Right now, everyone is talking about ways to optimize advertising and marketing budgets in an economic slump. Karl Weaver, director of the UK-based marketing consultancy Data2Decisions Ltd and former worldwide managing director of media specialist MindShare’s Advanced Techniques Group, has some thoughts on this.
Data2Decisions’ research has shown that market size plays a lead role in increasing the short-term profits generated by advertising and, on average, can help multiply profits by 16 times.
Creative execution is the second biggest determinant of an ad’s profitability and how people respond to advertising in terms of their purchasing behaviour, and can multiply profits by 10 times.
Weaver explains, “Regarding market size, I am specifically referring to the market opportunity available to a brand.” A brand operating in a big market will find it easier to generate profit from marketing than a brand in a small market because the potential is so much greater, he says. “Our calculations two years ago for the UK market revealed that for an average ad to generate a short-term profit for an average brand, the market opportunity has to be around £2 billion (Rs15,340 crore) per year.”
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He says that most statistical models for testing the efficacy of advertising in the last two decades have been for small consumer goods markets, especially since there is a lot of data available for these markets. This has resulted in the biased opinion that very little advertising is profitable in the short term.
Creative execution is also absolutely critical, particularly as this is a lever that marketers can influence quite significantly. “We recently measured advertising return on investment, or RoI, in the range $0.90 (Rs43.74) to $5.20 back (return) per $1 spent on advertising for a major FMCG brand, the difference being almost entirely attributable to the creative impact,” says Weaver. And in businesses such as retail, the RoI range is generally greater.
At another level, companies use price promotions as a short-term tactic to generate sales. It’s important, though, to optimize the ratio of promos to ad spending. Weaver makes an interesting point: Brand advertising and price promos can cancel each other out if the advertising is run after a promotion.
Weaver explains his point on timing with the example of one brand. The brand in question was relatively small, so it achieved additional shelf space at retailers when it was on promotion. When it came off promotion, it lost the space to competitors.
However, at that point the brand had a tendency to advertise. So, consumers who saw the ads were likely to have stocked up (the product was on promotion, after all) or driven to the store to find that only the competitor’s product was available and bought that instead. In this example, the effectiveness of the ads was completely cancelled by the promotion. Worse: The advertising helped generate sales for competitors.
Optimizing advertising and promotions is essential but finding the right balance is tough.
Weaver agrees and says that in the current climate of increasing economic uncertainty, some brands will find it hard to justify advertising to the same extent, particularly if the investment only pays back over a long period of time and cash is required sooner.
“Carefully targeted promotions can bring money to a brand quickly and may be a necessity in order for a business to survive. Stronger brands may also choose to ‘promote’ in an attempt to win market share and put weaker competitors out of business permanently,” he says.
Media specialists such as Weaver and Shashi Sinha, CEO of Lodestar Universal Pvt. Ltd, say that the balance of spend is inevitably going to shift towards promotions, at least until the economic picture is clearer. Sinha reckons that other than a psychological impact, ad spending hasn’t really been affected till date and that the real impact should kick in after a few months.
That’s when many advertisers will forget esoteric terms and look at hard-core price promos to push short-term brand sales.
It’s no secret, though, that promotions can erode brand values in the longer term while brand advertising builds values. The bigger issue is that brand values are not really featured in price promos.
The true value of advertising is only apparent, however, when we consider the long-term impact. Many practitioners have investigated the long-term effects and typically quantify it as a multiple of the short term.
A 2006 paper co-authored by Data2Decisions directors Paul Dyson and Weaver for Admap says their experience suggests that the total advertising impact on sales is typically three to five times the short-term impact.
Final takeaway: In tough times, it pays to be smart to survive in the short term and yet get long-term dividends.
Marion Arathoon is Mint’s advertising editor. Your comments are welcome at firstname.lastname@example.org