Advertisers need to get over their fear of commitment

Marketers are getting in their own way by being afraid to financially commit to their campaigns. New data shows ROI is generally higher when advertisers spend more – that is, until they spend too much.

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Do you find yourself constantly afraid of making things serious with your current marketing plan? Is there a part of you that wants to do this campaign, and a part that wants to run away? Do you wonder if the grass would be greener with a different strategy?

If you answered yes to any of these questions, your fear of commitment could well be undermining the effectiveness of your marketing.

That’s the finding from a new analysis of more than 1000 years of advertising experience properly evaluated using econometrics. Return on investment is generally higher when advertisers commit: when they spend a lot and use a lot of media channels.

But there’s a problem. The same rich data source shows that advertising is risky. It shows that, as well as commitment, a lot of other factors matter. And there’s a very real possibility of not breaking even. This means it’s actually pretty sensible to be cautious.

So how should advertisers proceed? Of course it’s about research, testing, and experimenting, but it’s also about being willing to abandon the wrong types of work. When it comes to marketing ideas, it’s worth playing the field. Dating for a while, waiting for ‘the one’, and then going all in.

ROI rises when advertisers commit to higher media spend, study shows

It pays to pull out all the stops

The chart below is a simple analysis based on a new database of effectiveness results from everyday campaigns, not entered into any awards. It includes 343 evaluations covering 3 years of data carried out in the last few years by expert econometricians at OMG, D2D, IRI, VCCP media, and magic numbers. The database is named ARC for the advertising research community that came together to build it.

The graph shows revenue returned per £1 spent vs annual budget. The relationship is hump-shaped, with a very clear maximum for return on investment.

Note: 343 cases, between 18 and 162 cases in each blob. Blobs are plotted at the midpoints of spend buckets used in the raw data, £0-5m, £5-10m, £10-50m and £50m+. The result that ROI is maximised at high media budgets holds even after controlling for size of advertiser’s business (not shown).

The fact that there is a hump in the chart isn’t surprising. In fact, it confirms two things that marketers believe and talk about a lot.

In the left-hand part of the chart, spend is low, and returns are getting bigger as you spend more. This confirms the idea that you need to spend enough to get cut-through. To repeat your message enough that it’s remembered and maybe even talked about.

On the right-hand side, spend is high and returns are falling as you spend more. This confirms the idea that if you spend too much, you’ll either be preaching to the converted or talking to people that will never buy your product. In other words, there are diminishing returns.

What is surprising is the location of the top of the hump and, reading off the x-axis, the amount you have to spend to get those high returns. It is a lot of money for any business, and an investment that 75% of the advertisers in ARC were either unable or unwilling to make.

The evidence shows that it’s not just a cash commitment that’s needed. It’s all the effort and co-ordination that goes into using multiple media channels too.

Note: 343 cases, between 41 and 79 cases in each bar. The result that 7-8 media channels is optimal holds even after controlling for size of advertiser’s business (not shown).

The chart above shows another summary of the ARC data. This time we’re looking at how revenue returned per £1 spent varies with the number of media channels used. The highest returns are achieved when advertisers use 7 or 8 different media channels.

It makes sense. Nowadays people can find exactly the entertainment they like, no matter how niche it is. Media placements which can reach most of a particular target audience are increasingly rare.

But using 7 or 8 media channels is a considerable endeavour. It means using both on and offline channels, and several options within both categories. Creative work has to be designed in different formats, multiple deadlines have to be juggled, and separate monitoring and measurement schemes have to be put in place.

It’s a commitment.

But advertising is risky

The problem is that allocating large amounts of money and significant effort doesn’t sit comfortably with a consistent worry amongst marketers, boards, investors, and founders: the possibility that the return on all that investment might not be enough to cover its cost.

The evidence shows that the worriers have a point. The chart below plots the share of all cases in the ARC database that achieved different levels of return on investment. Although there are a lot of campaigns that pay back handsomely, the majority don’t. Some 70% of the advertisers in ARC got returns of £2 or less in revenue per £1 spent.

This does, in part, reflect the types of businesses in the database, but it remains worrying. For any business with profit margins of less than 50%, an ROI below £2 means a negative return on investment in profit terms. And, of course, advertising is paid for out of profits, so that’s the measure that matters.

But there are ways to reduce the risk. For example, if you had a campaign of the type that wins IPA awards it’s much less risky to go all in. In the chart below only 17% of IPA winners got less than £2 back per £1 spent. Almost 50% got £8 back.

This raises the question as to what IPA winners do differently that makes them so much less risky? Commitment is one aspect of it. On average, IPA winners spend 70% more than other campaigns. But there are other factors that matter too, and an important next step for researchers is to compare winners with ordinary campaigns so we can find out what.

Until then, picking a winner is one of the most important tasks that marketers must carry out. There’s no getting away from it, you need to invest the effort to find out whether the campaign in front of you is likely to be a winner you can back wholeheartedly.

And there’s really no excuse not to anymore. Copy testing has improved massively because large samples of respondents are available online and we can do clever things like monitor facial expressions.

There are also many and varied opportunities for testing copy by simply airing it. A/B tests online can look at more than simply whether the widget should be blue or red in the ad. Experiments are so quick and so cheap that they’re worth it for all kinds of decisions. Even “big” media like TV and OOH can be tested over a limited regional footprint.

This test and learn approach is something that traditional advertisers can learn from the newer breed of digital first marketers. They test a lot and they act on the tests. If something doesn’t stack up, they very quickly stop it.

Caution and then commitment

This cautious approach – rooted in testing – is the right way to navigate the catch 22 that often prevents advertisers getting the best outcomes they can.

The data shows that returns to advertising will be lower if you don’t commit, but if you do commit, you’re making a big gamble with the business’ hard-earned money. And it’s by no means a sure bet, either.

It’s no wonder too many advertisers “love the one they’re with” but half-heartedly. It’s not the worst plan in relationships, but in advertising it’s a middle ground where both media money and the effort of hard-working people goes to waste.