FINDING THE OTHER HALF

The Idea That Advertising Doesn’t Pay May Be More About Packaged-Goods Than It Is About Advertising.

By Erwin Ephron & Gerry Pollak

A cliché is a Truth grown too familiar. The most damaging cliché to advertising is “I know half my dollars are wasted, but I don’t know which half.”

That’s the Curse of Lord Leverhulme, part joke, part dare.

In fact, “half the dollars wasted” is generous if the measure is sales response. Campaigns that measurably increase sales are outnumbered by campaigns that don’t by at least two-to-one.

Since we’ve been unable to prove Leverhulme wrong, we’ve shifted the focus to vague longer-term benefits like “building brand equity.” But we haven’t stopped trying.

The sharper analysis made possible by marketing-mix modeling hasn’t seemed to help. The celebrated Adworks 2 (1999) showed the TV advertising of the top 10% of consumer packaged goods (CPG) brands paid back about 32 cents on the dollar (our approximate calculation from their numbers). And most marketers consider CPG brands to be expert advertisers and Television to be the most cost effective form of advertising.

But are half of the dollars actually wasted? We doubt it.

Almost everything we know about sales response to advertising comes from decades of analyzing consumer packaged goods (CPG) brands on Television. That may not be the place to look.

CPG brands are a minor part of advertising, (only 16 cents of each national ad dollar). They operate in mature consumer markets characterized by known brands and intense competition (which means they often advertise just to hold place). There is little product differentiation. They are small in dollar volume. And most of their advertising is concentrated in a single medium, Television.

Could we learn more by looking at other categories? Might not advertising produce greater returns for brands in growing markets where news and information are important to the sale, for example Rx drugs, Finance, Electronics, Retail, Movies?

Could the idea that “advertising doesn’t begin to payback short-term” be more about packaged-goods than it is about advertising?

A New MMA Database

Fortunately, MMA, the leading marketing-mix modeling firm, has the beginnings of a database that can help us look at these questions. It includes categories other than CPG. The measure used is the modeled one-year contribution of advertising to total brand sales, minus the costs of goods, divided by the cost of the advertising. It is the equivalent of advertising-delivered “profit before taxes”. We call it “Payback”.

The results of the analysis are encouraging. The Non-CPG brands studied, on average, return 87 cents in profit for each advertising dollar spent. This is substantially better than the average 54 cent payback of the CPG brands in the database. But on average, it is still not a positive return (Table 1).

Table 1. Advertising Payback by Category

Distribution Of Media Payback

Digging deeper into the data, our 45-brand sample displays a fairly even distribution of paybacks (Chart 1). When the brands are identified, it becomes apparent that the high payback group contains a higher concentration of Non-Packaged Goods. In fact, 10 of the top 15 brands ranked on payback are Non-CPG. Furthermore, six Non-CPG brands (of 20) pay back in full while only one CPG brand (of 25) accomplishes this.

Distribution Of Media Payback

Among the media used, Television had the lowest payback for both CPG and Non-CPG brands. Magazines performed substantially better. Radio results, although good, were too small a sample to be reliable. For every medium, Non-CPG brand payback was higher than for CPG brands (Table 2).

Table 2. Advertising Payback by Medium

Payback By Brand Size

Another area of inquiry was the potential effect of brand size on payback. There are economies of scale accruing to large brands, which could make advertising more profitable. Since individual packaged-goods brands are small, those economies of scale might contribute to higher advertising payback for Non-CPG categories.

Table 3 (see page 6) arrays the Non-CPG brands by size (ascending), showing total brand dollars and payback to advertising. The pattern is clear. Payback correlates directly with brand size. The largest third of the brands show a positive payback ($1.48). Advertising pays back in the short term for each of the four brands with more than $1 billion in sales.

A similar pattern of higher payback to larger brands is visible in the CPG database, but CPG ad payback exceeded cost in only one case.

Table 3. Non-CPG Brands. Payback by Brand Size

Summing Up

At the start of this paper we asked, “Is the idea that advertising doesn’t pay short-term more about packaged-goods than it is about advertising?” After all, packaged goods brands are unusual. They operate in mature, highly competitive markets, concentrate most of their dollars in TV, and tend to be small. None of this, we believed, is conducive to high returns.

It was our contention that brands in growing markets, where news and information were important, would show greater immediate advertising response, as would brands using media other than Television, as would larger brands.

Our analysis of MMA data found that advertising delivers positive short-term paybacks for six of the 20 Non-CPG brands, but for only one of the 25 CPG brands studied. It showed that positive payback correlates strongly with brand size, and it found that Magazines pay back more than Television at current budget allocations.[2] These results are cautioned by the relatively small number of cases in the database.

The Importance of Short-term Effects

Why are short-term effects so important? Certainly, they do not fully capture the payback of advertising. There is good evidence that first-year payback more than doubles over time through heightened awareness, saliency and repeat purchase. Yet the idea that you plant today to reap tomorrow is far less satisfactory than earn-as-you-go. It leaves advertising as an easy cut when dollars are tight.

The inability to demonstrate a positive or prompt return feeds the attitude of many financial managers that advertising is less a tool for growth than an irritating cost of doing business.

Our analysis suggests the conventional wisdom that advertising does not pay in the short-term because its important effects accrue over time isn’t wrong, merely incomplete. Advertising does have the ability to generate positive immediate returns for dollars spent. The exception to this seems to be when we focus on packaged goods and TV. Today this is a small and shrinking part of the business.

Perhaps Lord Leverhulme is smiling.

[1] Excerpted from a paper co-authored by Gerry Pollak of MMA (Marketing Management Analytics) presented at the ARF/ESOMAR June 2003 Conference in Los Angeles.

[2] The data show that shifting dollars to Magazines will improve ROI, with two important caveats. First, there appear to be decreasing marginal returns as the dollars spent in a medium increase, which suggests that more dollars would re-duce Magazine ROI. Also most brands in our database using Magazines also used TV so it is yet to be determined what would happen to payback if Maga-zines were used alone.

- July 1, 2003 -

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