9 - Advertising and ROI
The topic of return on marketing investment has been the subject of focus for many years, and the author feels it is of particular importance today. Given that the long-term recession has companies carefully considering expenses, it is all the more important for the marketing department to demonstrate that it is paying its way.
Marketing ROI
The problems with measuring the ROI of marketing initiatives starts with the very instruments by which marketing is measured and follows through to the way that the measurements are interpreted. There is no accepted common system for measuring the impact of marketing.
While the cost of marketing activities can be calculated and projected, the second part of the equation is the total amount of revenue that these activities produce, which is subject to a great deal of speculation. Consider that:
- One cannot measure the revenue of marketing based on new customers alone, as this is taking for granted that existing customers will continue to purchase without marketing
- Marketing may be long-range, such that expenses in the present fiscal quarter may not have an impact until several quarters (or years) in the future
- Demand for product is not the sole product of marketing, as consumers are influenced by many factors that are beyond the firm's ability to control
- Easily measured factors such as audience size have little influence on the results of marketing (there is no stable conversion rate for all marketing campaigns)
The lack of a standard measurement for marketing works to the disadvantage of marketers - who not only need to defend their numbers, but must defend the way their numbers are calculated, such that it all seems like smoke-and-mirrors in comparison to other business units, such as operations, who have much stronger and more standardized means to predict the outcomes of their activities.
Advertising in times of recession
The traditional goal of advertising is more long-term: to increase familiarity and positive sentiment that may not result in an immediate sale, but would improve the prospect of gaining business in future. During times of economic crisis, there is often pressure to address the firm's short-term need for revenue, with pressure to divert funds from advertising to sales promotion. But does reducing advertising really serve the interests of the brand?
The author refers to a review (Tellis 2009) of advertising expenditures and revenues that considers a number of economic cycles over a 75-year period. As might be expected, cutting advertising spending results in a drop in sales, regardless of the economic environment. Generics and house brands appear to have an inverted cycle - but this is merely because customers purchase house brands when they have no brand preference, hence any drop in preference to a national brand is a windfall for house brands.
Brands that advertise during economic downturns tend to preserve market share (and sometimes, to grow it) in times of economic hardship as compared to brands that switch to a sales-promotion tactic, even to the point of experiencing market share growth. Again, this may be the result of winning by default - i.e., when competitors cut advertising and customers lose preference, these customers switch to another brand. This is the chief argument for advertising as aggressively, if not more aggressively, during an economic downturn.
It's also suggested that economic difficulty winnows out the smaller players - who panic and reduce spending to acquire and maintain customers in order to divert funds to less critical areas of the business. However, this scales to companies of any size: while a large firm has more capital, it stands to suffer a proportionally large loss to its revenue if advertising is reduced.
It's also suggested that brands that maintain an aggressive advertising strategy during economic recession receive a lift in market share that persists for several years - and correspondingly that brands that reduce advertising may take several years to rebuild their market share. A direct quote from one study: "Cutting advertising budgets in times of recession can have a negative effect on sales, both during and after the recession."
A separate study (Steenkamp 2011) considers a group of 1,175 US companies over a period of three decades, conclusion that increasing advertising share during a recession has a strong influence on the financial performance of a firm (both revenue and stock market performance). Procter & Gamble serves as an excellent example, as they significantly increased their advertising efforts during the Great Depression of the 1930s and emerged as a leader in household cleaning products, a position it holds to the present day.
Advertising and Investors
While advertising activities are primarily directed toward the purchasers in a market, it also stands to reason that it has an indirect effect on the financial markets: the belief that a company will be successful in growing its market share through advertising leads to an expectation of greater revenue and better financial performance of the company as a whole, which makes its stock and other investment vehicles more appealing to investors.
However, this is not as straightforward as it seems: investors take different perspectives as to their preference for short-term versus long-term profitability of their investments. The long-term investor is more concerned with slow and sustainable growth, whereas the short-term investor wants as much of a return as soon as possible and shows little concern for the long-term sustainability of the firm.
As short-term investors gain greater control within a firm, their demands guide management in business decisions. A marketing director under pressure to prove his worth by generating short-term results may focus on quick-fix solutions, in the form of sales promotion, indifferent to the damage that is done to long-term customer loyalty.
(EN: The author hems and haws a bit over the debate whether investors are short-term or long-term in their perspective, but the point is moot. There will generally be both in the market, and an individual's preferences will change over time. As such, a firm must make a largely arbitrary decision as to which kinds of investors it wishes to attract.)
The author presents a study that suggests that advertising correlates to movements in share price over a lengthy period (ten to fifteen years, depending on the product) but does not show a short-term correlation. The researchers suggest a delayed-reaction effect because the bulk of advertising cost is incurred before ads are run, and because investors have no advanced knowledge of a firm's advertising plans but react to what they see in the same manner that consumers do.
(EN: This seems a bit like torturing the numbers to get them to confess to a hypothesis, but it is also rather plausible. I'd be more convinced by a study that correlated movements in share price to the publication dates of advertisements, but that does not seem to exist.)
Advertising versus R&D
In many instances, the marketing department finds itself in competition with product research and development - as both are significant cost centers that have a tenuous connection to revenue and market share: it is claimed both are necessary to remain competitive, and both are treated as discretionary expenditures because they have no effect on the immediate demand for product, but promise to sustain or improve demand in future. So during times of crisis, they are often first and second on the chopping block.
While decision-makers seem to be more protective of their R&D budgets, this is entirely irrational: "research" has demonstrated that R&D is a far more risky proposition than advertising in terms of earning a return on investment because it is so often misdirected to the creation of products that consumers do not want, whereas advertising attempts to tap into desire for a product that has already proven its value in its existing form.
(EN: This seems very sketchy, and I expect that it depends a great deal on the type of activity. R&D to enhance an existing product is less risky than developing an entirely new product. Advertising to increase share in an existing market is less risky than attempting to enter a new market. So I do not expect there can be generic "rules" about which of the two carries greater potential or risk.)
Strong brands have added financial value
Research is presented that indicates that firms that undertake greater advertising expense to build a brand have better performance in terms of profitability and share price than those which do not (Madden 2002), based on a comparison of the "most valued brands" and others between 1994 and 2001.
It's also suggested that a strong brand is an asset unto itself, as a brand that has gained consumer trust can be extended to facilitate the introduction of new products as well as maintaining customer loyalty to existing lines.