Profit Ability 2: The new business case for advertising

In Brief

For a multitude of businesses, advertising is about creating the profit that helps them grow, which in turn helps the economy grow. If advertising doesn’t do that, it’s largely pointless.

Thankfully, advertising does create profit. But convincing senior company management can be a challenging task, without supporting evidence. That’s why we’ve launched ‘Profit Ability 2: The new business case for advertising’, an update and expansion of Ebiquity and Gain Theory’s ground-breaking Profit Ability study from 2017.

Methodology

Profit Ability 2 was conducted by Ebiquity, EssenceMediacom, Gain Theory, Mindshare, and Wavemaker UK. It’s a meta-analysis of econometric studies from 141 brands covering £1.8 billion of media spend across 10 media channels and 14 business sectors (where 7 are reported individually). All the data is from 2021 – 2023 (most recent 52 weeks available for each brand; spend by year: 21% 2021, 32% 2022, 47% 2023).

Key points

• Profitability varies by media channel
• TV advertising is the greatest driver of overall profit volume
• TV has the highest weekly ‘saturation point’
• Immediate payback is not exclusive to ‘performance’ media
• Profitability varies by sector
• Advertising effectiveness shifts post-Covid have been incremental

In Depth

Background

Following a number of years of significant behavioural shifts, with changing media consumption combined with events like the pandemic, Brexit, and the cost-of-living crisis, the need for an up to date, robust view of the role for advertising investment – and whether it has been affected – was vital.

So we commissioned ‘Profit Ability 2: The new business case for advertising’ from Ebiquity, EssenceMediacom, Gain Theory, Mindshare, and Wavemaker UK to provide the first post-Covid analysis of advertising’s financial impact. The biggest ever econometric meta-analysis of the drivers of advertising effectiveness, it shows how and why advertising is a profitable driver of business growth, and proves that all forms of advertising pay back, especially when their sustained effects are measured.

Its data also powers the Media Mix Navigator - a tool that allows advertisers and planners to evaluate the optimal media mix and return on investment tailored to their specific business.

Methodology

Collectively, Ebiquity, EssenceMediacom, Gain Theory, Mindshare, and Wavemaker UK collated econometric analyses from 141 brands, covering £1.8 billion of media spend.

To provide a true post-Covid understanding of performance, the databank features campaigns from 2021 – 2023 (where only the most recent 52 weeks available for each brand was used).

By definition, the database is a benchmark of advertisers with the means to econometrically analyse their advertising’s performance. Whilst not representative of the whole advertising economy (as it does not include the long-tail of advertisers who don’t do market mix modelling, or use media agency partners) the Profit Ability 2 dataset does provide a valid read on mainstream ‘big brand’ performance.

This study also explored the pre- and post-Covid effects. 53 brands from the wider dataset were matched where like-for-like market mix modelling analysis was available across both pre- and post-pandemic time periods, allowing us to investigate how effectiveness has changed since 2018-2019.

In total, 14 business sectors are represented in the dataset, where seven have the required brand count of nine brands to be reported individually. The data also covers ten media channels:

• Audio: all forms of audio advertising including linear radio, digital radio and podcasts
• BVOD: Video on Demand on broadcaster platforms
• Cinema: On screen advertising in cinemas
• Generic PPC: Pay per click search advertising on non-branded keywords
• Linear TV: Broadcast TV advertising
• Online Display: All formats of display advertising
• Online Video: All formats of online video pre/mid/post roll including YouTube
• Out of Home: Digital and static posters in all environments
• Paid Social: All advertising within social platforms including in-feed video
• Print: All advertising within newspapers & magazines. Digital spend with newsbrands etc. included in Online Display

Direct mail and SEO are not included, as the data from the 141 brands did not have a robust volume of effectiveness data for these two channels. Similarly, brand search and affiliates are excluded, as these are considered pure ‘fulfilment’ media which facilitate a sale but do not generate demand for a brand.

• Profit Volume and Profit ROI were the two business outcomes used to measure the effectiveness of the channels:
• Profit Volume is the incremental contribution of advertising to business profit based on unit sales, revenue contribution, profit margin and/or lifetime value.
• Profit ROI is the ratio between profit volume and advertising spend (ROI = profit volume / media spend where 1 = breakeven).

Profit Ability 2 also analysed the profit generated by advertising at different stages as its effects build over time. It examined four speeds of payback:

• Immediate payback – within one week
• Short-term payback – up to 13 weeks – i.e. includes immediate payback
• Sustained payback – week 14 through to 24 months
• Full payback – total payback 0-24 months

The Headlines

Profitability varies by media channel

This study proves that advertising is a profitable driver of business growth. Put simply, advertising works. All categories analysed in the study generated a positive payback from advertising. Advertising has an average short-term profit ROI of £1.87 per pound invested which increases to £4.11 when sustained effects are included.

Looking at short-term profit ROI, this chart shows the overall view by channel of profitability, mapping the spend (x axis) and the Profit ROI (y axis). Each channel is mapped using a bubble, with the size representing how much profit is driven. The chart is also split at a profit ROI of 1, anything above this line is considered profitable.

