Why advertisers pay more to reach viewers who watch less

A new study finds that viewers' income and likelihood of buying a product are not the factors that determine how much it costs to reach them— it's how active they are on the platforms where the ads run.

Television advertisers consider men between 18 and 34 a coveted demographic—they'll spend as much as three times more to reach them than they will on women and older adults. Online, it's just the opposite. On platforms such as Instagram and TikTok, older audiences can be more expensive to reach.

These price discrepancies may seem puzzling. Young men's purchasing power is not any greater than that of older adults. Shouldn't digital advertisers go after the younger people who live online? Yet that's not how media ad prices are set: Viewers' income or likelihood of buying a product is not the biggest factor—it's how much time they spend viewing the content where the ads run.

More active audiences command a lower advertising price per impression, while groups that don't tune in as often cost a premium to advertise to, because they're simply harder to reach. So advertisers pay more to reach the young men who watch TV infrequently and the older viewers who stream fewer videos or shows.

That's one key takeaway from a recent paper by Stanford Graduate School of Business researchers Ali Yurukoglu, Matthew Gentzkow, and Frank Yang, Ph.D. The study is published in the journal American Economic Review.

"In this advertising market, it is not purely a demand story; it's a supply story," Yurukoglu says. "What's being sold are the eyeballs of the consumers. Data show that there are fewer young eyes on sale for TV because fewer young people watch TV. And older people are more scarce online."

The Stanford researchers and Jesse M. Shapiro of Harvard adapted an existing economic model of competition in advertising markets and tested it on advertising data. This model explains around 35% of the money that TV and online advertisers pay to reach people across different groups. The researchers believe they are the first to quantify the relationship between an outlet's ad pricing and how active various segments of its audience are.

"Since a huge part of the economy now is powered by advertising, it's really important to know how valuable—and why—different consumers are to advertisers, because that has a huge impact on what kinds of products and content are produced," says Gentzkow, a senior fellow at the Stanford Institute for Economic Policy Research(SIEPR).

It's this scarcity factor that helps to explain the price differences, he says. The researchers' model sheds light on why, for example, a 30-second televised spot during the 2024 Super Bowl cost advertisers $7 million. Companies paid this astronomical price because among the more than 100 million Super Bowl viewers were many people who rarely watch TV.

"Those are scarce eyeballs," Yurukoglu says, "and the Super Bowl is your way to reach them."