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Since COVID, advertising ROI has grown 4% but the profit driven by advertising has dropped by 11%, reports Les Binet, the world’s foremost authority on marketing effectiveness. These findings come from a brand-new study published by Les Binet and Will Davis called, Go Big Or Go Home: How Small Thinking is Killing Advertising and What To Do About It.

Davis is the founder of Medialab, an advertising agency with a data driven approach to media planning and buying. Davis brings forensic, results-focused discipline to brand building.

Here are the key findings:

• A new study by Les Binet and Will Davis reveals the advertising industry’s maniacal fixation on ROI has resulted in a modest 4% increase in ROI since COVID but a worrying 11% erosion in advertising driven profits.
• ROI is mistaken for business outcomes such as sales growth, profit growth, and customer growth. ROI is none of those things. It is simply a ratio of revenue/profit generated by ad spend.
• Surprisingly, ROI and revenue/profit growth move in the opposite direction. Low profit growth produces high ROI. Strong profit growth results in lower ROI.
• Perception vs. reality: Marketers mistakenly believe ROI trumps budget in driving profit growth. The reality is budget is 9 times more critical than ROI in generating profit.
• A 50/50 mix of brand building and performance strategies generates 50% greater revenue growth versus 100% performance tactics. Performance marketing converts existing demand. Brand building creates future demand, which permits conversion activity to continue to work as new demand becomes available.
• The strongest predictor of growth is the relationship between share of voice (brand ad spend ÷ category spend) and the brand’s market share. If share of voice exceeds share of market, sales tend to grow. If share of voice is similar to share of market, sales tend to be stable. If share of voice is smaller than share of market, sales tend to shrink.
• Since ad budget is nine times more likely to predict profit growth than ROI, Binet and Davis offer three approaches to thoughtfully setting ad budgets: Ad spend ratios, task-based budgeting, and share of voice analysis. All three can be utilized for a well-reasoned process for developing advertising budgets.

Since COVID, advertising ROI has improved by 4%, but ad-driven profit has plunged by 11%

Sourced from the Institute for the Practitioners of Advertising, the data reveals a dangerous trend: advertising is getting less effective.

What is going on?

The advertising world’s myopic focus on ROI is causing sales and profit growth to erode.

ROI is an efficiency measure, NOT an effectiveness measure

The advertising world easily throws around the word “return on investment” or “ROI.”  We mistakenly use it as a catch-all for every business outcome: sales growth, profit growth, and customer growth. 

Sales growth, profit growth, and customer growth are effectiveness measures. ROI is none of those things.

ROI is a ratio of efficiency. To determine ROI, divide short-term revenue growth or profit growth by campaign media investment.

ROI is a ratio of ad spend and profit/revenue generated

• ROI formula = profit/revenue generated ÷ ad spend
• Example: $20,000 of sales were generated by a $10,000 advertising campaign
• $20,000 sales revenue ÷ $10,000 ad campaign = $2.00 ROI
• How to read: for every dollar of advertising, $2 of sales were generated

Which ROI would you want for your advertising campaign?

Would you want a:

• $4 ROI?
• $3 ROI?
• $2 ROI?
• $1.50 ROI?

The biggest ROI would seem desirable. However, ROI does not tell you anything about actual revenue growth, profit growth, or customer growth. It’s just a ratio.

Now which ROI would you select?

Let’s revisit the ROIs and reveal the revenue generated by each campaign:

• $4 ROI that generated $120,000 in sales
• $3 ROI that generated $165,000 in sales
• $2 ROI that generated $260,000 in sales
• $1.50 ROI that generated $345,000 in sales

Now which campaign appears more desirable? The smaller the ROI, the greater the sales!

The most important number that really determines sales and profits is not ROI. It’s the budget! The advertising profit is the result of budget and ROI.

ROI and sales move in the opposite directions, explain Les Binet and Sarah Carter in their spectacular book, How NOT to Plan: 66 Ways To Screw It Up

“As you spend more on advertising, it often gets more effective (sales and profits generated go up), but less efficient (ROI goes down). That’s the nature of diminishing returns.

It means that in practice, the highest ROIs tend to come from small budgets. If your aim was to maximize ROI, you’d go for the small-budget campaign. But that would mean smaller profit. Going for the big-budget campaign would mean lower ROI, but bigger profit. And that’s the nub of it. 

