03 FEB 2021
Advertising works. The challenge for C-suite is to convert success into higher share prices.
The immediate link between successful advertising and a successful business should be clear: advertising boosts sales and margins, helping to grow earnings.
That’s why shareholders should regard it as an essential ingredient for growing value, even in the industries hardest hit by COVID-19.
The good news is that investment in advertising is also less risky than the stock market. The equity that brands build with consumers isn’t subject to cyclical crashes. It’s very hard to destroy brand equity - big brands that change their name tend to appear in research survey answers even after years of significant spend promoting the new name.
The challenge for marketers and those at C-suite level is there’s no rule of thumb that governs how much and when they should invest in advertising in order to build their share price.
Stock market success for private investment can be summarised as regularly buying (S&P500) Exchange Traded Funds and holding them long-term - but there’s no equivalent for advertising. What we can do, however, is identify the things that we don’t want to do; the things we know will destroy shareholder value.
You need to ask yourself these three questions, which are proven to reduce returns but are practices followed by many:
#1 Are you being too technical?
Brands have rushed to become digital first. The logic behind this goldrush is that as long as you have the right data and algorithms, everything else (including marketing fundamentals) is less important.
The problem is that algorithms are just tools that go through historical data and give a probability score. This can easily result in wasted investment as the people who are most likely to buy are people you often don’t need to advertise to. That’s why getting digital right is so hard. Adidas was the first to speak publicly about this, helping to kickstart the new effectiveness vs. efficiency agenda for the industry.
#2 Are you taking advantage of market downturns?
How much you invest corelates to your market share development. Typically for many products and sectors, if your share of advertising investment in your category is higher than your market share, then you would expect your share to grow. As the economy expands, advertising investments also tend to expand and vice versa. When the economy contracts, the same applies to advertising investments.
Kantar found that almost two-thirds of companies had slashed marketing budgets by an average of almost 37% last year, but for any investor it should be logical that economic downturns are best times to invest since retaining your investments while your competitors are reducing them will allow you to build share at a significant discount. Brand owners such as Procter & Gamble know that – in the years following the Dotcom bubble, the company’s then CEO A.G. Lafley famously stated: “When times are tough, we build market share."
#3 How exposed are you to speculative investments?
Advertisers often rush to test new technologies and channels for which intrinsic value is yet to be confirmed. The advertising industry delights in this “being first” culture, which is often nothing more than speculation.
It’s true that, depending on brand size and market position, it’s often acceptable to expose a small percentage of your investment to high-risk solutions as part of a test and learn approach. The correct course of action, once the testing is over, should be to stop or scale down these investments to the level that is supported by econometric modelling.
This is very hard since it’s not unusual to see senior marketers invest hundreds of hours into the newest opportunities. This makes it emotionally difficult for them to make the rational decision. Direct Line Group has an evidence-based culture that acts as a great hedge against speculation.
Often, damaging actions can be driven by data signals that allow algorithms to determine the probability of a certain event taking place, triggering ads that can help influence consumer decisions.
The truth is that advertising has changed dramatically in recent years, but the fundamentals remain broadly similar - we just need to apply them to the new opportunities that digital has created. Because only if we do that can we ensure that the benefits of advertising are seen not just by the business, but also by shareholders too.