Profit ability: the business case for advertising

Profit Ability: the business case for advertising

In brief

We all recognise the fundamental importance of brands, but in these times of economic uncertainty, it can be tougher than ever to carve out the path to marketing effectiveness.  Whilst we’re better equipped to plan, execute and measure the effectiveness of advertising, research suggests the impact of our ad investments is dwindling.  The problem?  A worrying increase in short termism.

The pressure to meet short-term targets is reducing our ability to drive long-term profitability.  From short-term procurement techniques to attribution modelling and an unhealthy obsession with ROI, for many, the focus has shifted squarely to the here-and-now.

The reality is that driving a short-term sales return is essential, but building a base of sales that grow brand profitability in the long-term is – and always has been – at the heart of marketing effectiveness.

We commissioned a major new study from Ebiquity and Gain Theory, who independently evaluate advertising performance and effectiveness for hundreds of brands. ‘Profit Ability’ provides advertisers with the evidence they need to build the business case for advertising and within this the case for TV. Across their data sets of better known advertiser brands whose media is bought by the major media agencies and professionally audited they have quantified how advertising drives growth in both the short and the long term.

The research falls into three broad sections:

  1. Profit delivered in the short term (throughout the campaign and for a period of around three months afterwards), carried out by Ebiquity.
  2. Profit delivered in the longer term (up to three years following a campaign), carried out by Gain Theory.
  3. A combined view across both the short and the long term to reveal total advertising-generated profit return

Download the Charts for this research study here

Key points

  • Advertising pays back in the short term
  • TV is the dominant driver of both profit and ROI
  • ROI is a measure of efficiency, not effectiveness
  • TV delivers scale of return
  • TV is the ‘safest’ (lowest risk) form of advertising
  • By ignoring the longer-term effects of advertising, we’re doing it a massive disservice
  • On average, advertising delivers a long-term effect that is 1.9 times greater than the short-term effect
  • TV delivers the greatest ‘Long Term Multiplier’ effect
  • FMCG, which struggles to deliver short-term ROI, see some of the greatest effects in the long term
Profit Ability key findings table
Profit Ability the business case for advertisingThis table summarises the key findings:

In depth

Background

Something rather strange is happening in the world of advertising.  Whilst we’re better equipped than ever before to create, plan, execute and measure the effectiveness of advertising, according to Binet and Field, our industry is in crisis.

The cause? An unhealthy focus on the short term driven by a long list of factors that, according to Enders Analysis, mount a real and ongoing risk to marketing effectiveness and therefore long-term profitability.

We need to change the narrative. By providing a solid business case for advertising, we can position it as a business investment that drives growth in both the short and the long term.  We commissioned both Ebiquity and Gain Theory to do just that.

The research falls into three broad sections:

  • Profit delivered in the short term (throughout the campaign and for a period of circa three months afterwards), carried out by Ebiquity.
  • Profit delivered in the longer term (up to three years following a campaign), carried out by Gain Theory.
  • A combined view across both the short and the long term.

Part one: short-term profitability

Methodology

Ebiquity employed their econometric expertise to analyse their database of over 150 clients to understand the impact of media investment in the short-term (within 3-6 months of a campaign finishing).  This included econometric analyses covering 11 sectors and 1,900 campaigns that ran between 2014 and 2017. 

Importantly, this analysis was not restricted to the best performers, but included the average performance across the vast dataset.  Although this makes it more representative overall, this is a still a benchmark of advertisers with the means to econometrically analyse their advertising’s performance.  It’s therefore not representative of the long-tail of smaller business.  The analysis did not include online search as this is a demand-harvesting rather than demand-generating investment. For the same reason, the value of high street location or prime shelf space in supermarkets is not included in this study.

(Ebiquity’s methodology is further explained in a short film at the foot of this page)

Headline Findings

Advertising pays back in the short-term.
Across all sectors the average short-term profit return delivered by advertising is £1.51. This varies by sector, from £0.52 in FMCG to £2.49 in retail and £4.37 in travel.  This reflects the relatively small size of individual FMCG brands compared to retail brands, for example.

TV is the dominant driver of both investment and ROI
The average short-term profit ROI for TV is £1.73 per pound spent, which is remarkably consistent with TV ROIs over the last decade.  TV performs strongly across a range of sectors.

Profit Ability Figure 1
Figure 1
ROI is a measure of efficiency, not effectiveness.
As the latest Binet and Field study for the IPA proved, we must use ROI responsibly by positioning it within the context of volume of spend.  We know that the easiest way to increase ROI is to decrease spend – but this usually has a direct and negative impact on volumes of profit.  And, of course, profit is the end-game of advertising.

The following chart displays the average profit ROI of different media channels alongside volume of spend.  The bubble size represents the % of total profit generated by that channel. It’s apparent that TV punches above its weight by delivering two thirds of all measured profit return in the short term.

Profit Ability Figure 2
Figure 2

TV delivers scale of return
TV doesn’t drive the largest volume of profit because it receives the highest volume of spend. It drives the highest volume of profit because it can deliver efficient profit return at high volumes of spend – i.e. there’s a high threshold for the point of diminishing returns.  See the chart below that uses a financial services campaign as an example of the diminishing return curves by channel.

