Marketing’s ROI returns to 2005 levels, study shows

Marketing effectiveness has been on the rise over the past five years and has now exceeded its last recorded peak in 2005, new research shows.

Looking specifically at advertising campaigns that have not won awards, the report by econometrics firm Magic Numbers, supported by the IPA, reveals a “quite significant” fall in revenue return on investment (RROI) between 2005 and 2016. In 2016, RROI (adjusted for the size of the advertiser) was around a third what it had been in 2005.

However, that figure has been rising ever since, and in 2019 RROI was 140% what it was in 2005, according to the report’s authors, Paula Gonzales and Dr Grace Kite – who shared some of the findings of the study with Marketing Week in her column earlier this week.

Indeed, unawarded advertising now returns an average of £3.80 in revenue per £1 spent. Advertising is therefore likely to be profitable “for all but those with the slimmest margins”, the report says.

RROI does increase with the size of an advertiser’s business, however. The report’s authors estimate that an advertiser earning £50m more in total turnover per annum received on average 40p more revenue per £1 spent on ads.

Meanwhile, advertisers that have won an IPA effectiveness award perform even better, returning three times as much revenue per £1 spent – an additional £9. Recent winners include Aldi, Tesco, Volvo, KFC and Tango.

The study gathered ROI data from more than 500 UK advertising cases worth £5bn in spend, including 343 non-award-winning cases. The database has been named Arc21, and will continue to be expanded.

The report notes that ROI is only one measure of marketing effectiveness. The data does not take into account very long-term effects, or the impact of advertising on ability to charge price premiums, or permanent changes to sales caused by campaigns. Because Arc data is comprised of results from econometrics, it also only represents advertisers with spend of more than £25,000.

However, according to Kite, the data does suggest that any “crisis of effectiveness” – as first identified by researcher Peter Field in 2019 following an analysis of IPA award entrants – is now over.

In fact, the RROIs of 2016 may have been disproportionately impacted by the uncertainty and disruption surrounding the Brexit vote, the report states. “If we were to consider 2016 as an outlier, a possible read from the chart (above) is that there was no crisis outside award winners at all,” it says.

Why?

According to the report, over the period in which RROIs have been increasing there has been “significant experimentation and evolution” in online channels, which is “likely” a contributing factor towards their improvement.

In 2005, 9% of spend among 139 non-awarded cases was invested online. This figure rose to 17% by 2016 as technologies developed, before jumping to 35% in 2017. While online spend has marginally dropped off since, its percentage remains in the low 20s.

Indeed, data from the study shows more brands with low RROIs have a low percent spent online, while there are more high RROIs when 30-70% of budgets are spent online. The report claims the optimum share of budget to spend online is between 40-50%.

The same relationship can be seen across categories (see graph below), showing that in the range of 0-30% of budget spent online, category RROI increases with spend. Entertainment and ecommerce are treated as outliers here, as accurate conclusions could not be drawn.

However, the relationship between these two metrics is “noisy”, suggesting the optimum online/offline mix depends on context.

“While this dataset is not fully conclusive on the issue of whether there has been a more general crisis of effectiveness, we favour the explanation that effectiveness has been in flux,” the report concludes.

“Based on this dataset and our own experience we believe that in the last 15 or so years a lot of experimentation has been taking place, and that in the last five years the experimentation is starting to come to fruition, so we’re now seeing a more mature use of the newer channels and so better RROI.”