ManSavesDog

Advertiser Mag

First published in Advertiser Magazine

Research against $US 1 billion in advertising spending reveals that 47% of campaigns fail before a dime is spent on media[1]. This would suggest that not only was John Wanamaker right but that the ad industry has improved little since he predicted that was the case 100 years ago[2].

While my book, What Sticks, addresses a variety of reasons on why advertising fails, there is one element I believe is doing the most damage to advertising effectiveness. That is the underlying economic fundamentals of the relationship between Agencies and Marketers and in particular the misaligned incentive system. I’ll let the reader decide if this explains a horrific 47% ad failure rate.

So what does the current business relationship between advertisers and their agencies incentivize? Based on what I have observed, it is winning awards. Let’s look at how that works. Commission structures and hourly fees structures incentivize volume, or more revenue, for agencies. When the incentives are directed at volume, then the agency is perpetually directed to win new business (the backbone of any agency today) and one of the contributing factors to winning new business is awards (the backbone of new business). And I’ll go one step further, awards are best garnered from “big idea” high production values TV commercials, which is certainly reflected in today’s media allocation. It’s a perfect system, unless you value effectiveness.

And to be fair, I am not saying that advertisers or agency personnel don’t try to develop effective advertising. Of course they do. However the failure rate seen in the research suggests something else has to be going on. Incentives are insidious like this; they create all sorts of unintended consequences. If you’ve read Steven Leavitt’s Freakonomics[3], you get that incentives play a large role in the outcome of any situation.

So what is the trend in the agency marketer relationships today? Procurement. Much is written in today’s trade press and discussed by both the ANA and AAAA about marketers seeking to reduce agency fees via the insertion of procurement departments into the agency/marketer relationship. The focus of which is to reduce the agency hourly fee, lowering commission or eliminating elements of the agency’s recommended program. None of which directs an agency to act in the interest of producing better and more effective campaigns.

In fact, some of the unintended consequences of reduced agency fees include reduction in agency training programs, decrease in research that seeks to increase learning about how advertising really works, lessening of research into the effectiveness, or ROI, of a particular campaigns, and the lessening of agencies’ ability to hire talent. I am not saying higher agency fees alone would improve these critical elements, however, reduced agency fees and a lack of strong incentive toward advertising effectiveness will pretty much guarantee a high rate of failure.

Oddly, many of the procurement personnel I recently spoke to concurred with my logic above but they are paid to do a specific job (probably even incentivized to do it) and so the negotiation of agency fees continues to be a major industry trend.

The Argument for Procurement & Negotiation of Agency Fees

To better understand today’s trend, let’s look at this in relationship to advertising’s economic impact on earnings – generally the ultimate incentive for any company. As the chart suggests, if a company with $500 million in sales, allocates 10% to Advertising and another 10% of that goes to the agency’s fee, (yes, I am aware that agency fees of 10% are from a bygone era) this leaves the agency with a $5 million fee. If the marketer negotiates 20% off that fee, this ultimately results in a +1% gain in corporate earnings. My guess is that every company today would be very excited about a 1% gain in earnings. Thus, the economic support for procurement and hard-negotiating of agency fees is obvious. Who wouldn’t support that?

But are we missing the boat? What if we invested in advertising effectiveness instead? What happens then?

What Do We Really Know About the Impact of Advertising?

Before we look at this issue, allow me to put some of the research learning’s in context. The focus of the research was to assess the relationship of one medium to another both in effectiveness and most importantly, in cost effectiveness. Cost effectiveness by medium was then used to reallocate dollars from the most expensive media to another medium, obviously seeking to produce a more impactful overall campaign.

Of course, a lot of factors influence cost effectiveness, among them the strength and breadth of the consumer motivation selected, the clarity of the ad message itself, the targeting and timing of the ad, the cost of the medium, and really important, where each medium is on its diminishing return curve (a measure we have seen no marketer making to date). The measures of effectiveness were whatever the brand told us to measure, which would be some variation of awareness, brand imagery, purchase intent, or sales. The cross media optimization analysis was accomplished via real-world campaigns against 1.1 million consumers’ attitudes and sales behavior. Each study was reviewed by the ARF in addition to each marketer’s research group, all of which gave us high confidence in the results[4].

