Advertising ROI is Negative
Approximately $150 billion was spent on advertising in 2008 in the United States. The working assumption of advertisers making ad investments is that their ad campaigns work—they produce a reasonable return-on-investment. Unfortunately, this simply isn’t true. The best available evidence suggests that ROI across a broad range of media types is negative.
In the past decade we have collected performance data on more than 200 marketing programs for consumer and business-to-business (B2B) products and services. The results are disappointing. At least two thirds of them fail to have a positive ROI. This issue concerned us so much that we asked Marketing Management Analytics (MMA), this nation’s largest and most prestigious analytics firm specializing in assessment of the profitability of marketing expenditures, to ransack its databases to tease out the effects of advertising. Using sophisticated econometric models applied to years of weekly, if not daily data, capturing both sales and advertising expenditures for many of America’s largest marketers, MMA discovered that advertising for established consumer packaged goods returns only 54 cents for every dollar invested. Other product categories return 87 cents—better, but still a losing proposition. This work was published in the Harvard Business Review by Kevin Clancy and Randy Stone, CEO of MMA.
We and MMA are not alone with respect to our findings. A 2004 Deutsche Bank study of packaged goods brands found that just 18 percent of television advertising campaigns generated a positive ROI in the short term; less than half (45 percent) saw any ROI payoff over the long run. And according to Dominique Hanssens, the director of the Marketing Science Institute and former professor at the University of California, Los Angeles’s Anderson School of Management, the elasticity coefficient of advertising for established products and services is 0.01, which means that marketers would have to increase their ad budget by 100 percent (double it) to see a 1 percent increase in sales.
If Anheuser-Busch, as an illustration, doubled the approximately $550 million the company spend on television, print, radio, outdoor, and Internet advertising in, the firm would likely enjoy a 1 percent increase in net revenues from its current base of $15 billion. In other words, the firm would have spent $1.1 billion to make an incremental $150 million.
Often when Copernicus and MMA report dismal results, clients respond that econometric models only measure short-term effects, whereas the corporate objective is to build brand equity for the long term. Yet five different studies suggest that brand equity for leading brands in America is declining. Stated differently, as we approach the end of the first decade of this new century, most marketers are building neither sales nor brand equity.
If this isn’t bad enough, consider that customer satisfaction averages just 74 percent, not just in our database but in the American Customer Satisfaction Index, produced by the University of Michigan. In addition, most new-customer acquisition efforts fail to reach breakeven (i.e., it costs more to acquire a customer than the customer returns to the company); most promotional programs have proved to be unprofitable; and direct marketing response rates have been declining for forty years. Looking at all the evidence, it’s clear that most marketing programs are failures and that most brands are in trouble.
Most Executive Don't Know How Bad It Is
Most CEOs, CFOs, and even some CMOs are unaware of these terrible findings. Most are unaware of marketing’s dismal performance. After all, if they were aware, it would be illogical to keep running programs that don’t work. But some company executives, who have seriously studied marketing program performance, now recognize that what they’ve been doing for years doesn’t work, and are looking for ways to reverse the findings. Often they blame television advertising, frequently the largest-dollar item in the marketing budget. They argue that TV audiences are shrinking and consumers are giving less attention to those ads to which they are exposed. Surely, they say, there must be more effective media.
Their confidence in traditional media shattered (for good reason), marketers are responding by reallocating substantial dollars to non-traditional media. Unfortunately, there is very little data on the effectiveness of non-traditional media. In fact, measurement is today where measurement of traditional media was in the 1960s. Non-traditional media include sports and event sponsorships, Internet advertising, electronic outdoor billboards, simulated word-of-mouth buzz, and plastering logos and ads on every possible space (subway turnstile bars, office water jugs, turnpike toll booths).
Even though there is little information about non-traditional media’s performance, with less clutter and, in many cases, lower costs—not to mention lots of hype—they appear to some marketers to be a more attractive (i.e., safer) investment. Our own experience is that non-traditional forms of media are no more effective or efficient than the traditional forms.
If marketers would turn their attention beyond measurement and media for just a moment and take a big-picture look at why the numbers are so bad, they’d see that their marketing strategies are flawed. With the help of the new measurement systems, marketers are evaluating with ever-increasing precision the impact of ill-defined targeting, weak positioning, unprofitably configured products and services, mediocre advertising campaigns, giveaway promotions, poorly allocated marketing dollars, and more. The average ROI of advertising may be negative but it doesn’t have to be this way. Better strategies and better implementation of these strategies leads to highly positive ROI—what we like to call transformation programs; programs which change brand trajectories, career paths and sometimes even entire industries.