It may feel counterintuitive for marketers even to consider increasing spend in the current climate. Amid a spiralling cost-of-living crisis in the UK, there are already signs of a slowing rate of growth in core media channels, according to IPA Bellwether, with 13.4% of marketers scaling back budgets in the first half of the year.
But a new report by Nielsen shows that the risks of underspending are significant for ROI.
Its analysis found that, globally, 50% of planned media channel investments are too low for optimal payback. Additionally, planned spending overall is 50% lower than it should be for optimal returns. If marketing teams were to commit the ideal volume of resources to the right balance of channels instead, their ROI could jump by as much as 50%.
In short, Nielsen’s research uncovered a 50-50-50 gap when it comes to marketing spend.
So, where are marketers going wrong? And how can they start to calculate optimal investments, for maximum returns?
One of the key reasons for underspending is that marketers tend to get stuck on past results, believes Imran Hirani, VP of strategic insights at Nielsen. “If your past spend has been too low, your results were probably unflattering, and this may limit your ability to grow the investment – even though that’s exactly what you may need to do in order to improve your ROI,” he says.
It’s clear that Europe has a particularly urgent need to rectify the problem. According to Nielsen’s research, it’s currently the worst performing region when it comes to ROI.
That might also explain why the problem is more pronounced in channels with less of an ROI track record and a smaller share of media budgets, too. More than half of investments in display (60%) and digital video (66%) campaigns are too low, for instance, while in TV this falls to just under a third (31%).
It’s clear that Europe has a particularly urgent need to rectify the problem. According to Nielsen’s research, it’s currently the worst performing region when it comes to ROI, falling far behind the likes of North America, for instance. European marketing teams need to address the gap between what they’re spending and what they’re getting in return – fast.
How should they go about it? Well, the sweet spot for investment lies somewhere between 1% and 9% of revenues, according to Nielsen’s research.
That can vary significantly depending on the size of the brand – and how fast it wants to catch up to the competition. For a relatively small operator looking to compete with established companies, they’ll need to skew toward the upper end of that range. Conversely, a large company with sustained market share could afford to invest proportionally less.
Channel tipping points
Regardless of the size of the business, though, they’ll need to think about what they’re spending and where they’re spending it, in order to optimise returns. “Each channel has its own tipping point,” says Hirani, influenced by the size of the target market, the region in which they’re operating and the dynamics of the brand being advertised.
To understand exactly what the tipping point for each channel may be, brands may want to make use of marketing mix models. These are analytics tools that draw on historic performance information to create a clearer view of the impact of each channel going forward.
“Sometimes firms are unable to do a marketing mix model for every brand in every market, and for these cases, we take Nielsen’s combined learnings from 150,000 mix curves to predict the tipping point for a brand given its unique dynamics,” explains Hirani.
With the right marketing mix in place, brands can then ensure they distribute budgets to generate the right balance of short-term returns, such as temporary sales uplifts, and longer-term returns, such as brand building and consumer loyalty. This approach is known as creating a full funnel. It’s the idea that, while tempting to focus purely on the immediacy of those shorter-term results, doing so at the expense of longer-term brand engagement and awareness can be incredibly damaging to future prospects.
Risks of short-termism
This damage is twofold. First, a brand may find consumer awareness and consideration are eroded, with an impact on future sales. In fact, Nielsen found that a 1% change in awareness or consideration is likely to deliver a 1% change in sales over the long term.
Second, as this awareness is eroded, conversion rates decline. With fewer consumers aware of a brand and primed to buy, conversion marketing is less effective and cost per acquisition goes up.
“The net of these two effects is that marketers have limited their long-term prospects and also made it harder to capitalise on their short-term prospects – which is a fast path to contraction,” says Hirani.
Creating a full-funnel strategy isn’t always straightforward, of course. There are those channels that deliver both short- and long-term results, such as digital display, social and TV. These make up just over a third (36%) of channels and should be prioritised within a brand’s marketing mix.
Then, for the remainder of their investment, brands should track both sales impact and brand building on channels to understand exactly what their value is and how they fit into the longer term aims of the business. “When marketers evaluate media’s impact on both sales and brand metrics, they can better understand each channel’s role for their particular brand and make smart decisions,” says Hirani.
Another key consideration when making these calculations is target demographic. Campaigns with strong target reach deliver better sales outcomes. This might sound obvious enough, but Nielsen research shows that only 63% of US ads across desktop and mobile – ie some of the most data-rich platforms – are currently hitting the mark on age and gender. That’s why it’s critical that companies prioritise better measurement solutions, alongside calculating optimal investments, in order to secure the highest ROI on their marketing spend.
Though it may take a little extra effort, the rewards for brands that take the time to calculate the right spend, for the right channel, can be huge. Failing to do so can leave brands blindly wasting cash at best and missing out on significant ROI at worst – just when they can least afford to do so.