I have observed that the Boards of Directors are increasingly wary of the return they obtain from the funds they devote to ‘marketing’.
I also note that even the commercial directors are feeding these doubts, usually with the invaluable backing of the financial director. It is normal for the rest of the managers to wake up many days with news about audience drops in mass media, or with data about lack of visibility on digital media.
Perhaps many of us involved in marketing activities have allowed ourselves to be seduced by the attraction of our technologies and our wonderful jargon of ‘likes’, ‘tweets’, ‘feeds’, ‘followers’, ‘reach’.
But to reconnect with those skeptical decision-makers one has to be very clear about what they can expect from the budgetary efforts they invest in marketing and in advertising. The answer of this is quite evident: generating more demand for products and services in a quantifiable and transferable format to the profit and loss statements: more prospects, more traffic to the point of sale, more conversions to sales, more turnover, more margin… In short, more ‘cash flow’, which eventually is the blood of the companies and the ultimate goal of any successful brand.
At Data Digitalis we are convinced that ‘marketing’ does generate ‘cash flow’ for companies that have chosen to invest in this major business development resource. This post is about getting less enthusiastic when talking about coverage, visibility metrics, etc… but more passionate when talking about the contribution of marketing to the profit and loss accounts or and to the stock market capitalization of those companies investing in a sustained way in their marketing departments.
Firstly, we will try to establish, with reliable and proven data, that investing in communication and advertising has a positive impact on the profit and loss statement.
Let’s start by analyzing whether advertising generates incremental sales in the short term. This seems to be the case for most brands. Specifically, for 70% of them, according to studies published by J.P. Jones. Furthermore, the study considers that, on average, advertising generates 5% incremental sales in the week following its publication, following the analysis of Professor Roberts, from the UNSW Business School. Such studies also suggest that short-term incremental sales more than double when aggregated over a one-year period. In fact, on average, in the case of major retailers, the direct effect on sales is over 12% per year and up to 29% over three years (see IRI papers)
But what about durable goods or services? Will we see the same effects in the short and long term? Well, it looks like we will, at least according to the Ymedia database. In their services model, they show a short-term impact of about 19% and a 15% long-term effect.
Extrapolating results with larger databases, the conclusion reached by these studies is that in 72% of the cases a positive ROI is obtained and the input/output tables show that, on average, for each euro invested in advertising, a contribution of 1.51 euros is generated to the result in the short term (within the following 3-6 months) and 3.24 euros after three years of sustaining the investment in advertising.
For further reflection, the studies by IRI and Kantar in Spain conclude that investment in advertising reduces the price sensitivity of those categories advertised and therefore makes it possible to sustain price premiums. All indications are that this price elasticity (change in demand associated with price changes) is halved when the category invests above average, while it doubles when it invests below average. To understand us better, in those categories that are more advertised, the drop in demand will not be so affected by deciding to increase prices. And this directly affects the cash flow because a lower price elasticity means greater positive cash flows on the income statement through higher income, insofar as it allows for selling at higher prices. It also shows that an increase of 10 points in the advertising quota reduces price sensitivity by between five and 20 points. Because consumers usually give more value to what they know well.
With regard to brand loyalty, investment in advertising has a direct impact (according to the aforementioned study by IRI and Kantar in Spain), in improving repetition rates and therefore generating more income in the income statement. In addition, sustained investment in advertising leads to sustained sales growth which, due to inertia, continues to occur once advertising ceases, the so-called Base Sale. Studies by Les Binet for the IPA (Institute of Practitioners in Advertising) showed a positive correlation between investment above the market share and the annual growth of this share of Base Sales.
Secondly, what about the capitalization value of the company? The well-known ‘brand equity’ is not an abstract concept of ‘marketing’, it is actually the economic value that brands have, which makes Coca-Cola or Apple worth much more in the stock market than the value of the accounting assets reflected in their books. In fact, more than 70% of the stock market value of the companies corresponds to intangibles. People continue to invest in these companies because they believe that there are real options of greater value that will become tangible realities of future income. But these options must be communicated. Just as an oil company raises the value of its equity when it properly communicates the new discovery of a major well with pockets of oil and high potential for extraction, brands daily make their real options known through advertising. The effect is to increase its brand equity through the perception of its customers of that intangible.
All the evidence obtained in studies and databases is consistent with the reality we live. That is why the vast majority of large companies capable of measuring, in a faithful way, the effect of advertising on their sales use advertising in a sustained way.
Only forward-looking targets will help us increase the bottom line through advertising. Therefore, focusing on increasing our sales figure and not on improving the sales/investment ratio is the way forward. To do this our marketing department must get new customers, not just loyalty and profitability to existing ones. This is achieved through three complementary, although different, lines of work. In Data Digitalis we will provide you with marketing strategies that undertake efforts in all three approaches. On the one hand, capturing new audiences with a clear message. On the other hand, achieving sales in the short term through a differentiated brand and, finally, generating repetition in purchases thanks to an excellent user experience.