Let’s talk about advertising impact on sales and profits

Advertising impact - mock-up of a billboard that sales this will drive $1m in sales. Probably.

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Snapshot : This week, we look at the pros and cons of short-term versus long-term advertising. The former focuses on sales activation, while the latter builds brand equity. Research shows the best results come when you find the right balance between the two. You only find the right balance for your brand when you review advertising impact. So, we’ll share three different ways to do that. 

Advertising (including media) is usually the biggest spend in the marketing budget. So, there’s always a lot of interest from marketers, agencies and finance teams to understand advertising impact on sales and profits. Because, as advertising legend David Ogilvy famously said, if it doesn’t sell, it isn’t creative (advertising)” 

Before you start, aim to be clear on what you want advertising to do for your business. Be clear that advertising has different impacts short-term versus the long-term. This helps you know what to look for when you measure advertising impact. 

What can advertising do for your business?

Well, it needs to drive sales and profit, right?  

Well, yes. 

But, to drive sales and profit, you need to understand how advertising does that. Advertising influences customers to buy. But understanding customer influence is where advertising impact measurement gets more complex. 

To start with, people don’t like to admit that advertising influences them. But it does, or products wouldn’t sell. Advertising influences what customers think, feel and do. And the doing (sales) generally only happens if the thinking and feeling have happened first. 

Measuring advertising influence on customer thinking and feeling is more complex than measuring advertising influence on doing. 

They don’t all happen at the same time with the customer. That means there’s two types of advertising campaign. 

Firstly, there’s activation advertising. This focuses on driving sales now. These types of campaigns focus on a specific benefit or offer, and encourage buyers to act quickly. The focus is short-term gains, and landing key functional benefits. These type of ads create transactional connections with customers, but don’t build long-term emotional connections. 

Then, there’s brand-building advertising. This approach takes a longer-term view. Its aim is to build deeper, emotional connections with customers. These adverts appeal to more customers because unlike activation adverts you don’t need to be ready to buy to notice them. 

They’re noticed by customers even when those customers are not currently buying. 

These emotional connections “stick” longer in the minds of customers. This boosts the chances of future sales by strengthening perceptions of the brand. 

Activation adverts – Short-term sales

It’s tempting to look at activation advertising driving immediate sales, and focus your efforts there. But that would be a mistake.  

Dig deeper into what happens with activation advertising, and you realise they only impact customers at a certain point in their buying journey.

And, an over-reliance on activation advertising has some negative longer-term consequences. 

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

Activation adverts focus on people close to the point of purchase. In the brand adoption funnel, they’re already at consideration.

Activation advertising nudges customers from consideration into trial. That means the type of customers influenced by this advertising are already in “buying” mode.

But most of the time, customers are not in this mode. They may not have heard of your brand (no awareness). Or, they know it, but don’t think it’s right for them (no consideration)

Activation advertising doesn’t really drive awareness or consideration. It focusses on rational and logical arguments to buy. But, customers ignore these if they don’t know your brand or consider you irrelevant. 

Incentives and sales promotions

In addition, activation advertising often includes an additional incentive or sales promotion to buy. Examples include price discounts, a physical gift with purchase, or an extended warranty or guarantee.

Many retailers run this type of advertising. In this Bunnings example, you’ll see a range of products on sale. Plus, the Bunnings price guarantee.  

When you look at units sold through activation adverts, you almost always see an uplift in sales. 

Brilliant. 

But sales is not your only business objective. Profits are even more important, and that’s where activation advertising has weaknesses. 

Activation advertising impact on profits

Activation advertising will almost certainly boost short-term sales. But that short-term boost often comes at a cost that impacts on profits. 

There are many reasons for this. 

Firstly, consider the type of customers who buy when you run activation advertising. Ideally, your advertising will switch customers from competitors. 

But, if customers can be switched by one advert, chances are your competitor’s next activation advert will switch them back. Activation advertising between competitors often cancels itself out. It’s not sustainable long term.  

If you add in a sales promotion, it adds more costs into the evaluation. You lose profit on every existing customer who would have bought anyway, regardless of the promotion (see our article on price discounts for more on this). 

Buying behaviour when on promotion

There’s also buying behaviour related risks with activation advertising and sales promotions.

Firstly, there’s the risk of pantry fill. This is when people stock up on products when they’re on promotion. This delays their next purchase. In the long-run, they don’t buy more. They just wait until they need to buy. Multi-buy offers such as “three for two” or “buy one get one free” are particularly bad for this. 

