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Archive for February 1st, 2012

We’re going to talk about a few things today: The relationship between ad spend and sales, the importance of focusing on the right metrics in order to make smart budget decisions, the problem with using impressions as a unit of campaign success, and how easily die-hard habits can trip us up.

Hat tip to Chris Young for pointing me to this story in Business Insider. Pay attention to how the story begins:

Reality appears to have finally arrived at Procter & Gamble, the world’s largest marketer, whose $10 billion annual ad budget has hurt the company’s margins.

P&G said it would lay off 1,600 staffers, including marketers, as part of a cost-cutting exercise. More interestingly, CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

Read it again.

The piece de resistance in that little insight dinner you just treated yourself to isn’t the part about P&G’s $10B ad budget or that P&G is the world’s largest marketer. It isn’t even that it shrank its workforce by 1,600 (which is really unfortunate) and it isn’t even that Jim Edwards chose to characterize P&G CEO Robert McDonald’s fork in the road moment as an awakening. No, the really interesting thing in this story is this:

CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

That’s right: Ad budgets vs. sales. The company’s $10B investment in advertising & marketing vs. return on investment measured in… wait for it: sales.

Finally. Not likes, not followers, not retweets or follows or shares.

Sales.

But hang on… we aren’t out of the woods yet.

1. Advertising vs. Sales: In search of symbiotic balance.

On a call with Wall Street analysts, Mr. McDonald illustrated the relationship between spend and revenue by explaining how P&G’s  advertising budgets are determined in relation to sales numbers:

As we’ve said historically, the 9% to 11% range [for advertising as a percentage of sales] has been what we have spent. Actually, I believe that over time, we will see the increase in the cost of advertising moderate. There are just so many different media available today and we’re quickly moving more and more of our businesses into digital. And in that space, there are lots of different avenues available.

So far so good, right? Here we find that advertising spend roughly amounts to 10% of sales revenue. This is an important point as it illustrates three important insights:

1. Advertising and sales are not independent of each other. They are in fact intimately connected. (If not, your company has a problem.)

2. The former (advertising) is meant to influence the latter (sales). We know this. That is generally advertising’s purpose.

3. There exists for every company a sweet spot in regards to the ratio of ad/marketing spend vs. the sales revenue it helps generate. Companies that measure the impact of advertising on their sales have a 100% better chance of finding it than companies that don’t.

If there’s a concrete lesson here, it is this: Not tying your advertising and marketing dollars to sales is a lot like landing a 747 with a blindfold on. Actually… it’s harder. A 747 has elaborate navigation systems and can pretty much fly and land by itself. Your business can’t really do that. So… if you think that landing a 747 blindfolded is a bad idea, not measuring the impact that your ad spend has on sales is an even worse one.

The difficulty is that with a $10B ad budget like P&G’s – that encompasses thousands of campaigns in a broad range of markets – identifying what works and what doesn’t requires some measure of diligence, accountability (and competence) from every campaign and product manager across the organization. 1,600 staffers on P&G’s payroll lost their jobs over this simple point.

Here’s the warning shot fired by Mr. McDonald across the bow of every single professional in a marketing management role today: It doesn’t take a whole lot of skill or savvy to spend a company’s money. Anyone can gamble a budget on a campaign or an ad buy and cruise by, quarter after quarter, by virtue of the fact that they generated impressions or dialed up brand mentions. It used to be that the guy with the biggest chunk of money to spend was the most powerful guy in the room. Well… that simply isn’t good enough anymore. Accountability might just have been called back to the table.

As every CEO on the planet watches and learns from P&G’s course direction this year, expect this sort of organizational adjustment to become far more commonplace. Not the laying off, mind you: The focus on real results and accountability.

One can hope.

2. Ad spend and the new media landscape.

Under Mr. McDonald’s stewardship, P&G’s ad budgets are reported to have grown by 24% in the last two years. The theory behind the increase was probably pretty simple: Spend more, sell more. And to be fair, it isn’t entirely without merit.

The same theory was put into practice this month in Florida by the Mitt Romney Campaign and its allies. In an effort to decimate his principal opponent (Newt Gingrich) in the GOP’s Florida primary, the Romney camp took no chances: According to a study by Politico, the Romney campaign and its super PAC allies outspent Gingrich by a ratio of almost 5 to 1. (Ad spend breakdown: $15.3 million for Romney and Restore Our Future vs. about $3.4 million for Gingrich and Winning Our Future.)

