New model: Ads pay off longer than first year

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A Cincinnati market researcher is using retailer frequent-shopper data to demonstrate advertising's long-term impact beyond first-year sales.

The so-called Lifetime Value of Marketing Model makes a strong case for sharper advertising copy, a higher advertising-to-sales dollar ratio and the long-term cost-effectiveness of advertising over promotion.

"For about 10 years, people have been [using] scanner data telling them that advertising causes about 3% to 6% of sales," said Mike Hess, exec VP of Promotion Decisions Inc., the company that created it. "But when [frequent-shopper data show] that what causes the 3% to 6% is predominantly repeat buyers . . . the real effect is another 5% to 6% on top of that." The net effect is that a one-year campaign can pay off with a 9% spike in sales over a decade.

Since brands typically spend about 5% of sales on advertising, traditional marketing-mix model data from companies such as ACNielsen and Information Resources Inc. showing ads drive only 3% to 6% of sales haven't made advertising look very cost-effective, said Greg Ambach, VP-marketing analytics at PDI.

PACKAGE-GOODS MAKERS CONSIDER

The new model already has changed the way at least one package-goods marketer, General Mills, allocates its marketing budget. And several more large package-goods companies are also using or looking into the model, Mr. Hess said.

Jeff Hunter, director-consumer insights, best practices and new technology for General Mills, is scheduled to appear alongside Mr. Hess March 6 in a presentation on the new computer model to the Advertising Research Foundation convention in New York. He couldn't be reached for comment, but presentation materials indicate General Mills marketing executives are using the model to support their case for ad spending over trade promotion, or money paid to retailers, based on data showing higher long-term return from ads.

In contrast to ads, trade promotion delivers most of its benefit in the short term, said Mr. Ambach, but it isn't more cost-effective long-term. He pointed to the example of one brand for which the initial cost per incremental pound of volume was $3.40 for advertising and only $2.60 for trade spending in the first year. Evaluated over 10 years, however, the cost per unit of volume increase was only $1.24 for advertising compared to $1.99 for trade deals.

Moreover, Mr. Hess said in some cases, PDI's database shows ads actually speed up a brand's average repeat purchase cycle.

"People who try [a brand] during trade deals with a price discount are generally less likely to repeat [as a purchaser] than if they try [the product] during an advertising period," he said.

WAITING FOR MORE DEALS

Not surprisingly, the frequent-shopper data also show consumers lured by trade deals or coupons tend to wait until the same deal comes around before they buy the product again.

Couponing tends to fall somewhere between ads and trade deals in long-term impact, costing less than either initially, but also offering less of a long-term advantage than ads, Mr. Ambach said.

Though PDI's research can help brand managers at companies such as General Mills support arguments for sustaining or increasing ad budgets, Mr. Ambach said, it won't rescue every agency urging clients to patiently await the long-term results.

"It probably puts more pressure on the agency and the brand than ever to come up with really good copy because of the multiplier effect," he said. "We can't kid ourselves here. If you have bad copy in year one, you're going to get a puny number, and just because you multiply it by two, it isn't going to become a big number."

COMPETING FOR FUNDS

Marketers have long believed long-term ad impact accounts for much of a brand's equity -- or the ongoing baseline sales that traditional marketing-mix models can't tie to any current marketing, Mr. Hess said. But quantifying the lifetime value of advertising could help marketers compete for funds with other brands or projects in a company, he added.

"People are going to change the way they make decisions about allocating expenditures between advertising and promotion and trade," Mr. Hess said.

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