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Let’s talk about advertising impact on sales and profits

Outdoor billboard with writing that says this will drive $1m in sales - probably

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Why read this? : We look at how you measure what advertising does for your business. Learn the different ways to look at advertising impact on your results. We also look at the pros and cons of short-term and long-term advertising approaches. Read this to learn more about advertising’s impact on your sales and profits.

Advertising (including media) is usually the biggest area of marketing spend. That gets it a lot of attention. Marketers, agencies and finance teams spend a lot of time analysing advertising impact on sales and profits. As advertising guru David Ogilvy famously said, if it doesn’t sell, it isn’t creative (advertising)”. 

Advertising clearly needs to drive sales and profit. That’s why you do it. But there are short- and long-term ways to boost performance. So you need to first decide what you want your advertising impact to be.

What can advertising do for your business?

First, you need to work out how advertising drives sales and profit. In simple terms, advertising influences customers to buy. When they buy, your sales and profits grow. Obvious, right?

But the relationship between advertising and sales isn’t obvious. How many people need to see the advert to drive sales, for example? How often do they need to see it? What if the wrong people see the advert? What if customers don’t like the advert? 

These are the sorts of questions you need to work through. You need to work out how your media spend impacts sales. It’s one of the many challenges with media buying.

Activation versus brand-building

For a start, people don’t like to admit advertising influences them. But if it didn’t, companies wouldn’t do it. Advertising influences what customers think, feel and do. And that drives sales. 

Influencing thoughts and feelings usually takes longer, and pays off longer term. Influencing actions is faster, but the impact doesn’t last as long. 

That means there’s 2 types of advertising. 

First, there’s activation advertising. This focuses on action now. It creates an imperative to do something, often based on the idea of scarcity. Act now or miss your chance. (see more on this in our behavioural science article). 

The focus is on what people do. You use a rational benefit or offer to encourage buyers to act quickly.

Your focus is on short-term gains. You talk about functional benefits to drive the transaction, not the emotional connection to the brand. The focus is on customers who are ready to buy.

An old pocket watch dangling hypnosis style in front of a leather chair with a speech bubble saying "Buy me..."

Then there’s brand-building advertising. This takes a longer-term view. It aims to build deeper, emotional connections with customers. These adverts appeal to a broader audience. They’re not about the sale. They appeal to those who aren’t ready to buy now, but who may buy in the future. 

These emotional connections “stick” longer in the minds of customers. They see the brand more positively. And when they’re ready to buy, they’re more likely to choose the brand whose advertising they liked.

Activation adverts - Short-term sales

It’s tempting to look at activation advertising driving immediate sales, and only run that type of advert. But that’d be a mistake.  

Activation advertising only impacts customers at a certain point in their buying journey. It focus on customers who already consider the brand in the brand adoption funnel.

Activation adverts drive trial. Customers are already in “buying” mode. 

But if the customer isn’t aware of or considering the brand, activation adverts won’t work. Customers will ignore them. They’re not relevant. 

The brand choice funnel - trust - aware - consider - trial - loyalty - repeat purchase

You need brand-building adverts to build awareness and consideration first. Then your activation adverts persuades those customers to buy with rational and logical offers. 

Incentives and sales promotions

These offers often include an incentive or sales promotion. Examples include price discounts, a physical gift with purchase, or an extended warranty or guarantee.

It’s common in retail advertising. In this Bunnings advert, for example, you see a range of products on sale. Plus, the Bunnings price guarantee.

Activation adverts like this almost always drive the number of units sold.  

Great. 

But sales isn’t your only business objective. Profits matter too. And activation advertising isn’t always great for the bottom of your profit and loss.

Activation advertising impact on profits

Activation advertising boosts short-term sales. But you need to think about where those sales come from, and how much they’re costing you.

For example, think about the type of customer who buys when you run activation adverts. Ideally, these are switchers. Customers who currently buy a competitor, but switch after seeing your advert.

But, if customers switch based on an advert, chances are they’ll switch back when your competitor advertises. This can be an expensive way to get customers. Customers who switch easily won’t stay loyal.

If it includes a sales promotion, your cost per acquisition goes up even more. You also lose money on every regular customer who’d have bought at full price anyway. (see our price discounts article for more on this). 

Buying behaviour when on promotion

Next, think about the buying behaviour which activation advertising and sales promotions drive.

First, there’s pantry fill. This is when people stock up on promoted products. In the long-run, they don’t buy more. They just wait till they need to buy again. Multi-buy offers such as “three for two” or “buy one get one free” are particularly bad for this. 

Then there’s cannibalisation. This type of advertising often influences existing customers to switch from other products in your range to the promoted product. Again, not good for your profits. You’re not gaining new sales. Just switching what existing customers buy. Usually at a lower price. 

Activation advertising also pulls in deal hunters. These are customers who always buy lower price products. This can boost short-term sales if you’re the best price on offer. But, there’s no loyalaty. They switch if another brand offers a better deal. That’s not good for your profits. 

