Marketing Economics: Digital Marketing Is The New Costly Signal

The economist Michael Spence’s groundbreaking work on costly signaling in the job market demonstrated how advanced degrees could serve as an accurate signal of candidate ability, because more qualified workers could acquire the “costly signal” at lower cost than unqualified ones. External forces, like the proliferation of MBA programs, can devalue a costly signal over time. Marketing has undergone a shift in its signaling system. In traditional advertising, the high cost of media exposure signals legitimacy, irrespective of content. This was the costly signal of of recent, but with the Web itself introducing disruptions into this traditional costly signal, as entities like Google, have made the popularity of content as a condition of exposure. Digital marketing extends popularity-based signaling into a systemic form, in which marketers are learning new rules for gaining exposure. This has provided new opportunities for upstart brands, as well as significant disruptions and adjustments for many traditional brands.

Shaking handsSpence’s work has been particularly focused on how signals convey information in asymmetrical games, i.e., when one party can’t directly know everything they need to know about the other party in order to make their best decision. Spence’s work on signaling focused on the knowledge asymmetry between new job seekers and employers – a scenario rich with the kind of conflicting and overlapping interests that game theory thrives on. In the job market, potential employees seek to sell their services to employers for some wage, or price. Generally, employers are willing to pay higher wages to employ better workers. While the individual may know his or her own level of ability, the hiring firm is not (usually) able to observe such an intangible trait — thus there is an asymmetry of information between the two parties. Education credentials can be used as a signal to the firm, indicating a certain level of ability that the individual may possess; thereby narrowing the informational gap. This is beneficial to both parties as long as the signal indicates a desirable attribute.

The leap I wish to make is this: traditionally, advertising has functioned as a form of costly signaling. As with education, the signal is clearly not advertising’s only function, but it is an important one. In the case of traditional advertising, the signal is legitimacy; the cost, exposure on high-end mediums. The mere presence of a brand in a high-cost media venue signals the brand’s prominence within its competitive marketplace. The content of the ad itself is less important. A luxury car that appears in a high-end magazine may not be reaching its audiences in the most cost-efficient way, but the act itself creates an equilibrium that isn’t measured in dollars. This act signals the car’s suitability to its high-end audiences, regardless of the quality of the car. Just as costly signaling is not merely convenient but essential for the recruiter faced with candidates of unknowable productivity, consumers come to rely on costly signals quite heavily in the absence of other information.

But as Spence showed, costly signaling itself is a constant, even as its terms may evolve; it gets disrupted by external factors (like the growth of the web and digital marketing), but ultimately a new equilibrium takes hold. The “costly” part of costly signaling is almost never a meter of pure capital; it is comprised of all of the efforts the signaler (the brand) must make to convey a particular status to the receiver (consumer). And for equilibrium to occur, these costs must be worthwhile, i.e., they must produce a return.

We are in a highly disruptive period, with a very high signal-to-noise ratio, as brands and consumers attempt to figure out the rapidly evolving primary currency used in costly signaling. The current condition of the primary currency used in costly signaling places some players in a position with more access than others. This anxiety among brands as to how to “monetize” digital marketing springs from this uncertainty about how to make it provide a reasonable rate of return as a costly signal.

The evolution of the primary currency used in costly signaling can be traced back to when Google changed the costly signal currency. Traditionally search engines focused mainly on the relationship between terms that users search on and the density with which those terms appear in the page content, as a way of assigning privilege or authority. A page with a lot of content about alternative fuels was deemed by the engine to be more valuable than a page with very little content, and so on. Google changed this currency by introducing popularity as a major currency in its costly signaling requirements. In an effort to build an algorithm that more closely aligned with what a given user is actually looking for, Google assigned weight or authority to the content’s popularity, i.e., how important other users judged the content to be. The change shifted to a constant evolution, and ultimately a highly disruptive period, as brands and marketer’s attempt to game Google’s system.

In order to protect its stake in the stability of popularity as a costly signaling currently, Google manually seeks out and de-ranks gaming schemes, urging brands and marketers to follow the virtuous but arduous path of simply making better content that can, in turn, become more popular:” The best way to get other sites to create revenant links to yours is to create unique, relevant content that can quickly gain popularity in the internet community.” In other words, pay for the costly signal.

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