The Genetic Markers of High Advertising ROI Brands

April 12, 2010

When I was in 8th grade, I was a pretty good basketball player who aspired to the NBA, but never noticed that my father was only 5’10” tall. The more scientists learn about our genes, the more they learn that while they’re not destiny, they do increase the likelihood that we will turn out a certain way. 

In a similar vein, TV Advertising has genetic tendencies–that is, certain characteristics tend to be associated with high ROI advertising brands. In June, I’m leading a series of Marketing ROI sessions at Nielsen’s annual Consumer 360 event in Las Vegas (Disclosure: I work for Nielsen). In preparation, I’ve been reviewing what we know about Advertising ROI from Market Mix Modeling. And learnings clearly point to a set of “genetic markers” of TV Advertising ROI. 

Market Mix Modeling — What Is It ?

Market Mix Modeling, if you’re not familiar with it, uses Marketing inputs and retail scanner data to build regression models which show how each Marketing element impacts revenue and, ultimately, Marketing return on investment. These models have become increasingly sophisticated and can now answer questions about ROMI by media channel, trade promotion, consumer promotion, FSI, etc. Most major CPG companies and many companies in other industries now routinely use MMM to evaluate the effectiveness of their Marketing mix.  

The Principles of Market Mix Modeling

So, back to the question: Assuming quality creative (always the most important factor), what are the genetic markers of brands with high TV advertising ROI? In a previous post, “The 5 Truths of TV Advertising Effectiveness,” I discussed whether TV advertising works as well today as 15 years ago. But beyond this, Marketing Mix Modeling can provide some answers not just about whether TV advertising is effective, but what kinds of brands and situations it’s most effective for.  

TV Advertising ROI is Highest:

1.  When Brands are Large — Larger brands ($200M+ in revenue) deliver higher ROI’s from TV advertising than smaller brands (<$50M in revenue). Why ?  

  • First, they have more users for advertising to influence. Advertising doesn’t just cause more consumers to buy your brand (or not). Beyond building penetration, effective advertising also builds purchase frequency and transaction size. Larger brands generally have more users, and therefore, more opportunities for advertising to build consumption through changes in purchase frequency and amount.
  • Second, it’s easier for larger brands to pay out the advertising investment. Simple math shows that a +10% revenue lift on a larger $200M brand ($20M) yields more revenue than the same lift on a $50M brand ($5M). So, on a fixed advertising spend, big brands can more easily achieve a good financial return.

TV Advertising ROI: Large Brands Have Large ROI

2.  When Purchase Frequency is High — Higher purchase frequency brands and categories tend to have strong Advertising ROI’s compared to low purchase frequency categories and brands.  

Higher purchase frequency brand consumers are likely more loyal to your brand (they’re buying it more frequently), and therefore, more predisposed to your brand and more likely to respond to your advertising. Also, a higher category purchase frequency means there are more buying opportunities for your advertising to influence consumers to buy your brand.  

3. When the Category is Expandable — Some categories are easily expandable (e.g. movies) while others are not (e.g. prescription medicine). Advertising ROI’s tend to be higher in expandable categories.  

And, big brands tend to benefit the most from category consumption increases, so the big brand effect mentioned above is doubly important (see Mike Ferry’s Guest Post “5 Ways Market Leading Brands Can Drive Growth“). 

4.  When Seasonal Category Consumption Is Higher than Media Costs — Many categories have seasonal consumption spikes. When the increase in category seasonal consumption is higher than the comparable seasonal increase in media costs, this presents an opportunity. Advertising ROI tends to be higher for brands that advertise during these seasonal consumption/media increase periods of imbalance.  

5. When the Brand has the Halo of a Masterbrand — Brands within a “Masterbrand” tend to have higher TV advertising ROI’s than brands without one. The halo effect of other brands within the Masterbrand have a clearly positive ROI impact on individual brands.  

But, Trade Promotions Are Even Better — Or Are They ?

Perhaps the most discouraging learning for Marketers who are big believers in advertising is this:  on average, MMM shows that advertising ROI is less than trade promotion ROI. And for some Marketers, that leads to the obvious: more and more trade spending and less and less advertising. Is this a good thing?  

Definitely not. MMM work clearly shows that there is a strong relationship between the % volume sold on promotion and regular price elasticity. Consumers aren’t stupid. If your brand is frequently on promotion, consumers learn that it’s only a matter of time until the next great deal–and they wait until it comes along.This points to another important way that Advertising works–it reduces price elasticity. It does so by reminding consumers of your brand’s benefit, getting current users to continue buying, encouraging them to buy more frequently and even buying more per buying occasion. 

Genetic Markers of High Advertising ROI Brands — Destiny or Hard Work ?

So, if your brand has the right genetic markers–is big, part of a large Masterbrand,  or lives in a category with seasonal consumption/media increase imbalances, high purchase frequency and expandable consumption–you’re in luck. For everyone else, don’t despair, it’s still possible to have high Advertising ROI.  After all, even the sons of 5’10” fathers make it to the NBA, just not very often and not without a lot of hard work.  

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