The result: 12,768 ads supporting Mitt Romney. Only 210 ads supporting Newt Gingrich. (Sources: USA Today; Wesleyan Media Project)

The outcome: A 14-point lead for Romney going into the Florida primary. (The 14-point lead held to the end of the contest: Romney ended up with 46% of the vote vs. Gingrich’s 32%.)

The first lesson here is this: In a world of traditional media, ad spend does matter. If you are willing to erode your margins or if you have money to burn, spend more, sell more can still work pretty well, at least in short intense bursts.

The second lesson, however is this: The world has evolved. More importantly, the media landscape has evolved. That kind of wholesale ad spend is quickly losing its appeal for the folks footing the bill. Reach can be achieved at much lower costs now. Compare traditional media buys vs. the cost of engagement via social networks, for instance and you will see a radically different set of numbers.

Another aspect of the old vs. new media discussion is that we are learning that the stickiness of a message varies from channel to channel. There is mounting evidence that content shared by trusted and like-minded peers holds more power than the exact same content simply blasted over traditional media outlets. This raises a question about the validity of “impressions” as a relevant (see neutral) unit of measure (or KPI) for campaign success, at least moving forward. Not only do impressions only measure reach (rather than consumer behavior – like actually buying stuff rather than just watching an ad), it is now clear that impressions are not created equal. The notion that an impression via a television spot bears the same weight as an impression resulting from a trusted peer sharing the same spot on Facebook, for instance finds itself on increasingly shaky ground.

Is this another nail in the coffin of traditional media measurement? Maybe. (Hopefully.) Why am I even bringing this up? You will find out in a few minutes.

Back to the main vein of our discussion: Political campaigns and the business world would do well to catch up to the times unless they want to continue to spend hundreds of millions of dollars (if not billions) on bandwidths which may no longer provide the most bang for their buck. P&G’s Robert McDonald appears to have come to this realization.

Here he is again in the same call to Wall Street analysts:

I believe that over time, we will see the increase in the cost of advertising moderate. There are just so many different media available today and we’re quickly moving more and more of our businesses into digital. And in that space, there are lots of different avenues available.

In the digital space, with things like Facebook and Google and others, we find that the return on investment of the advertising, when properly designed, when the big idea is there, can be much more efficient.

There.

This is a radical change of perspective from a CEO who increased ad spend by 24% in just two years. Why the sudden change of heart? What happened? Three things:

1. A 24% increase in ad spend resulted in just 6% growth in sales for the same period. The numbers don’t lie: Spend more, sell more no longer works the way it used to twenty years ago. Not with the advent of the social web. Not in the new media landscape. The two year experiment was worth a shot but it failed. No sense continuing on the wrong path. As any good CEO would, Mr. McDonald looked at the facts, assessed the damage, and made a course correction. That’s how it’s supposed to work.

2. Communications channels have changed. The technologies have changed. Consumers and their expectations have changed. Search, mobile, location, social networks, community management and advertainment have pushed the old ad spend models a few feet closer to the edge of the big pit of irrelevance. Marketing has been fundamentally altered in the last few years. With a richer media mix today than ever before, and with a brand new palette of far more cost-effective (and stickier) options than traditional media, P&G finds itself in a position to adapt and explore new possibilities and models. That has to be exciting for Mr. McDonald and his team.

3. One of P&G’s experiments with new media was pretty successful already. Remember Old Spice? That was them. Mr. McDonald surely took a closer look at the little phenom and saw in it a template for a smarter, more effective hybrid model of traditional advertising, consumer engagement and potentially viral, WOM-driven advertainment. Case in point:

One example is our Old Spice campaign, where we had 1.8 billion free impressions and there are many other examples I can cite from all over the world. So while there may be pressure on advertising, particularly in the United States, for example, during the year of a presidential election, there are mitigating factors like the plethora of media available.

And here we come to another fork in the road. Remember that thing about impressions I brought up earlier? We’re getting to it.

3. Relevant success metrics vs. everything else.

We know that advertising’s purpose – at least for consumer products companies – is ultimately to drive sales.

We also know that one of the principal reasons why P&G CEO Robert McDonald is now shifting his attention (and budgets) away from traditional advertising models to a more diverse model of traditional and interactive/social types of media was brought about by the realization that more ad spend did not have the desired impact on sales.

It  stands to reason then that the principal success metric for P&G’s investment in advertising should be sales: The campaigns which most effectively drive sales win. Following the same logic, the campaigns which manage to most effectively drive sales while minimizing costs will be even bigger wins. Right?

Imagine you’re a CEO. Looking back on two key campaigns in the last year, you are asked to choose which one was most effective at selling one of your top products. Here they are:

Campaign A (Traditional advertising) – Cost: $2,000,000. Revenue: $20,000,000.