Then there’s cannibalisation. If you have a range of products, this type of advertising and sales promotion can often trigger customers to switch from their regular product to the product on offer. Again, in this case, you’re not building long-term profits. 

Activation advertising and sales promotions also attract deal hunters. In most categories, there are groups of customers who always buy whatever is on deal. These buyers can boost your short-term sales. But, they’ll never become loyal repeat customers. They’ll just buy the next brand that’s on a deal. These customers drive down your profitability. 

And finally, if you (or your competitors) run too many sales promotions, customers will start to expect sales promotions to be the norm. They’ll hold off buying at the regular price. They know there’s always a promotion coming soon. 

This is bad for profit levels. We know one food category for example, where over 60% of purchases are on promotion. 

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

If activation adverts only drive short-term sales, drive profit down, attract disloyal customers, and reward customers who would have bought anyway, are long-term brand building adverts better for advertising impact? 

Well, go back to the brand adoption curve, and remember that part of the job of marketing and advertising is also to drive trust, awareness and consideration. 

Building trust and awareness takes time. Customers don’t trust a brand on the basis of one advert. They trust a brand that’s built a reputation over a longer period of time. Trust usually comes from an emotional connection to what a brand stands for. 

Example brand-building advertising

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

This advert doesn’t focus on functional, short-term benefits of picking Qantas over its competitors. It taps more into the emotional benefit of coming home to family that Qantas supports.

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

Brand-building advertising usually focusses on emotional engagement. It makes customers feel things. They might make you laugh, they might make you cry, but and these are strong connections for customers. 

This connection might not make the customer buy now. But, customers will remember it next time they’re ready to buy. They’ll have positive associations with that brand.

Of course, the challenge is it’s hard to predict when that next sale will be. Or, what the value of that positive association is. Brand equity doesn’t show up in your bank account. So, you find yourself trying to justify brand-building to finance teams and senior leaders without immediate data to back you up. 

You need patience to wait for the data, that shows how it drives sales long-term. (more on this later). But of course, not all businesses can afford to be patient.

Competitors will run short-term activation advertising that hits this month’s sales. Retail partners will pressure you into short-term advertising to drive run rates. And sales teams love price deals. It’s a great negotiating tactic with retailers, and boosts the relationship with them. 

So, what’s the right approach for maximum advertising impact?  

Short and long-term advertising in harmony

Unsurprisingly, it’s about finding the right balance between short-term activation advertising and long-term brand building. They’re not mutually exclusive. Think about how they work together, rather than separately. 

Start with long-term brand building campaigns. These drive deeper connections with more customers. You drive awareness and consideration, and set up a base level of customers, who regularly buy your brand. 

But, plan in short-term tactical activation adverts to influence customers who are ready to buy, right now. This helps you defend against competitors, build retailer relationships and gives you “sales” messages at key points in the year. 

How you split your marketing investment between activation advertising and brand-building advertising depends on your business context. 

It’s trial and error to find the split that works best for you. 

The rule of thumb you’ll find most often is around 60% focus on long-term brand building and 40% focus on short-term activation advertising. The book The Long and Short of It by Binet and Field outlines a detailed analysis behind this ratio. 

How do most businesses create advertising?

Planning and creating advertising demands time, effort and money. And as we cover in our guide to how to advertise, there are a number of key steps to go through. 

Define your business objectives and budget, write the brief, and then work though proposals, production, editing and approval before your advertising finally goes live. 

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

There’s a lot of work in that. Of course there is. 

Advertising needs to make an impact. There’s decisions to make about messaging, story, casting and production. You’ve got a clear goal. (the go live date) And, if you have a good agency, you’ll have an experienced team of people to support you through the whole process. 

When you’re the client, these are enjoyable activities. You feel important and get to make decisions. People ask your opinion. You feel like you’re some behind the scenes Hollywood film producer, bringing your creative ‘baby’ to life. (you’re not by the way, it just feels like it though).

Brilliant.

Tiring. But, brilliant. 

By the time your advertising goes live, everyone involved is usually exhausted. The novelty and adrenaline has run out. Everyone’s happy the job’s finally 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 that little box that connects “go live” back to the start? It says review performance

Oh yeah, that. 

How do most businesses review advertising performance?

Well, this is where you find out that most businesses have different ways of measuring advertising impact. 