As Tim Ambler points out in his classic article ‘ROI is dead: now bury it’, advertisers should try to maximize profits, not ROI. ROI is usually highest when sales and budget are close to zero. So trying to maximize ROI is a good way to destroy your brand.

This confusion is one example of a general confusion between effectiveness and efficiency. They’re often used interchangeably, but can point in different directions.

Effectiveness is about reaching targets. So, sales and profit are effectiveness measures. 

Efficiency is about how much effort you expend to achieve a given effect. ROI is an efficiency measure.

 IPA research shows that, while pure direct response activity is a highly efficient way to spend budgets, it’s not very effective on its own. Sales effects tend to be small and short-term (as Heinz found to its cost in the 1990s, when it briefly junked all advertising in favour of Direct Marketing).

Long-running brand campaigns, however, tend to be highly effective (big sales and profit effects), but less efficient without the support of activation channels like Direct Marketing and search. Ideally, we should be effective and efficient. IPA research suggests that this means spending the majority of budget on brand (effective), supported by lower spend on direct (efficient). 

But effectiveness matters most. Better to achieve your goals inefficiently than be a gloriously efficient failure.”

This is why your ROI obsession can cripple revenue and profit growth. If you keep optimizing for a higher and higher ROI, you could cause real harm to your firm’s sales and profit growth.

What matters most for driving profit? Budget or ROI? 500 Chief Marketing Officers got it wrong

Researchers asked a panel of 500 Chief Marketing Officers which mattered more for driving profit: budget or ROI. Marketers overwhelmingly picked ROI.

However, analysis of actual business outcomes from the Institute for the Practitioners of Advertising Effectiveness Databank told a different story. Les Binet explains, “The main driver of profit is not ROI, it’s the budget by a factor of eight or nine to one. ROI is not the main driver … Budget is nine times more important than ROI, and that suggests that the most important decision in marketing is actually how much to spend.”

IPA data reveals that 89% of profit variation is due to advertising budget. Only 11% is due to ROI. The pattern is consistent across consumer-packaged goods, retail, services, and durables. Thus, your ad budget is nine times more important to your company profits than your ROI.

ROI and profit move in the opposite direction

The left to right axis depicts ad spend. The vertical axis represents incremental profit from the campaign. As you move to the right, spend grows, profit increases, and ROI drops.

As you move to the left, spend drops, profit drops, and ROI increases. You can get a super high ROI with tiny spend and zero profit growth.

The bigger the ROI, the smaller the profit. The greater the profit, the smaller the ROI.

To grow profit, increase your advertising budget

Underspending on brand building comes at a significant growth cost

Brands that devote most of their marketing budgets to performance tactics see the lowest growth, according to a major study from the World Advertising Research Center (WARC) called The Multiplier Effect.

• Over one month, a balanced 50/50 mix of performance and brand building experiences 27% greater revenue growth than brands that put all their money into performance marketing.
• Up to six months, the 50/50 mix of brand building and performance marketing generates +40% greater revenues than 100% performance tactics.
• Over the longer term (6-12 months+), the 50/50 brand building and performance mix has +50% greater revenue than the 100% performance tactics.

Performance marketing “valley of death”: When converting existing demand dries up

Performance marketing excels at converting existing demand. Brand building creates future demand. If all marketing resources are devoted to performance marketing, sales plateau when demand is exhausted.

Conversion activity stops working as there is no more demand. The sales event machine stops working when the supply of in-market consumers aware of a brand has been exhausted.

When a business consistently uses brand building to create future demand and sales events to convert existing demand, great things happen

Why does the 50/50 mix of brand building and performance marketing generate greater revenue growth? Brand building allows future demand to be consistently created. Sales growth can be maintained.

ROI has nothing to do with growing sales; What matters is share of voice: How much you spend relative to your competitors

To understand brand or business growth trajectory, first determine “share of voice.”

Share of voice is the ad spend divided by category ad spend. Say a furniture store spends $500,000 dollars a year on advertising in a town where there is $5 million dollars of total furniture advertising.

Divide the store ad spend over category spend to determine share of voice. $500,000 divided by $5,000,000 equals a 10% share of voice.

The furniture store represents 10% of furniture store advertising impressions in the market.

You can also determine share of voice using gross rating points or gross impressions.

