Advertising can be a big commitment. However, it can also prove costly. And while we know that brands are prioritizing their brand awareness efforts in the coming year, there isn’t a marketer on the planet who’s not focused on the tangible returns that their spend delivers. And given that focus, it’s not uncommon for brands to pull back when the returns aren’t there. Somewhat counterintuitively, however, that’s usually not a good strategy.
It is natural to react with a knee-jerk response and reduce spending when the returns are poor. Why continue—or even increase—spending if it’s not generating positive results? As odd as it might sound, the answer is because you’re likely not spending enough to get the returns you want. In fact, there’s a spending threshold to generate the best returns, and if you don’t hit that, the returns will likely be underwhelming. The problem can get worse if you back off.
If you’re not spending enough on advertising, you’re not going to get the returns you’re looking for
In a recent deep dive into an array of cross-channel media plans, we found that 50% of marketers’ media investments are actually too low to drive maximum payback. And in terms of amount, they’re 50% below what they should be to generate the best possible results. When marketers embrace the premise of spending more to earn more—by committing to the ideal amount—they could boost their return on investment (ROI) by as much as 50%.
Marketing professionals will be able to determine what the optimal spending amount after they understand that maximum ROI relies on certain levels of spending. To put it another way, to achieve the highest ROI brands must know what amount they should spend in order to succeed.
Here’s an example: In a recent analysis, we found that when a brand spent too little, the vast majority of the audience (87%) were exposed to the campaign less than three times. These impressions accounted for 68%. It means that 70% of impressions were not as successful as they might have been.
A separate study showed that 40% of the audience saw an ad at least three times. Only 8% of the audience, or 42%, were exposed to the advertisement eight times per week. This suggests potential wasteful advertising. If a brand spends a lot of money, 75% of impressions can be attributed to those who view the advertisement more than 8 times. However, in the above example 32% of campaign audiences saw the ads only one or two times.
In addition to looking at a few specific cases, we wanted to better understand—at a global level—how frequently brands underspend and in which channels. Through our analysis of ROI observations, we focused on three key questions to understand what spending and ROI looks like—as well as what opportunity is being left on the table:
- Is it necessary to spend a lot in order to stay competitive?
- Which geography is this different?
- How do brands’ planned spend levels compare to the optimal spend levels for the media channel?
We found that advertising accounts account for 3.8% of brand revenue.1. Advertising is a key component of a company’s competitiveness. We recommend that it spends between 1%-9% of its revenues on advertising. Our study found that brands typically spent anywhere from 1.4% to 9.2%. One-fourth of brands spend less than 3.8%, while the other quarter spends over 3.8%.
It’s also worth noting that to compete, a newcomer will need to spend proportionally more than an established player. An established brand might be able to move toward the lower range in order to remain competitive.
For agencies and advertisers looking to maximize their ROI, it is important to model the relationship between spend and ROI. There are risks to spending too little or too much, but underspending can be even more dangerous.
A study of media plan data from clients of different sizes was conducted to determine if 25% of investments at channel level were sufficient to increase ROI. The spend in this category was 32% higher than the recommended level. Channel ROI would be improved by decreasing spend, though it is only 4%. This would however result in significant sales volume reductions, as reducing spend also means fewer ads-driven sales.
The solve here isn’t to slash the budget. Brands should optimise their channel mix. The right balance will ensure that spend is correctly allocated to reach, efficiency, and frequency. A recent example of this is an auto manufacturer that increased its reach by 26 per cent and improved its impressions significantly by optimizing its media distribution. To accommodate radio, the brand lowered its media allocations across digital, linear and CTV.
It is a bigger challenge to spend too much. Average brands are underspending by 52%. That’s likely too big a gap for many brands to close in a single planning cycle. For those who can do it, there are significant upsides: an increase in ROI of 50%.
Worldwide, there is a lot of underspending. Although most companies allocate the majority of their budgets for TV, many cases show that these allocations are too small to achieve maximum ROI. Outside of television spending, almost half of media plans SME examined showed inadequate investment across video and display.
ROI is just one of the many factors that advertisers and agencies consider when they’re planning their media budgets. However, campaign effectiveness can be driven by budget. Right now, half of all global media investment are not sufficient, meaning that a substantial amount of return on investment is missing.
Get more information here Download our most recent ROI Report.
- SME Compass Database 2020-2021