Big spenders reap rewards

Size does matter – at least, in terms of advertising budgets. New research from the Institute of Practitioners in Advertising shows that companies which spend more on advertising than their rivals do have a better image with their customers, who see them as offering higher quality products or services.

While the IPA stops short of claiming to have conclusively proved a direct relationship between higher ad spend and higher profits, Leslie Butterfield, chairman of Partners BBDH and a member of the IPA’s Value in Advertising Panel, observes: “The analysis strongly suggests that advertising which builds quality does lead to profitability.”

Butterfield has written up the results of the IPA study in the first of a new series of IPA research papers to be published under the collective name AdValue. All the papers will examine the impact of advertising on various aspects of a company’s business, and will be based on the analysis of performance data from more than 200 branded consumer products companies compiled by research consultancy PIMS (see box).

It is now widely accepted by marketers that perceived quality is a vital component of any company’s business strategy. As Butterfield says: “The importance of perceived quality to brand buying decisions and loyalty is hard to overstate.”

In his commentary on the IPA research, Butterfield quotes from David Aaker’s book, “Building Successful Brands”. Aaker observes: “Perceived quality is the most important contributor to a company’s return on investment, having more impact than market share, research and development or marketing expenditures – it is usually at the heart of what customers are buying, and it is a bottom-line measure of the impact of a brand identity.”

The IPA started from the assumption that the principal component of perceived quality is product image and company reputation. It then looked at:

The relationship between absolute levels of advertising spend and relative quality of offer;

Advertising spend relative to competitors;

The correlation between product image and company reputation;

And absolute and relative advertising spends.

Disappointingly, from the IPA’s viewpoint, there is little correlation between absolute levels of ad spend and relative quality of offer. But when the IPA examined companies’ ad spend relative to that of their competitors – which Butterfield says effectively represents a measure of share of voice relative to share of market – there is a clear result.

He says that in influencing customer perceptions of the quality of the product (and hence its value) it is not a question of how much a company spends, but of how much it outspends its competitors.

But Butterfield stresses the IPA is not saying number two brands have to spend more in absolute terms than brand leaders. What they have to do is outspend their rivals relative to their share of market – in other words, their ratio of advertising spend to sales has to be higher than that of other brands. If they can achieve that, they should enjoy a larger share of voice and should see significant results.

He also argues the research shows that “it is not just ‘any old advertising’ that matters, but rather advertising that seeks and succeeds in building quality perceptions of the product, either directly or through the intermediary of product image and company reputation”.

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