The first thing you notice is 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 find the right numbers, and work out how real customers actually responded to your advertising. 

But “not fun” as this is, you need to do it to know if your advertising impacted sales and profits and delivered your business goals. 

There’s a few different ways to carry out this evaluation.

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 marketing money with. Which means, they tend to want to make you feel your money’s been well spent. It’s important to watch out for agency bias and self-interest here. It may not be deliberate, but it’s hard to avoid. 

It’s usually media agencies who take the lead. That’s where most of the money goes, after all. They’ll come in a month or two after the campaign goes live with a very long Powerpoint deck. They’ll show you graph after graph of data with a few bullet-points of commentary about the way the campaign was delivered. 

Great.

But usually, this only tells you how well the media agency have done their job. And that’s not actually what you need to know to understand advertising impact. 

It’s only part of the answer. 

Research companies and advertising impact

Better is when you ask market research companies to do the advertising evaluation. They’re independent of the advertising, so no bias.

Usually, this means some sort of quantitative research

The research company will do a specific audit of the advertising campaign. Or, they’ll build it into their continuous research in the form of brand equity tracking. 

From this, you’ll usually see a standard set of evaluation measures.

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. It builds your understanding of advertising impact, because it’s based on actual customer feedback.

A few things to bear in mind 

Firstly, it’s usually based on a statistical sample of customers, not all customers. While the research company can calculate the sample size to give you a degree of confidence in the results, sample results always carry a degree of error. 

Secondly, there’s the challenge of comparability of 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 what happened 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 will often be based on changing groups of customers. 

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

These quantitative questionnaires usually take place online. They don’t replicate the actual customer experience of seeing the advert. Having an advert shown to them and answering questions about it is an artificial recreation of how customers experience advertising. So, there’s always some degree of error and bias in the results. 

Market research company evaluations do give you a strong indicator of advertising impact, but you don’t always get a true read on customer responses to adverts in real-life.

Full post campaign evaluations

The final way to look at advertising impact is to carry out a full post campaign evaluation. This will usually include key data from marketing agencies, and market research company brand equity studies. 

But, importantly, this full evaluation will also include sales and profits. Ultimately that’s the advertising impact you most want to measure. 

This full evaluation will look at all the available data. It’ll look for correlations between movements in the advertising, media, brand funnel and brand equity data, and their impact on sales and profit. 

This evaluation will also factor in any other factors you found that could have impacted sales and profits. What did competitors do when your advertising was on? What was happening in retail channels? Were there any sales promotions on at the same time? 

Gathering all this data, analysing it and looking for the key measures that drove sales and profit is the best way to truly measure advertising impact. 

While, there will be lots of data points, identifying which ones drive sales and profits is what really matters. 

The best way to do this is with econometric modelling.

This is where you run all the data through a detailed statistical model. The analysis statistically identifies which activity factors and market context factors actually influenced sales. 

Quantatitive calculator

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 comes with two large provisos. 

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

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

Econometric models can take a few months to run as a project start to end. They can easily cost hundreds of thousands of dollars to run. 

That’s a big chunk of time and money to consider. 

Then, there’s the fact they’re complex.

They involved 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 mostly carried out by only the businesses which can afford them. 

If you don’t have the budget for econometric modelling, there are other faster, cheaper, but less high quality evaluations you can do. 

Certainly you should ask your marketing agencies and research agencies to share their results. But you need to feed in your actual sales data, and try to link that data with what your agencies provide. 

If your business is big enough, often finance teams will include a business analyst, who has relevant skills that can help you out with this sort of analysis. It’s worth learning basic statistical techniques like how to check two sets of data for correlations, and how to do linear regressions.

You’ll have marketing and communication objectives that work back up to this objective. How many customers needed to see or hear your advertising? How many of those did you need to persuade to do something differently? And what’s the customer action that’ll lead back to your sales and profit?

These are the types of questions you need to answer to 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 is not so simple.

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 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, pull hard on expertise from your marketing agencies and research agencies.

You can check out our guide to advertising evaluation to learn more. Or contact us directly, for help with your advertising evaluation skills. We’ve carried out many advertising campaigns, and run all sorts of post-campaign analyses, up to and including econometric modelling. We can help you figure out the best way to measure your own advertising impact. 

Photo credits

Billboard : Adapted from photo by Kate Trysh on Unsplash

Calculator : Photo by Ray Reyes on Unsplash

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