Consider this. A £50k budget produces 460 sales but £100k only produces 530 sales. That means that for the second £50k, you only generate an additional 70 sales. The return from the second £50k is disastrous from an ROI perspective. The cost per sale generated by the first £50k is £108 but the cost per sale in the second £50k is £714. Many agencies would simply report 530 sales from £100k giving a cost per sale of £188. But that average cost per sale clouds terrible inefficiencies. It’s obvious that not controlling diminishing returns can seriously undermine campaign performance and have an even worse effect than running poor creative work.
Yet this area does not get anything like the attention it deserves in advertising and media agencies. How many times have you heard of incorrect budget allocation being cited as a cause of poor campaign performance? No often. Agencies and advertisers usually seek to explain poor performance by factors like poor market conditions, uncompetitive offer, poor creative, weak targeting etc.
Joy Joseph of the School of Business at the University of Connecticut wrote a paper called ‘Understanding Advertising Adstock Transformations’ in 2005. In this paper she observes that “advertising can also have diminishing returns to scale or in other words the relationship between advertising and demand can be nonlinear. For example, the effect of 200 GRPs of advertising in a week on demand for a brand maybe less than twice that achieved with 100 GRPs of advertising. Typically, each incremental amount of advertising causes a progressively lesser effect on demand increase. This is a result of advertising saturation.”
To quantify these points she provides this example, “[If] for 100 GRPs the sales effect of advertising would be 4.6 units and for 200 GRPs the sales effect would be 5.3 units…… a 100% increase in advertising we would only have a 15% increase in sales”. In other words increasing budget clearly does not increase sales. What actually happens is that sales decrease with every additional unit of spend.
What’s interesting this that many agencies and media owners still cling to the idea that 3-5 exposures are required to generate “awareness and understanding” of advertising creative. They say old habits die hard and this is no exception. The 5-8 exposure rule actually has its roots in a paper written by an amateur media planner called Thomas Smith in 1885. That’s right 1885 - 125 years ago. These days we don’t ride around in trains from 1885, nor do we consume the medical potions of 1885. Come to think of it our Queen is called Elizabeth and not Victoria. So why on earth more than century later, are people still using Victorian media research to plan marketing communications?
The message of diminishing returns is simple. You cannot spend your way out of trouble but you can certainly spend your way into it. By not controlling budgets properly you can reach a point where the sales generated cannot be profitable. If you plough money into generating unprofitable sales, you’re building a business that burns money.
If you’re one of those advertisers spending most of your budget in one channel, take a close look at exactly what is returned at different levels of spend. Even super sales efficient channels like PPC are subject to the same diminishing returns rules. If you want to optimise your campaign performance try spending less. Less in each channel. Less on each day. Less on each keyword. Less on each Google ad group, Less on each creative treatment. Smaller space sizes. Shorter commercials. You will find that less can indeed be more.
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Google acknowledges the power of television advertising with Superbowl spot
So why did they do it? Television does amazing things for brands. It builds stature, it builds status, it builds employee confidence, it rocks competitors and it drives lots of traffic. More than that, TV advertising embeds brands into popular culture. It’s powerful stuff. However, Google is already part of popular culture so why advertise on TV? My guess is they’re interested in seeing how TV ratings can be correlated to web traffic. I could have saved them around $1m here. TV ads drive web traffic at a rate of between 0.015% and 0.25%. So with an audience of around 100m viewers, Google could have expected traffic uplifts in the US of between 15,000 and 250,000 within a few hours of transmission. What value is this to Google? When Google searchers clicks on AdWords it generates income for Google. Assume 50% of that 250,000 clicked into AdWords at a cost per click of $2, then there you have it; £250,000 of revenue. Not enough to cover the cost of the spot. But Google shouldn’t be disheartened by this - these figures are based on buying a spot with inherently high premiums. Outside the Superbowl, the economics might look considerably better.
And for Google’s fan base (of which I am one). They are right, Google AdWords is a very powerful business generator. It collects response at the end of the sales funnel - just as the Yellow Pages did for so many years. But something has to populate that sales funnel and drive search volumes. Something has to make each brand credible; make it top of mind, the safe choice; the right choice. That’s where TV comes in.Even though things look good for Google in search at the moment, I suspect there may be changes ahead - demand for AdWords is forcing up click costs at Google and this may drive search marketing budgets to competitors like Microsoft’s Bing. As Google loses traffic it will look to fight back and it has to do that by holding and winning back search traffic - the source of its revenue. There may well be a ferocious marketing battle to be fought amongst search providers, with Google standing to lose the most. Testing TV now, may indeed be a dress rehearsal for future TV advertising activity.
It’s interesting to note that predictions of the end of mass marketing tend to come primarily from within the non-TV marketing community. The reason for this is that those who have not been at the “business end” of TV advertising are unlikely to have made careful study of the effects of mass marketing versus the costs of undertaking it. Mass marketing can still be very powerful and it can be very cost effective. The temptation is to assume that because it costs so much, it couldn’t possibly work is erroneous. Perhaps with Google’s use of TV advertising, some of mass marketing’s critics may take time to reconsider. Google has.