The business case for ad budgets – in language the business understands

Head of International Effectiveness, Mike Campbell, reflects on the impact of the work that we do in partnership with both national and transnational advertising industry bodies. By helping to up the marketing effectiveness game of the CMO – and by ensuring the CMO speaks the language of the CFO – Ebiquity’s research-led thought leadership content, based on industry good practice, can raise all ships and drive ROI.

Working alongside leading advertising trade bodies has significant benefits and creates great platforms and opportunities for Ebiquity. Not only does this approach provide us with access to the opinions of the world’s leading advertisers through research and membership surveys. Our long-term partnerships – such as the collaboration we have as the Strategic Partner for Marketing Effectiveness with the World Federation of Advertisers (WFA) – enable us to go on to develop and publish thought leadership content of value to the WFA’s members, many of whom are also Ebiquity clients. A case in point is the paper we co-created in late 2023 with the WFA and the UK’s Institute for Practitioners in Advertising (IPA), titled Creating a Global Culture of Marketing Effectiveness.

Common challenges

Ongoing research among WFA members has repeatedly shown that getting marketing effectiveness right is the number one challenge faced by the world’s biggest and most progressive brands. The survey behind our latest, 2023 report addressed the role of advertisers’ corporate culture in terms of marketing effectiveness, teamwork, and expertise. Specifically, it highlighted the following:

• Although media and marketing departments believe that their companies are doing a good job at marketing effectiveness, the better-informed insight and analytics teams do not agree with them.
  In too many companies, there is an over-reliance on measuring the short-term impact on sales from media which, as a result, leads to an ill-advised, short-term focus in media planning.​
• This, in turn, has resulted in declining efficiency in media and the long-term health of brands. The finding reinforces and underlines the well-established findings of Les Binet and Peter Field, published by the IPA as The Long and the Short of It. As Field has observed recently: “The more we move towards real-time, the more we move towards deal-time, and this is harming brands’ profitability.”
• Despite the well-established negative impact of reducing media investment – particularly when trading conditions get tough – many company boards regard advertising budgets as a soft and easy target to be cut from the P&L to achieve short-term business profit targets.

A dangerous shift from brand to performance media

Over the last 20 years, there has been a major shift away from broad-reach brand building campaigns designed to sustain sales both short- and long-term. In that period, the advent of sales-focused, digital media channels – often also called performance media – has become the major focus for the industry. With the switch to performance, the return on investment (ROI) of media overall has declined. This is evidenced in both the IPA’s recent review of Marketing Effectiveness papers as well as Ebiquity’s Marketing Mix Modelling (MMM) benchmarks from different categories and across multiple years.

A significant factor in the shift towards short-term, sales-focused media is a lack of knowledge about what good media measurement looks like. Our paper with the WFA and IPA highlighted the need for better measurement of the long-term impact of advertising. Let’s consider three timeframes and three marketing effectiveness methodologies that can account for sales.

• Long-term sales impact is measured over months and years, and typically this is missing from most advertisers’ media measurement frameworks. Long-term sales impact is best measured using Brand Equity Modelling and can account for 100% of sales over time.
• Most MMM models in the industry are only able to measure short-to-medium term effects of media on sales, accounting for effects over weeks and months. Although they play an important role, they are not able to account for more than around 40% of total sales.
• Meantime and turning to short-term impacts, most of the digital attribution techniques used in the industry are flawed. They automatically and incorrectly attribute all the credit of any online sale to digital performance media, with no regard for the underlying base level of sales, seasonality, pricing, and broadcast (non-digital) media. Able to assess media impact over hours or days at most, attribution models cannot correctly identify even a fifth of total sales impact.

This flawed approach to media measurement therefore significantly inflates the ROI contribution of digital media channels. This, in turn, serves to bias the allocation of media budgets heavily – and unjustifiably – towards performance’ media channels. The long-term sales impact from brand building campaigns is not being measured correctly. As a result of these errors, there’s a pervasive, ongoing bias in many modern media plans against long-term, brand building media.

Protecting media budgets

As noted above, our Creating a Global Culture of Marketing Effectiveness report with the WFA and IPA reported that for many companies, the media budget is the first element of a company’s P&L that is cut when they’re looking to make savings to hit targets. There are many reasons for this, but the fundamental truth is that the media budget is quick and easy to cut. The full cost reduction can be realised within any given financial year. This differs from capital expenditure (CAPEX) projects, where only a proportion of savings can be realised – and impact the P&L – within a given year.

Why the CMO needs to learn – and speak – the language of the CFO

To make the right investment decisions, it’s important that the impact of cutting the media budget is made evident to the board and is presented using financial metrics that speak the language of the CFO. Many media commentators have observed that ROI metrics are not useful in this debate. ROI is a rate of return at a level of spend and, since diminishing returns of media reach are a major planning issue, ROI itself becomes subject to its own diminishing returns.

Sometimes it is said that smaller media budgets are more efficient because they can generate higher ROI. This is true in so far as it goes, but it is also the case that lower media budgets are not necessarily the point of spend at which net profit is maximised from media investment. The chart below shows why. The media response curve passes a level of spend (point B) whereby it then moves from positive to negative marginal returns. It is at this point that the media budget scale delivers the maximum net profit, calculated as a function of incremental sales due to media, the marginal rate of sales, and the media investment.

Net profit is also a financial metric that is well understood by company boards and this measure is increasingly used by progressive advertisers to define best practice in media budget scaling. It also serves to provide clarity to boards about the potential impact of cutting media budgets. The example below shows how some in the automotive sector set the most effective media budget ranges.

Summing up

By speaking the language of the CFO, this approach provides the clarity boards need to make sense of the impact of media investment in both the short-term and the long-term. With a proper understanding of media spend – and by embracing fit-for-purpose marketing effectiveness measurements, communicated clearly – the CMO can help to counteract the pressure for drastic cuts in media spend at times of challenging company performance.

That’s the long and the short of it.