When sustained effects are accounted for, average profit ROI increases to £4.11. In particular, TV (Linear and BVOD) has a very strong sustained effect, responsible for 54.7% of the full advertising-generated profit, with an average full profit ROI of £5.61 for every pound spent. Linear TV alone accounts for 46.6% of full advertising-generated profit, and an average full profit ROI of £5.94. By comparison, Online Video (which is mostly YouTube) has an average full profit ROI of £3.86 for every pound spent and accounts for 3.4% of full advertising-generated profit.

TV has highest weekly ‘saturation point’

Whilst it may seem intuitive to spend more in order to get more, it’s crucial to take into account diminishing returns. As spend increases, the payback of each extra £1 of investment starts to reduce as diminishing returns kicks in. The scalability and diminishing returns profile vary channel to channel. Diminishing returns also means that scale and efficiency are inextricably linked, and therefore optimising towards one will impact the other. As a channel hits diminishing returns, the ROI gradually reduces. As each pound generates slightly less than the one before, the ROI ratio drops as spend increases, yet you drive more sales than would have been achieved at lower spend levels.

This ratio can be used to calculate the saturation point for each channel, which is the last point where every pound invested in a channel generates at least £1 profit.

Analysis shows that Linear TV has the highest saturation point. Essentially, advertisers can increase investment in Linear TV to a higher level than other media and it will continue to generate a profitable return.

Based on immediate payback (i.e. payback within one week of investment), Linear TV advertising on average hits saturation at £330,000 – nearly triple the equivalent scale of the next largest channel (Print) and over 8-times the scale of Online Video. This is no surprise, TV’s broad reach and its ability to drive scale helps deliver this result in contrast to typical digital channels like Paid Social and Online Display.

Immediate payback not exclusive to ‘performance’ media

When looking at immediate payback (within one week) and the percentage of all advertising profit-driven, Generic PPC performs favourably, and accounts for the largest proportion of immediate payback (30.5%). Linear TV is the second biggest driver, accounting for 20.5%. This is followed by Paid Social (15.1%), Audio (8.6%) and BVOD (7.3%). This analysis shows how the immediate return is not exclusive to so-called ‘performance’ media, as channels like Linear TV and Audio also perform favourably.

Profitability varies by sector

Whilst advertising generates a profitable return in all sectors, full Profit ROI varies greatly by sector. For example, in the Automotive sector, advertising’s full Profit ROI is £4.65 per pound invested – more than double the Profit ROI in the Financial Services sector, where it is £1.95. Likewise, when looking at short-term profitability, advertising’s Profit ROI for Retail (large) was £3.15 per pound invested – nearly triple that of Travel (£1.19). The variance in ROIs is explained by nuances in the different business environments for each sector – such as the value of products, operating margins and the relative sensitivity of each category to the impact advertising has on sales.

Advertising effectiveness shifts post-Covid have been incremental

Arguably, the biggest event in recent years is the Covid-19 pandemic. Many advertisers were required to shut doors, some couldn’t advertise at all, others benefitted from their advertising campaigns. Similarly, households adjusted expenditure patterns, share of wallets switched from holidays and train tickets to things like better broadband and home improvement.

In order to evaluate how advertising return on investment has changed over recent years, the database that underpins this study only utilises the most recent available read. If an advertiser has done multiple rounds of media mix modelling within the specified period, only the last 52 weeks were used.

To understand the trend over time and to determine the difference between pre-Covid campaigns (defined as 52 weeks ending results reported between 2018 – Q1 2020) and post-Covid (projects ending in 2022 to 2023), only brands where like-for-like data was available pre- and post-pandemic was used, resulting in 53 matched brands.

When looking at the average efficiency of advertising across all channels, the ROI has declined 1% a year. This is a story of stability and gradualism. Looking at particular channels in more detail (see chart below), the top right quadrant features channels that have seen an ROI improvement and attracted increased spend post-Covid vs. pre-Covid. Unsurprisingly, Generic PPC saw an increase in ROI improvement and spend, likely driven by the increase in working from home and the growth in ecommerce.

Looking specifically at AV channels, despite the reduction in spend and return on investment, Linear TV remains the channel with the largest profit contribution (33.9%). And Linear’s reduction in spend and return on investment is counterbalanced by the improved returns investment within BVOD (as well as Online Video). These shifts in channels essentially follow the trend in consumer’s media consumption behaviours.

Paid social is the only channel that appears in the top left hand quadrant, meaning it has seen an increase in spend but experienced a decline in return on investment. With the spend increases being out of step with efficiency performance, this suggests that as a channel it’s a little overspent.

Looking across the full range of media channels, rather than a seismic shift, advertising effectiveness is shifting more incrementality over time.

In summary

‘Profit Ability 2: The new business case for advertising’ shows how advertising is a profitable driver of business growth. The study is vital in understanding the nuances of different channels and sectors. It can help build your case that advertising (for your sector) is money well spent, as well as provide the expected timescale of returns. It can help planners to right-size their media investment by channel and by timeframe.

And all its data helps fuel the Media Mix Navigator, the free tool that allows you to explore different planning scenarios to define the optimum media mix for your business. The tool can be used in a variety of situations, such as a starting point for budget allocation and payback when you don’t have access to specific econometrics; to show the impact on business outcomes of adding a new channel; or to explore the impact of different risk tolerances.