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Profit Ability 2: The New Business Case for Advertising

Thinkbox has launched a new iteration of their Profit Ability research: Profit Ability 2, The New Business Case for Advertising. Based on 141 brands across 14 sectors, £1.8 billion media spend, and 10 media channels, the research is a data-led analysis of the profitability of advertising. In the current economic climate, it is even more important for agencies and marketers to use language that connects with the boardroom, and this research provides the evidence to position advertising in terms of incremental profit, return on investment, and payback horizons.

Advertising is a profitable driver of business growth, though profitability varies greatly by sector.

The average short-term (<14 weeks) profit ROI of advertising is £1.87, with all media channels showing, on average, a profitable return. However, sustained effects (payback from 14 weeks up to 2 years) contribute nearly 60% of advertising’s contribution to profit, increasing profit ROI to £4.11.

How we present media investment within the context of sustained effects on profit is essential for discussions with marketing teams, particularly CFOs and budget holders. Financial pressures have led to advertising investment decisions being driven by very short-term metrics which, whilst sometimes necessary, can lead to decisions that damage profitability. This profitability varies across sectors. Within FMCG, for example, ROI is only realised within the timeframe of sustained effects, while in the automotive sector, ROI effects are multiplied by nearly 4x when comparing sustained timeframes to the short-term.

There are three dimensions that impact profitability – scale, efficiency, and time.

The language of ‘performance vs. brand’ is damaging when justifying media investment. The former is seen as commercial and immediate, whereas the latter is seen as theoretical. To support how we move away from this categorisation and towards a more accurate view of the impact of advertising on profitability, the paper proposes three dimensions of effectiveness:

  • Scale, the size of advertising’s effect on the business
  • Efficiency, the ratio between cost and payback
  • Time, the period that the advertising payback is over

As the scale of advertising spend increases, the effect does too. But this effect experiences diminishing returns, which vary by media channel. This diminishing return means that scale and efficiency are linked; optimising towards one will impact the other. Using this information, we can identify when media channels will reach saturation point and build recommendations for diversifying into new channels.

How marketers talk about ‘time’ needs to change too. The analysis shows that immediate payback is no longer exclusive to typical performance media, with audio, BVOD, and print bringing themselves into play as ‘performance’ drivers. When looking towards longer-term profit effects, advertising sees an average multiplier of 2.2 on effectiveness. By determining when advertisers need to see the impact of advertising, we can recommend which channels should be invested in, noting that it is not always correct to default to the stereotypical performance channels for immediate returns.

Advertising effectiveness has more gradually changed as media consumption has evolved.

When comparing pre- and post-pandemic, media channel profitability hasn’t shifted as significantly as perhaps expected, with most individual channels seeing ROI variations within +/-5%. The shifts that are seen largely follow consumers' media consumption. BVOD (i.e. ITVX) and online video see increases along with the further fragmentation of video viewing and the growth of BVOD, SVOD (i.e. Amazon Prime Video), and YouTube over recent years. How we right-size investment based on the updated effect, in line with the target audience’s media consumption, is key for creating plans that deliver above-average gains in returns.

This research gives us further empirical evidence to prove, contextualise, and communicate the profitability of advertising. By continuing to adapt the way that we communicate media investment to the boardroom, such as moving away from ‘performance vs. brand’, advertisers will see a greater response to budget-setting.