Slicing Advertising Spending Myths with Occam’s Razor

November 22, 2010

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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Your Ad Spending: How Much is Just Right ?

August 9, 2010

Are you spending too much or too little on advertising? Don’t know the answer to this question? You’re not alone–it’s a big issue for almost all Marketers. Think about it for a minute: how do you make this decision for your brands?

How Much Should Your Brand Spend on Advertising?

The most common answer for many, it seems, is “whatever we can afford.” This is certainly the practical answer, and often the reality of managing a brand in a business environment that demands annual revenue and profit growth, but is it the right one?

There’s little glamour in this question, but I would argue that it’s a huge profit lever for Marketers that is rarely addressed in a systematic and rigorous manner. If you’re focused on improving Marketing ROI, it’s a question that deserves your time and thought.

The Usual Budget Approach

Many Marketers work backwards from a communications goal to determine ad spending levels. If we need 80% awareness to achieve our volume forecast, we can calculate the required GRP’s to achieve this. And, given our target audience and media strategy, we can then calculate the cost of the planned GRP’s. Presto—we know how much we need to spend. Or do we?

Advertising Spend: Volume Forecast & Planned GRPs

Requirements of Advertising Budgeting

How might CMO’s and Marketing leaders better defend their advertising spend levels? I’m always a fan of solutions that are:

  • Derived from empirical data and research
  • Connected to real business outcomes – revenue and profit
  • Are simple and practically possible to execute

Are there approaches to determining your advertising spend level that meet these requirements?

Advertising Responsiveness & Spending

One of the more rigorous approaches I’ve seen  to determining ad spend levels was written about by Malcolm Wright in the June 2009 Journal of Advertising Research. To greatly simplify, and avoid making anyone go thru the algebraic equations used (although you’re welcome to read about them here), Wright argues that advertising spend should be set based on:

  • Advertising elasticity as a % of gross profit

This requires that we know our gross profit—which every Marketer should know. But it also requires that we know advertising elasticity for our brand. This is a trickier topic.

Advertising Elasticity – What is it and how Can It be Measured ?

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.

Within the CPG category, there have been a substantial number of studies done on advertising elasticity. These studies used rigorous single source data where it’s possible to observe what people watch and what people buy at the household level, and thus measure advertising elasticity with precision.

Household Level Research: Measuring Advertising Elasticity

What’s Known About Advertising Elasticity

These collective results show that the average advertising elasticity across 186 different studies is about .11. This means that for every $1 invested in advertising, sales increased by an average of $0.11.

Like all averages, it’s useful to deconstruct the .11 advertising elasticity to see differences under different conditions. For example:

  • Established vs. New Products – Using the case examples above, the average advertising elasticity for established products was .05. For new products, it was .24. So, new products are obviously much more responsive to advertising than established ones, and advertising levels should be set accordingly higher.
  • Cluttered vs. Non-Cluttered Environments – Another key factor in the studies was the impact of competitive clutter. In low clutter environments where competitors were not advertising heavily, advertising elasticity was .15. It was only .07 in a highly cluttered environment.

Competitive Clutter: Does Your Brand's Advertising Break Through?

Advertising Elasticity for Your Brand

The ideal is that you use single source research to measure advertising elasticity for your brand—and then use this learning to set affordable and appropriate spend levels.

Of course, this takes time and money and isn’t always affordable for small brands. For others, here’s a few useful guidelines:

  1. Start with the Advertising Elasticity Norms – A good starting place is the .11 average advertising elasticity norm. If you know nothing else about your CPG brand’s ad elasticity, you can assume that you should be spending about 11% of gross profit on advertising.
  2. Adjust for Other Meta Learnings – Adjust the ad spend up or down based on whether your advertising is for an established brand or is less than 3 years old. Consider whether your brand operates in a highly cluttered versus less cluttered environment. Review any additional learnings about differences in advertising elasticity by category, geography, etc. Make adjustments to the .11 as appropriate.
  3. Modify for Creative Strength – If your brand does copy testing, consider how your ad scored versus historical norms for the category or your brand. If your brand is well above norms, you should consider adjusting upward from the .11. If your brand scored below norm, reconsider whether you should be advertising at all until you get better creative.

Advertising Elasticity Guidelines: Copy Testing & Brand Learnings

I’ve spent enough time in Marketing to know that advertising spend is as much art as it is science. That said, there’s a big opportunity for CMO’s and their Marketing teams to be more rigorous in setting budget levels.

There’s financial upside to this exercise. Spending too much is wasteful and inefficient. Spending too little is missing a significant revenue and profit opportunity. Answering the “how much should I spend?” question is about getting your spend just right.

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