Companies have generally slashed advertising spending when tough times loom, and these tough times are no different: One recent report predicts spending in 2001 will be down 6 percent from 2000 levels. Advertising is a particularly easy target for cost cutting, because few companies have developed reliable ways to track or predict the return on investment (ROI) for such spending. Instead, advertising budgets are often computed strictly as a percentage of revenues, or based on the previous year’s budget, with little attempt to determine how much is needed to address market goals.
That is the wrong approach, say those who actively seek the Holy Grail of metrics–an ROI on advertising. Advertising spending does produce measurable returns, they insist. But so far, “most of the effective advertising ROI techniques are based on attitudinal research like field research, and focus groups on consumer perceptions,” says Don E. Schultz, professor of integrated marketing communications at the Medill School of Journalism at Northwestern University. “When you try to blend that information with financial metrics, a lot of CFOs don’t want to go there.”
On the other hand, some CFOs have been there for a while. Businesses that have control over the means of distribution–service firms, restaurants, hotels, grocery stores, and the like–can quite precisely determine the impact of advertising on sales by means of bar code-scanning and other point-of-sale technology. But for firms that lack this direct connection to the consumer, such metrics are hard to come by.
“The finance function has traditionally struggled with advertising investments, because of the difficulty of measuring the impact,” says Keith Woodward, vice president of finance at the Big G cereal division of General Mills Inc., in Minneapolis. “We are very analytical people. We want to say, ‘I invest here, I see the return there.’ That’s what we see with most of our capital expenditures. Our return is directly traceable to increased volume or revenue, and you can’t do that with advertising.”
Woodward thinks that attitude is changing out of necessity. “We have more sophisticated tools to get at the measures, and we’re beginning to realize that it’s necessary to evaluate new types of metrics,” such as brand value. “That’s how you differentiate and maintain your position in the marketplace today,” he says.
Nonetheless, Woodward says that advertising investments at the cereal division are driven primarily by the market-growth potential of each product line, a traditional revenue metric. “We start with the premise that we will invest most in the highest-return areas,” he says. “We look at a total division in terms of brand valuation, but we also look at each specific brand to determine the income for each. There has to be an opportunity for growth, or else we won’t invest.”
Investment decisions are made by examining the historical performance of the brand as well as market research metrics on previous advertising effectiveness, growth versus competition, and other changes in the marketplace. Using this information, the company determines how much money to spend on advertising each brand, a decision in which Woodward is closely involved. Once the ad campaigns are launched, the company uses revenue and market data, along with some proprietary metrics, to see if they are working.