Slicing Advertising Spending Myths with Occam’s Razor

Marketing is a complex blend of art and science, and if you talk with anyone in the profession today, they’ll tell you it’s only getting more so. Audience fragmentation, new media form factors, the rise of social media, etc. is making life more complex, not simpler for CMO’s.

Occam's Razor -- Slicing Ad Spending Myths

Enter Occam’s Razor.  Occam’s Razor is usually attributed to the 14th-century English logician Father William of Ockham. Simply stated, it says that:

“simpler theories are, other things being equal, generally better than more complex ones”


Simplifying Rules of Thumb

Thus, it’s natural to use simplifying “rules of thumb” to reduce complexity to manageable simplicity.

Two of my favorite rules of thumb, which both happen to be true, are:

  • Double Jeopardy – Big brands are big because they have more users and those users are more loyal to the brand. Small brands are small because they have fewer and less loyal users. Said differently, in CPG there’s no such thing as small, niche brands.
  • Heavy Users – Across categories and brands, about ½ of a brand’s heavy users are not heavy users in the subsequent year. This is partly because some heavy category users become light or non-users (diapering parents who kid graduates from diapers), but also because some brand heavy users become are not heavy users in the subsequent year. This means that Marketers can’t simply assume that heavy users will stay heavy and need to work to keep them so.

Principals like these are powerful because they have both great explanatory power and also greatly simplify how to think about an important Marketing issue — a classic Occam’s Razor.


Marketing Principals: Heavy Users & Brand Loyalty

Advertising Spending Rules of Thumb

Here are two more well known principles:

  • Align advertising spend to a target % of revenue
  • Aim for a target share of voice

What’s different about these two rules versus the previous ones?

They’re not true. These are great “rules of thumb” for making key Advertising spending decisions, except for one small problem—there is no factual basis that they are right.

In a recent study, the Boston Consulting Group and Marketing Analytics, a leader in market response marketing, looked at Market Mix Modeling results across 75 CPG brands.

They then looked at these common guiding principles to understand whether they held true in practice. Here’s what they found:

Align Advertising Spending to a target % of revenue:

“We found no consistent correlation between marketing spending as a percentage of dollar sales and either marketing impact or ROMI.”

Aim for a Target Share of Voice:

“…we found that brands with a relatively higher share of voice, which we calculated as an estimated percentage of overall media spending in the category, did not consistently drive greater unit-sales volume—and often generated less gross margin for every dollar they spent on marketing.”

So, we’ve now successfully debunked two often used principles for deciding how much to invest and where. What now?

Advertising Spend & Marketing ROI: What and Now?


Three Considerations for How Much to Spend

First, understand the advertising elasticity of your brand.

Advertising elasticity is simply the change in volume divided by the change in associated advertising spend. It’s essentially a return on advertising spend metric.

Malcolm Wright, in the June 2009 Journal of Advertising Research, argues that advertising spend should be set based on Advertising elasticity as a % of gross profit, which for the average CPG brand, is about .11.

Second, understand how programming impacts your advertising.

Many studies have demonstrated that programming context impacts real world ad effectiveness.

Olympic themed ads score better in the Olympics than the same ads outside the Olympics. Ads for weight loss ads score better in “The Biggest Loser” than the same ads in other programs.


Ad Effectiveness Factor: Programming Context

Which programs and genres drive the best results for your brand?

Last, understand how creative quality affects ad performance.

All ads are not the same. Two different ads with different breakthrough levels (e.g. low and high) will require differing levels of media support to achieve the same ad recall (e.g. the high performing ad requires less media weight than the low performing ad to achieve the same outcome).

Breaking Rules with Occam’s Razor

Rules are made to be broken, except when they’re science based and not rooted in myth. In the case of ad spending, the smartest marketers are breaking the old % of ad spend and share of voice rules daily and, instead, focusing on advertising elasticity, programming and creative quality to optimize spend levels.

Shouldn’t you?

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2 Responses to Slicing Advertising Spending Myths with Occam’s Razor

  1. I really like the advertising elasticity advice. A great concept that is not easy for most marketers to determine, but a worthy quest none the less.

    • beardrs says:

      John — Thanks for reading the blog and commenting. One of the biggest issues Marketers have is such a simple one: how much do I need to spend to achieve my goals ? Yet, there are surprisingly few validated approaches for answering this simple question. The advertising elasticity approach is one that’s been empirically shown to optimize profitability, but there certainly needs to be a lot more work in this important area. Randall

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