Whisper it — because this unstable economy hasn’t kept anything true for too long — but larger advertisers are seemingly looking at advertising less as a cost, more as an investment.
It doesn’t mean they’re going to spend big during the downturn. Given inflation and supply constraints, it’s just not possible. It also doesn’t mean ad spending is going to be stripped back. But it does create a quandary: limit spending too much and advertisers risk being left behind at a time when price increases have become easy to make, but inflation still squeezes profits.
It’s neither an entirely good or bad predicament for the ad industry — it’s complicated. After all, inflation can be a good marketing opportunity to get consumers to pay more for a product they love when they’re braced for price increases. They’re making advertising investments now that they hope will pay off in driving growth.
That much is clear at this point in the current earnings window.
So far the largest advertisers have broadly said the same thing: advertising is more strategically important than ever because they need to push through larger than expected price hikes on the back of their strong brands. Which means those holding the purse strings at these companies are having to think differently about ad spending.
Where do the dollars go?
“We are actively shifting our spending from linear, non-targeted TV into programmatic and into digital spend that is a lot more targeted and a lot more precise in terms of delivering reach,” said Procter & Gamble’s chief financial officer Andre Schulten on the company’s earnings update last month. “It is difficult to describe media sufficiency in dollars.”
It’s led P&G to think about the reach metric with more clarity.
It moved more ad dollars from linear non-targeted TV into programmatic and digital media that’s more targeted and more precise when it comes to delivering reach, said Schulten. To do so, the marketers there must think less about building budget plans on the back of annual category spend, and more about a brand’s reach objection. Only then can they calculate what kind of media exposure is needed to hit the required reach objective, continued Schulten. Do this well, goes the thinking, and those brands should be able to hit the required reach at lower total advertising costs than what P&G has historically spent.
That last thing is key for P&G. Like so many of its contemporaries, the business has decided that the answer to higher commodity prices isn’t to slash costs to stretch out margins, but rather to pass those increases on to consumers and take the profitability hit. Eventually, costs will come down whereas price increases rarely do. So there’s no better time to try and convince people to fork out more for the same thing given they’re all too aware that inflation is everywhere. Better still if the business can do so without spending as much as they have done on marketing. A permanent step up in margins becomes steeper as a result.
“Consumers are clearly taking on more of the price increases than many companies had expected so now is actually a good time to advertise in order to push through price increases,” said Ian Whittaker, a market analyst and founder of Liberty Sky Advisors at a recent event hosted by media management firm Ebiquity. “It raises an interesting question about whether the firms who can push through price increases to the consumer are likely to see a permanent uplift that comes through to their margin. In this way, advertising, or rather brand advertising, becomes more like intangible capex.”
That certainly seems to be the case at Airbnb.
The company has just had its most profitable quarter to date. It raked in $2.9 billion over the period, up 29% from a year earlier. Of that total haul, its net income was $1.21 billion, a 46% rise. At least part of those gains were due to advertising. Or more specifically, a shift from search advertising to brand advertising that started three years ago. Needless to say, the company’s senior execs are pleased with these returns, even as they cut its ad spend. They’re a given in the current climate.
When to cut back spending
The real challenge is knowing how much advertising to curb before it starts to have an adverse effect on the business — something Airbnb seems to have figured out (at least for now).
“In terms of advertising ROI, we’re really pleased with our approach to the marketing strategy that we’ve had in the sense that our brand marketing results are delivering excellent results overall with a strong rate of return,” said the company’s chief financial officer Dave Stephenson. “We think that one of the biggest drivers of our traffic is PR. And then brand marketing is actually important. And actually, we think of it a bit more like product marketing. We want to educate people about our new features.”
These aren’t necessarily new ideas. Indeed, performance marketing has always been about spending a dollar today to get a dollar back tomorrow, next week, next month or whenever the sales cycle is. Here though, Airbnb is using performance marketing to essentially balance supply and demand, said Stephenson, as opposed to purchasing a large amount of customers. This should allow for a “very efficient, “very dynamic” approach to marketing that should “get more efficient” each year, he continued.
Like P&G’s focus on reach, Airbnb’s pivot comes back to pushing less dollars farther. There are consequences, too, to turning off the ad valve altogether.
“It’s vital for marketers to build sound profit metrics into campaigns and the successful online businesses are getting more savvy with their ad spend and taking time to understand and implement the broad range of tech innovations available to them, such as automation and AI that enable greater optimisation,” said Liam Patterson, CEO of e-commerce marketing platform Bidnamic. “It is important that brands don’t succumb to the temptation to cut back on advertising as a whole because this will result in a loss of brand recognition in the long term, which is hard to claw back.”
Advertising drives growth
PepsiCo saw the benefits of this in its most recent quarter.
“The investment we’ve made in our brands in the last few years is paying off, in the sense our brands are being stretched to higher price points and consumers are following us in Europe and other parts of the world,” said CEO and chairman Ramon Laguarta on the company’s earnings call last month.
Without advertising, it would’ve been harder to pass the price hikes on to shoppers. Advertising drove growth. The numbers back that up: revenue in Europe rose to $3.7 billion over the quarter, compared to $3.6 billion a year ago, while operating profit rose 28% to $564 million.
“We’re trying to be growth drivers to our customers,” continued Laguarta. “If you look at the majority of our conversations with our customers, it centers around growth and how we develop our categories and then bring consumers into them as well continue to bring new occasions into those categories. That’s the role we play to our customers and how we create value for the company long term.”
So many of Unilever’s brands have come through the downturn (so far) relatively unscathed. So much so that 80% of the company’s brands have either held or gained share, said CEO Alan Jope.
“We have been gaining market share and that’s a consequence of our brand health, the investments we’ve made, not just in advertising but in product quality,” he said. “Taking price increases is not easy and we’re very mindful of the pressure that puts on consumers.”
Not every ad exec sees it this way. Sir Martin Sorrell, the founder and executive chairman of agency holding group S4 Capital is one of them. He said that brand advertising will get cut moving forward at the Web Summit conference in Lisbon last week, per Adexchanger.
In many ways, he’s right. P&G, Airbnb, Unilever and more are working under tighter budgets these days. However, they’re only cutting back to a point, and moreover those cuts won’t always benefit performance media. Not when advertisers are having second thoughts about the efficacy of those places, or have taken those platforms about as far as they can when it comes to optimization.
Instead, these companies have taken a calculated bet to invest what they can now while things are tough in the hopes that they can reap the rewards once the economy settles down.
“Advertisers know that a stop and start approach to brand advertising would only increase costs in the long run just like it would do if they kept opening and shutting down a factory — there are additional costs incurred whenever this happens,” said Whittaker. “There’s an argument to say that many companies are realizing that — on a strategic level — advertising is becoming more structurally important.”
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