And finally, if you (or your competitors) run too many sales promotions, customers start to expect them. They hold off buying at the regular price. They know if they wait, there’ll be a new promotion along soon.

We know one food category for example, where 60%+ of sales are on promotion. That’s bad for profits. 

That’s not to say you should never run a deal. But deals should be infrequent enough that customers don’t expect them.

So, if activation advertising only works for short-term sales boosts, what happens with long-term brand-building advertising? 

Brand - building adverts - long term

Brand building advertising has a different impact on your sales and profits. Remember the brand adoption funnel. Part of advertising’s job is to drive trust, awareness, consideration and loyalty

These measures takes time to build. Customers don’t trust a brand after one advert. Trust comes from a reputation built over time. Customers trust brands they know, and feel emotionally connected to.

Example brand-building advertising

Look at this Qantas brand-building advertising, for example.

This advert focusses on the emotional benefit of coming home to family. No functional, short-term benefits to explain why Quantas is better. 

It’s not directly appealing to people flying now (not that many people are) like an activation advert. It has a broader emotional appeal. 

Brand-building adverts focus on emotions. They make customers feel things. You feel more connected to things which appeal to your heart, and not your head.

This connection may not drive an immediate sale. But, customers remember it when they’re next ready to buy. Those positive brand associations stick, and help create brand loyalty

Of course, it’s hard to predict when that next sale will be. Or, what the value of the association is. This is brand equity. But it doesn’t show up in your profit and loss.

Marketers often have to justify these brand-building adverts without a lot of back-up data. The data to prove the investment doesn’t come through till after the money’s been spent. That’s tough to argue. 

Plus, you have competitors running short-term activation advertising. Retail partners pressuring you into short-term advertising to boost sales. And sales teams love price deals. It’s a great negotiating tactic with retailers, and boosts the relationship with them. 

So, somewhere among all that, you need to work out how to get activation and brand-building adverts to work together. 

The balance of short and long-term advertising

Unsurprisingly, it’s about finding the right balance between short- and long-term. They’re not mutually exclusive. They can and should work together. 

Start with long-term brand building campaigns. These drive deeper connections with more customers. They drive the front of the funnel. Build awareness and consideration, so you have a pool of customers who consider your brand. Some of those will become regular buyers. 

But, plan in short-term activation adverts too.  Focus on customers ready to buy, right now. This helps you defend against competitors, build retailer relationships and creates noise about the brand.

The budget split between activation and brand-building advertising depends on your business context. You need to test it to work out the right mix over time.

Our rule of thumb is around 60% on long-term brand building and 40% on short-term activation advertising. This is based on the book, The Long and Short of It, by Binet and Field. 

How do most businesses create advertising?

Planning and creating advertising takes time, effort and money. There are many steps in the advertising development process

Define your business objectives and budget. Write the brief. Work though proposals, production, editing and approvals before the advert goes live.

That’s a lot of work. 

And of course, you want the advertising to make an impact. To justify all that work, all those resources, and all those tough marketing decisions

The advertising development process - a guide on how to advertise successfully

You’ve got a clear goal. (the go live date) And your agency will bring an experienced team of people to support you through the process. 

When you’re the client, this is the fun bit of marketing. You feel important and get to make decisions. People ask your opinion. You feel like a Hollywood film producer, bringing your creative ‘baby’ to life. (you’re not by the way. But it feels like it).

Brilliant. Tiring. But, brilliant. 

So when the advert goes live, it’s often tempting to think “job done”.  Except it’s not, is it? 

Look at that first step again. Define the business objectives and budget. 

Look at the whole process again. See the box which connects “go live” back to the start? The one which says review performance

Oh yeah, that. 

Measuring advertising impact is not a choice

It’s hard to get people to put time and effort into evaluating advertising impact. It’s much less fun than creating the advert. No cast choices, script conversations and fun locations shoots.

Evaluation means hard, detailed analytical work. You need to look at the numbers. Work out what real customers did after seeing your advert. 

But “not fun” as this is, you have to do it. You have no choice. You need to know if your advertising impacted sales and profits. If it helped you hit your business goals. 

There’s a few different ways to work this out.

Marketing agencies and advertising impact

Many companies outsource evaluation to their marketing agencies

This would be the same marketing agencies you’ve just spent a load of money with. Which means, they may be biased. They want to make you feel your money’s been well spent. Because, they want you to spend again in the future. 

It’s usually media agencies who lead the process. That’s where most of the money goes, after all. They’ll come in a month or two after the advert launches. There’s a long Powerpoint deck. Lots of graphs. Lots of bullet-points telling you how well they delivered the campaign. 

Great.

But actually, not yet great. Because this only tells you how well the media agency did their job. That’s not what you need to know to measure your advertising impact. As per our why media buying is weird article, they can’t always show how the media spend drives your sales and profits. Their graphs and bullet-points only give you their part of the answer. 