We found that simple optimization (just between media, not within a medium) produces average gains over 30%. Thus we coined the phrase “same budget, better results” for our work. Sometimes this optimized improvement was achieved by just removing ads that didn’t work but more often it was from redistributing funds from one medium to another. Also, many marketers were often very over invested in one medium and the reallocation of those dollars to more cost effective media made a big difference. Here are some examples:

McDonald’s launched a new menu item in 2002 behind a four week campaign of TV, Radio and some Online In this case, we found McDonald’s was spending so much in broadcast that the TV and Radio ads had virtually stopped having any impact. In fact, while the first 80% of spending increased awareness by 35 points (the primary measure), the remaining 20% grew it only 2 points. Therefore, shifting 14% of funds to Online (magazines were not in the mix) and leaving 6% for another campaign another day, brand awareness measures bounced by 5 points (not +5% but 5 whole points). This naturally violated our foundational phrase as we now had “lower budget, better results”.

For the Ford F-150 relaunch in 2004, the results were even more dramatic. In this study we measured through to sales, which involved gathering the vehicle registration data of every Ford F-150 sold and matching that against the 30,000 people whose media habits we were monitoring. In this case, we were able to identify and monitor consumers that were exposed to a media mix without Online and those that had just 2 ½ percent of the budget placed in Online. That campaign with online has Truck sales +21% versus mix with online, or an estimated $750 million in sales. And when we looked at sales against group with a different media allocation F-150 sales were $1.4 billion higher!!!

These are astonishing outcomes that could have the power to totally transform a brand and it was all accomplished with a little extra effort and an investment in research.

Granted, both of these campaigns operated with advertisements that worked and worked very well. Neither of these campaign ads fell in the 47% of campaigns that failed to hit upon a solid consumer motivation or a failed advertising message that didn’t communicate. Optimizing creative that doesn’t change consumer behavior is much like preverbal re-arranging the deck chairs on the Titanic.

What if We Made Sure Each Campaign Worked?

So why don’t all campaigns work this well? This article proposes that as well intended and professional as people are, commissions on media buying and hourly fees simply incentivize the wrong outcome. Driving down agency hourly rates or number of hours forces agencies to spend less time getting a campaign right. This would explain why we found in the course of the research that when we told the agency or client that the advertisement for a particular medium did not work, in all but one case, they said run the ads anyway. The epitome of throwing good money after bad.

But let’s look at the benefits of getting advertising right. Take our chart from before but this time let’s assume the advertising really worked. We’ll take a conservative 10% increase in sales (although we saw much better in our optimizations). We’ll leave the absolute budget allocation to advertising the same (resulting in only 9% of advertising to sales) and keep a full 10% to the agency fee. The result with margins staying the same was that the increase in earnings is +10% versus the paltry +1% before!

And my guess is that any brand getting its marketing right at this level has garnered a significant future producing competitive advantage for some period of time.

So why if it is this easy, does it not happen? Well first, marketing is not easy and I think part of the problem is that industry parishioners don’t give it enough credit for it being hard. Getting the motivation, the message and the media right is both an art and a science and takes more effort (i.e., resources) than is applied today. And given the level of increasing level of complexity in today’s media world, knowing a whole campaign works based on “our gut” just doesn’t cut it anymore.

So What Do We Do Now?

My suggestion is that marketer, their procurement group, and the CEO & CFO (this is that important) look carefully at what they want to achieve and the incentives and climate they are creating to foster that result.

Are you paying your agency to get the advertising right? Are you giving them the latitude to be wrong and the resources to get it fixed fast? Are you making sure the agency is paying its personnel to get it right? Properly aligned incentives are needed at all layers. Heck, are you paying your own marketers in the right way and giving them the lattidude to get the advertising right.

But it’s not going to be easy. I recently communicated a message of “advertising could be so much more powerful” to a group of European brand mangers suggesting in part that one 90 minute meeting in the process of campaign development could greatly improve insuring the campaign elements work. The head of advertising for this large package goods company stood up right after me and said they were not going to do that. Guess there was no incentive to take time to ensure the ads work.

In the end, I think Georg Christoph Lichtenberg, the 18th-century German scientist, satirist and Anglophile said it best. “I cannot say whether things will get better if we change; what I can say is they must change if they are to get better. “ And there sure is a lot of room for better here.

By Greg Stuart

Co-Author: What Sticks