Your ROI Obsession Is Killing Sales And Profit Growth And Could Destroy Your Brand
Since COVID, advertising ROI has grown 4% but the profit driven by advertising has dropped by 11%, reports Les Binet, the world’s foremost authority on marketing effectiveness. These findings come from a brand-new study published by Les Binet and Will Davis called, Go Big Or Go Home: How Small Thinking is Killing Advertising and What To Do About It.
Davis is the founder of Medialab, an advertising agency with a data driven approach to media planning and buying. Davis brings forensic, results-focused discipline to brand building.
Here are the key findings:
- A new study by Les Binet and Will Davis reveals the advertising industry’s maniacal fixation on ROI has resulted in a modest 4% increase in ROI since COVID but a worrying 11% erosion in advertising driven profits.
- ROI is mistaken for business outcomes such as sales growth, profit growth, and customer growth. ROI is none of those things. It is simply a ratio of revenue/profit generated by ad spend.
- Surprisingly, ROI and revenue/profit growth move in the opposite direction. Low profit growth produces high ROI. Strong profit growth results in lower ROI.
- Perception vs. reality: Marketers mistakenly believe ROI trumps budget in driving profit growth. The reality is budget is 9 times more critical than ROI in generating profit.
- A 50/50 mix of brand building and performance strategies generates 50% greater revenue growth versus 100% performance tactics. Performance marketing converts existing demand. Brand building creates future demand, which permits conversion activity to continue to work as new demand becomes available.
- The strongest predictor of growth is the relationship between share of voice (brand ad spend ÷ category spend) and the brand’s market share. If share of voice exceeds share of market, sales tend to grow. If share of voice is similar to share of market, sales tend to be stable. If share of voice is smaller than share of market, sales tend to shrink.
- Since ad budget is nine times more likely to predict profit growth than ROI, Binet and Davis offer three approaches to thoughtfully setting ad budgets: Ad spend ratios, task-based budgeting, and share of voice analysis. All three can be utilized for a well-reasoned process for developing advertising budgets.
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