Research companies and advertising impact

Better is when market research companies do the analysis. They’re independent of the advertising. They have no bias on the results.

Usually, this means they’ll do some sort of quantitative research.

This could be a specific project asking the target audience if they saw the advertising. And if they did, what they did about it. Or, it’s part of your continuous research in the form of brand equity tracking. 

Either way, you’ll usually see a standard set of evaluation measures.

Research Society Australia Company Directory page - headlines says Australia's number one research directory and options to Find a company

This will include measures like advertising awareness and recall. You’ll see changes in your brand adoption funnel. And you’ll almost certainly see changes in your key brand health statements. 

This is a better way to measure advertising impact, because it’s based on actual customer feedback.

A few things to bear in mind 

First, it’s usually based on a statistical sample of customers, not all customers. The research company can work out a sample size to give you a degree of confidence in the results. But there’ll always be some small degree of error. 

Then there’s the challenge of comparing results over time. Advertising campaigns are time based. And you want to measure impact at different times. You want to compare the situation before the advertising, during the advertising, and after the campaign ended.

But with continuous research panels, you won’t have the same group of respondents each time you do the research. Respondent circumstances change. So, your before, during and after results for advertising impact won’t track the same group of customers.

And finally, there’s what you can actually measure with this type of research. You can ask people if they remember an advert, for example. But remembering an advert doesn’t mean you like it. Or that it’s going to persuade you to buy.

This quantitative research usually happens online. That doesn’t replicate the actual experience of seeing the advert. Answering questions about an advert isn’t the same as seeing it in “real life”. So, there’s always some error and bias in the results. 

Market research company evaluations give you a better view of advertising impact. But they’re not perfect. 

Full post campaign evaluations

The final way to measure advertising impact is to do a full post campaign evaluation. This combines data from your media agency, and market research company brand equity studies. 

But, it also includes your own sales and profit data. Obviously, that’s where you want to see the impact of advertising the most. 

This full evaluation looks at all the data. It looks for correlations in the advertising, media, brand funnel and brand equity data, and their impact on sales and profit. 

This evaluation also looks for other factors which may have impacted sales and profits. What did competitors do when your advertising was on, for example? What was happening in retail channels? Were there any sales promotions on at the same time? 

This data heavy and statistical led approach is the most rigorous way to measure advertising impact. It has the least amount of bias

While, there will many data points, identifying which ones drive sales and profits is what matters. 

You can even go as far as using econometric modelling. This is where you run all the data through a detailed statistical model. 

The analysis statistically identifies which activity and market factors actually influenced sales. 

The results of an econometric model shows you how much of an uplift in sales you can attribute to each activity. And this give you direction on what worked, and what didn’t

So, why doesn’t everyone do it this way?

We’re big fans of econometric modelling. But, it’s not always possible to do it. 

First, it can be time-consuming and expensive to run. 

You need to capture and organise large amounts of data from many sources. You need to find experts in statistical analysis to carry out the work. They don’t come cheap.

Econometric projects can take a few months. They can easily cost hundreds of thousands of dollars. That’s a big chunk of time and money to consider. 

They’re also complex.

They involve sophisticated statistical and analytical techniques. You need your experts to be able to explain the results in a way non-statistical experts will understand. That’s not always easy. 

The advertising impact measurement gold standard

These models are the gold standard for measuring advertising impact. But they’re only carried out by businesses who can afford them. 

If you’re not one of those businesses, there are other faster, cheaper, but less high quality ways you can go.

Certainly you should ask your marketing agencies and research agencies to share their results. But you need to link that data to your actual sales data.

If your business is big enough, often finance teams will include a business analyst. They will have the relevant skills to do this sort of analysis. It’s worth learning basic statistical techniques like how to do correlations or linear regressions.

Advertising objectives should work back up to your business objective. How many customers need to see or hear your advertising? How many of those do you need to persuade to do something differently? And what’s the customer action that’ll lead to a sale? Answering these questions is how you truly measure your advertising impact. 

Conclusion - measuring advertising impact

At its simplest, you need to make more profit from your advertising than it costs you.

But the link between advertising and profit isn’t obvious.

Activation advertising drives short-term sales. Sales are important. But, it also has an impact on profitability, brand image and potentially trains customers to expect discounts. None of those are good things.

Brand-building advertising supports a wider awareness of your brand, builds trust and creates stronger, emotional connections with customers. These will eventually result in better sales. But they won’t necessarily help you hit short term sales targets.

Ideally, you use econometric models to get the most accurate evaluation of advertising impact. But if you can’t afford those, look for expert help from your agencies and research companies.

Check out our guide to advertising evaluation to learn more. Or contact us directly, for help with measuring your advertising impact. 

Photo credits

Billboard : Adapted from photo by Kate Trysh on Unsplash

Hypnosis Pocket Watch (adapted) : Photo by MK Hamilton on Unsplash

Marketing Dashboard : Photo by Carlos Muza on Unsplash

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