Firms like Borrell and Associates have detailed estimates on local ad spending. On a national level, MediaRadar reports ad spend of national brands.

Share of market: Revenues as a percentage of category revenues

Market share is a business’ revenue divided by category sales.

Let’s say the furniture store generates $10 million dollars in sales in a town with $100 million dollars of total furniture sales. Divide the store sales over total category sales to determine the market share.

$10 million divided by $100 million equals a 10% share of category spend. The store gets a ten share of furniture sales in the market.

Compare share of voice to share of sales

This simple chart from Les Binet and Peter Field, the “godfathers of marketing effectiveness,” depicts future growth trends of a business or brand.

Market share is shown left to right. Share of voice is depicted on the vertical axis.

• If share of voice exceeds share of market, sales tend to grow.
• If share of voice is similar to share of market, sales tend to be stable.
• If share of voice is smaller than share of market, sales tend to shrink.

Sales are flat because share of voice matches market share

It’s frustrating when sales are flat despite advertising. But growth depends on the relationship of an ad budget to what’s happening with ad spending in the category.

To grow, budget for “Extra Share of Voice” – implement a larger share of voice than your market share

If share of spending equals market share, business will generally be stable but not achieve the growth. Businesses that grow have an advertising share of voice that’s bigger than their market share.

If the furniture store with a 10% revenue share increased their ad budget to a 15% share of voice, they likelihood of increased sales increases.

Les Binet concludes, “What matters is not simply how much a brand spends, but how much it spends relative to competitors. Brands that maintain stronger visibility than their market position would suggest often create conditions for future growth.”

Three ways to set your advertising budget

In their report, Les Binet and Will Davis offer three approaches to set an optimal advertising budget. They indicate these concepts could be used together for a well-reasoned process for developing advertising budgets. Given that budget size is nine times more impactful on your company’s profit, it is worthwhile to devote considered care and thought to creating your ad budgets.

1. “Advertising spend ratio: A popular approach uses the advertising spend ratio. This metric tends to vary from one category to another. (A general rule of thumb is to devote 8% to 10% of revenues to advertising.) Ad spend ratios tend to be low for commodities and high for luxury goods. Find out what the average ratio looks like in your category. The more you aim above that benchmark, the faster you’re likely to grow.
2. Task-based budgeting is also common. Start by setting targets for customer acquisition and churn, then use conversion benchmarks to estimate how many exposures you need. Finally, use Cost per Thousand (CPM) to calculate budget requirements.
3. The third approach is Share of Voice analysis. This involves comparing a brand’s share of advertising expenditure (SOV) against its market share. Brands that set their Share of Voice above their market share tend to grow at a rate proportional to ‘extra’ share of voice (ESOV), the gap between share of voice and market share.”

Here are the key findings:

• A new study by Les Binet and Will Davis reveals the advertising industry’s maniacal fixation on ROI has resulted in a modest 4% increase in ROI since COVID but a worrying 11% erosion in advertising driven profits.
• ROI is mistaken for business outcomes such as sales growth, profit growth, and customer growth. ROI is none of those things. It is simply a ratio of revenue/profit generated by ad spend.
• Surprisingly, ROI and revenue/profit growth move in the opposite direction. Low profit growth produces high ROI. Strong profit growth results in lower ROI.
• Perception vs. reality: Marketers mistakenly believe ROI trumps budget in driving profit growth. The reality is budget is 9 times more critical than ROI in generating profit.
• A 50/50 mix of brand building and performance strategies generates 50% greater revenue growth versus 100% performance tactics. Performance marketing converts existing demand. Brand building creates future demand, which permits conversion activity to continue to work as new demand becomes available.
• The strongest predictor of growth is the relationship between share of voice (brand ad spend ÷ category spend) and the brand’s market share. If share of voice exceeds share of market, sales tend to grow. If share of voice is similar to share of market, sales tend to be stable. If share of voice is smaller than share of market, sales tend to shrink.
• Since ad budget is nine times more likely to predict profit growth than ROI, Binet and Davis offer three approaches to thoughtfully setting ad budgets: Ad spend ratios, task-based budgeting, and share of voice analysis. All three can be utilized for a well-reasoned process for developing advertising budgets.

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Pierre Bouvard is Chief Insights Officer of the Cumulus Media | Westwood One Audio Active Group^®.

Contact the Insights team at CorpMarketing@westwoodone.com.