with immediate and longer-term effects. In our practice we have seen that, when a celebrity’s name or image is used without consent or without paying fair market value, the entity making such unauthorized use is essentially benefiting from free access to the consumers that make-up the celebrity’s fan base.

Author: IPmetrics