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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? : Advertising is a big area of spend. You need to know what you get back from it. So this week, we cover how to measure advertising impact on your financial results. Learn the relative pros and cons of short-term and long-term advertising. Read this to learn how to improve your advertising impact on 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. Sounds simple, right?

But the relationship between advertising and sales isn’t simple. 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? 

There’s many questions to answer. You’re trying to measure the media time and space you buy and match it to sales. (see our media buying article for more of the challenges). That’s hard to do.

Activation versus brand-building

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

Influencing thoughts and feelings usually takes longer, but has a longer term impact. 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 are finally 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’ll seem irrelevant. 

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 convert those customers with rational and logical arguments to buy. 

Incentives and sales promotions

These rational and logical arguments to buy 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 advertising. Ideally, these are switchers. Customers who currently buy a competitor, but they 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 acquire customers. There’s not long-term loyalty from customers who regularly switch.   

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

You should also  consider 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 based on the best price offer. This can boost your short-term sales if you’re the best offer. But, they’ll never become loyal customers. They switch to another brand if it offer 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 sales promotions. 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

If activation adverts only drive short-term sales but can drive profit down, what’s the advertising impact of brand building adverts? 

Well, remember the brand adoption funnel. Part of advertising’s job is to drive trust, awareness, consideration and loyalty

Building trust and awareness takes time. Customers don’t trust a brand based on one advert. Trust comes from a reputation built over time. Customers trust brands they know, and that they feel an emotional connection 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) as an activation advert would. It has a much broader emotional appeal. 

Brand-building adverts focus on emotions. They make customers feel things. Whether what you feel makes you laugh or cry, emotions create strong connections for customers. 

This connection might not make the customer buy now. But, customers will remember it when they are ready to buy. They’ll have positive associations with that brand. For existing customers, these adverts increase their 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 brand-building adverts to finance teams and senior leaders 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-term and long-term. They’re not mutually exclusive. They can aand 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 loyal 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 out and work it out over time based on results.  

Out 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 just 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 that little box that connects “go live” back to the start? It 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 dig through numbers, and 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 and delivered 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 marketing money with. Which means, they may be biased. They want to make you feel your money’s been well spent. Because, they’ll 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 launch with a long Powerpoint deck. They’ll show you many graphs of data with a few bullet-points of commentary about the way 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 article on why media buying is weird, they often find it hard to relate the media space and time they buy with your sales and profits. The media company graphs only give you part of the answer. 

Research companies and advertising impact

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

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

This could be a specific audit asking the target  if they saw the advertising, and if they did what they did about it. Or, it could be 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 

Firstly, 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. 

Secondly, 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 take place online. it doesn’t replicate the actual experience of seeing the advert. Answering questions about an advert a researcher shows you is not the same as seeing it in “real life”. So, there’s always some degree of error and bias in the results. 

Market research company evaluations do give you a better view of advertising impact, but they’re not always perfect. 

Full post campaign evaluations

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

But, it will also include your own sales and profit data. Obviously, that’s the advertising impact you most want to measure. 

This full evaluation will look at all the 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 look for other factors that 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? 

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

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. 

Firstly, 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 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.

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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