Profit Ability Figure 3
Figure 3

TV is the ‘safest’ (lowest risk) short-term investment
Whilst average performance is a useful benchmark for advertisers, it doesn’t hold much sway with the finance team.  They care about profit return but they also care about risk.  By examining the proportion of campaigns by different forms of advertising that made a profit for the advertiser, Ebiquity and Gain Theory identified the relative safety of different advertising investments.

TV was found to be the medium most likely to create advertising-generated profit both in the short term and the long term. In the short term, 70% of TV advertising campaigns delivered a profitable return.

It should be noted that many of the negative profit ROIs will have come from the FMCG sector, which rarely sees a profit returned in the short-term, but the strong performance of TV, radio and print is evident.

When it comes to Online Video, the range of effects is very wide and likely a result of the mix of video formats used within the individual campaigns; campaigns that largely consist of low cost video with low view-through rates won’t perform, whilst campaigns consisting of high quality pre-roll VOD – e.g. Broadcaster VOD – that generates high view through rates will achieve better results.

Profit Ability Figure 4
Figure 4

Part 2: Long-term profitability

Methodology

Like Ebiquity, Gain Theory conducted an analysis on their own pool of advertiser data (2014–2017, 29 advertisers across 504 campaigns). They measured the longer-term impact of the effects of advertising on the future base of sales. Using a technique called ‘Unobserved Component Modelling’, Gain Theory could model the impact of a moving base of sales.  This differs from standard econometrics where the base is assumed to be flat.  This analysis allows advertisers to understand the impact their advertising has in the longer-term.

It should be noted that the margins of error for this type of analysis become wider as the time-period assessed in the model becomes longer.  There isn’t a perfect means to assess the effectiveness of advertising in the long term.  However, by taking an aggregated view across over 500 campaigns, this analysis brings us closer than ever before to understanding how advertising drives profitability over the longer term.

(Gain Theory’s methodology is further explained in a short film at the foot of this page)

Headline Findings

By ignoring the longer-term effects of advertising, we’re doing it a massive disservice
If we rely purely on online attribution models, the impact on our planning and optimisation are severe.  Just 18% of total return is visible through attribution modelling. If we optimise based on less than a fifth of our total return, we’ll hugely underestimate the potential profitability of our advertising and are likely to slash budgets to the detriment of our overall effectiveness.

On average, advertising delivers a long-term effect that is 1.9 times greater than the short-term effect
Across all clients, the ‘Long Term Multiplier’ is 1.9 x the short-term effect.  Put simply, if your short-term profit ROI is £1.50 for every pound spent, then you’d expect to receive £2.85 back in the long term.

TV delivers the highest ‘Long Term Multiplier’
TV drives the strongest effect in the long term, with online video not too far behind.  This is likely to be down to the power of AV when it comes to building brands. The media that are generally used for activation in the short term (such as radio and online display) generally don’t tend to deliver any visible effect when you look beyond the early impact.

Profit Ability Figure 5
Figure 5

Categories which struggle to deliver short-term ROI can often see the greatest effects in the longer term
FMCG, is a prime example of this. This notoriously tough category generates some of the strongest long-term effects.  TV, Online Video and Out-of-Home all deliver multiplier effects of more than 2.5 times their short-term effect.  This highlights the importance of looking at the bigger picture when it comes to understanding the effects of advertising on the bottom line.

TV is the safest investment for long-term profit generation
Just as in the short term, looking at total profit success during the 3 years after ad campaigns finished, 86% of TV advertising campaigns delivered a profitable return, higher than any other media investment.

Conclusions

Advertising works!
Looking at total profit ROI over 3 years, the average campaign delivers a profit ROI of £3.24 per pound spent

Of course, this varies by channel, but all channels, with the exception of Online Display, deliver profitable returns when you look at the bigger picture.

Profit Ability Figure 6
Figure 6

Short-term gain can lead to long-term pain if the effects of advertising aren’t measured properly
As we plough through this period of economic uncertainty, data that takes the bigger picture into account is crucial for holding up advertising budgets in circumstances where cuts might be executed for short-term gain.

FMCG and retail are two great examples.  The data reveals how FMCG brands become profitable and how vital advertising is for retail in driving high volumes of profit when you take into account the longer-term effects of advertising.

Profit Ability Figure 7
Figure 7

It’s time to reassess the return that advertising can generate
With this data to hand, businesses can now reassess the potential return that can be generated by different forms of advertising.

For example, the study concludes that advertisers may be missing out on maximising advertising-generated profit by under-investing in TV. 

Currently, TV accounts for 54% of advertising spend among Ebiquity’s database, yet it is responsible for 71% of total advertising-generated profit.

Here is Ebiquity and Gain Theory’s view of how considering long-term pay back as well as short-term payback would change the way you optimise TV spend in 3 key sectors to deliver the greatest returns to the business.

Profit Ability Figure 8
Figure 8

What this study shows is that investment in advertising, with TV at its heart, isn’t just good for brands – it’s good for business.

Methodology films

Short term
Nick Pugh, Director at Ebiquity, talks us through their data set and methodology, analysing the impact of media investment in the short-term (within 3-6 months of a campaign finishing). 


Long term
Matthew Chappell, Partner, Gain Theory explains how they quantified the long term returns of advertising, and how unobserved component modelling builds on what we can learn from mix market modelling (econometrics) and attribution modelling.














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