Campaign B (Social Media program) – Cost: $50,000. Revenue: $20,000,000.

Both campaigns resulted in the same volume of sales for the product but one cost 40 times less than the other. Which one was the most effective? That one. Campaign B. Same result at a fraction of the cost.

So the ultimate yard stick of success for a campaign is twofold: 1. The campaign drove (and grew) sales. 2. The campaign also minimized costs.

Now read Mr. McDonald’s words again:

One example is our Old Spice campaign, where we had 1.8 billion free impressions and there are many other examples I can cite from all over the world. So while there may be pressure on advertising, particularly in the United States, for example, during the year of a presidential election, there are mitigating factors like the plethora of media available.

Alas, when pressed to illustrate a key success metric for P&G’s Old Spice campaign, Mr. McDonald didn’t refer to increases in product sales or the relative cost of shifting a portion of his media spend to social channels. Instead, he introduced a completely different metric: Impressions.

Doh! How did this happen? How did we go from Mr. McDonald “waking up” to the connection between ad spend and sales back to “impressions?” Where did that even come from? *sigh* We were doing so well.

Let’s go over this again:

1. Impressions are an intermediate metric. They measure reach. Eyeballs, if you will. They don’t take into account kind of important things like conversions to sales, for instance.

If a campaign is clever and entertaining but ineffective at prompting consumers to buy a product, it will still be shared via social networks. It might even “go viral” and enjoy 1.8 billion impressions, likes and shares. But free or not, those 1.8 billion impressions could result in exactly $0 in net new sales.

Impressions are not transactions. Sharing content isn’t buying. It’s just sharing. Be very careful not to stop there, even on a call to Wall Street analysts. Stick to numbers that matter: Spend and sales. Close the loop. No matter how good the intermediate numbers look, remember to track the impact of your campaigns all the way to their ultimate goal: Driving sales of a product.

2. Those 1.8 billion impressions were not free. Not by a long shot. The amplification effect of social networks and viral sharing may have been free, but the campaign itself wasn’t. The strategists and creatives who designed, built and managed the campaign didn’t work for free. The actors, production staff and editors who put the spots together didn’t work for free. There were production costs involved. Digital folks wrote code and built apps and websites to make the content not only work online but spread properly to gain its initial momentum. A small army of talented and very well trained professionals made those 1.8 billion impressions possible, then nurtured that process.

Not to mention that the Old Spice campaign had major traditional media components. The campaign included ad spend for TV, print and web. The social components (YouTube, Facebook, etc.) were just one part of a greater whole. The two reinforced one another very well, but… we are a far cry from 1.8 billion “free” impressions.

Now you see how easily focusing on the wrong success metrics can lead companies astray. In three seconds flat, we were right back where we started: Instead of focusing on driving sales we shifted to driving impressions.

Note that as soon as the conversation shifted back to the old media notion that “impressions” also serve as a success metric for marketing activity, bad assumptions immediately entered the picture:

1. The assumption that 1.8 billion impressions necessarily impact sales.

2. The assumption that impressions are free because they take place on social networks.

That is how fragile business focus is these days: The introduction of just one bad metric can shift your perspective enough to send you and your media spend into the ditch in a matter of seconds. With hundreds of potential success metrics and digital statistics being thrown at decision makers all day long, it is easy to lose sight of what matters, of what works and what doesn’t.

In case you’ve lost track as well, here’s a reminder:

CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its sales.

The article does not say CEO Robert McDonald finally seems to have woken up to the fact that he cannot keep increasing P&G’s ad budget forever, regardless of what happens to its likes. … or followers. … or shares. … or retweets. … or impressions.

It says sales and there’s a good reason for that.

One last illustration to bring it home: Remember our two examples from earlier?

Campaign A (Traditional advertising) – Cost: $2,000,000. Revenue: $20,000,000.

Campaign B (Social Media program 1) – Cost: $50,000. Revenue: $20,000,000.

Now let’s add a third campaign:

Campaign C (Social Media program 2) – Cost: $50,000. Impressions: 100,000,000 (estimated) Revenue: unknown.

Let me ask you something: Given the choice, which of these three campaigns would you rather be responsible for come reporting time? Which one would you feel most comfortable presenting to Mr. McDonald? Which one would you want to stake your career on?

Here’s to keeping your eye on the ball.

Cheers,

Olivier

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CEO-Read  –  Amazon.com  –  www.smroi.net  –  Barnes & Noble  –  Que

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