Advertising Macroeconomics For Investment Decision Making
Our prior post on The Market for Attention pointed out the three core questions that must be measured for advertisers to understand whether their investment has caused consumer behaviors that wouldn’t have occurred without advertising:
- Actual Reach: Did the impressions actually get seen?
- Relevant Reach: If the advertisement was seen, did it resonate positively with the consumer?
- Effective Reach: Can that positive resonance be attributed to incremental consumer behavior?
This post extends from the answers an advertiser has into what is effective into the inevitable next question of how much the advertiser should therefore invest to leverage what is effective and drive the most incremental consumer behavior.
Categories of Conversion
Let’s consider four categories of conversion:
1. Pure Point-of-Sale: It is possible that some products require no prior advertising-generated brand-awareness in the mind of the consumer when it comes time to purchase. Consumers would have no propensity toward choosing this product over others prior to their first encounter with it at a point-of-sale, and would choose to buy this product purely on the merits conveyed at the point of sale. This is quite rare, and very few brands believe they can sustain any share of their category, let alone grow, without any assistance from advertising. For obvious reasons, this driver of conversion bears no further discussion in an advertising economics post.
2. Core Category Share: The base for advertising-assisted conversions is grounded in the brand’s average category share. This is a volume of conversion that holds to a regular trend over time when ad-spend and economic conditions also hold to prior trends. This share of the overall category is composed in large part of consumers who have been motivated to purchase before and are now repeat buyers at different degrees of “loyalty” (i.e. some will buy only one brand from the category, others are happy to substitute across the category, making occasional purchases from each brand).
Advertising certainly had a role to play in encouraging the initial purchases, and is regularly bringing new consumers into the category to replace consumers who exit, and potentially to grow the category. Advertising is also responsible for maintaining a “share of mind” for a brand that supports repeat purchase, though experience with the product also plays a part in decisions to make repeat purchases.
The big challenge for advertisers in maintaining this type of conversion is avoiding under-investment (and thus losing “mindshare”) while avoiding over-investment (pushing for higher levels of mindshare than are necessary to maintain historical patterns of consumer behavior). Finding the level of investment that maintains category behavior toward the brand can be modeled and estimated through Media Mix Modeling, or can be measured through test and control experiments; though this is much more complicated.
In the diagram below, the “core” conversions driven by advertising are indicated by the gray shaded area, and the core level of investment and core response (conversion) is given by the red dots. Most organizations have measurement (MMM/ROI) that identifies achieved optimal investment for base (“Beta”) conversions: they do not invest below what is needed to maintain their historical share of the category, and they’ve found that investment past that point yields no further return.
3. Measured Incrementality: Of course, brands want to grow, and advertising programs typically are given an objective to drive incremental conversions above the historical average share of category for a brand.
In the diagram above, the blue curve indicates the measured potential for increased conversions above historical average share of category for the brand. This “Delta” curve is typically benchmarked against above average performance on individual campaigns, and locked-in through application of new tactics at larger scale. It necessarily achieves its results through changes in approach that have been tested at smaller scale and go beyond those that have been used to achieve the current “Beta” level of core conversion. (Brands cannot expect higher than average performance from their average activities). Over time, the increases in conversion either replaces what has stopped working (to hold the core steady), or allows the core to rise to a new average level.
4. Potential Incrementality: The final frontier in advertising investment is made in the pursuit of what we call here a “Alpha” response curve, which is the true potential for consumers to convert after influence from advertising assuming the maximum effectiveness of that advertising.
The Alpha curve implies that even at the ideal investment for measured incrementality, there are further opportunities for performance that we have not yet effectively achieved.
Invest for Success
The most critical knowledge that advertising leadership for any brand can possess is the knowledge of what level of investment is required to achieve the optimal performance on each of the curves.
On the Beta curve of advertising’s contribution to continuity in share of market, underinvestment can lead to share erosion. Over-investment simply means that the same results in maintaining category share could be achieved with less spend.
On the Delta curve, incremental investment must be applied to tactical execution, data collection and analysis that expand beyond what is used to achieve core results. Not all investment to drive incrementality will yield the same results at scale as may have been delivered through smaller-scale tests. Thus, initial investments in this curve may show lower returns as ineffective efforts are tested and discarded, but the long term results from investment in this curve can drive growth in share of market through learnings over the long term.
Investment in the Alpha curve is very much speculative. Definition of the size and shape of the Alpha curve exists almost entirely through hypotheses about how previously untried advertising approaches could yield results. The definition of what could yield returns on the Alpha curve comes through expertise-based insights into untapped opportunities to shape consumer behavior through advertising. This may be related to new media platforms or channels. This may be through new or more resonant content. This may be through reaching out to new groups of consumers. What is true in all cases on this curve is that expected results are very difficult to predict because predictions are informed by prior observations of cause and effect.
When dealing with the expected performance of approaches that have never been tried or measured, there is little opportunity to accurately quantify the expected results. Some approximation can be made if the new approach has some close comparable in prior approaches. But requiring estimation against comparables to decide on investment in reaching the Alpha curve limits what is possible, as it constrains efforts to only those things that are close to what’s been done before.
In essence, the Alpha curve tells us that there is limited opportunity for growth without willingness to take some risk. Of course, the risk can be managed with good measurement. Alpha curve investments should have clearly articulated hypotheses about why the investment will deliver results. The mechanics of how it should work (differently from/better than established alternatives) should be clear in order to contextualize whether what was supposed to happen did happen. And of course, the innovative tactics should have clearly defined “key performance indicators” that can be measured and assessed against other tactics.
