“What I look for is the difference between what is expected and what occurred,” says Schultz. Any incremental revenue spikes that coincide with advertising activity (and exceed the amount spent on the advertising) show an ROI on that advertising spend. Schultz himself notes that this method is flawed, since “I’m only looking back over my shoulder.”
To find a predictive model, Schultz says it is crucial to quantify a brand’s overall market value. “Once you know how much a brand is worth, you have some basis for knowing what to spend against the brand,” he says. To get at that figure, Schultz uses a model developed by London-based Brand Finance. Using product and brand forecasts, historical growth records, costs, and other factors, he determines total sales of the product now and into the future. He then calculates various charges against the brand to cover internal costs, and identifies a brand contribution. This contribution is used in a discounted cash flow model that defines the financial value of the brand.
Brand valuation calculations have been big business for other consulting firms, including Corporate Branding LLC and Interbrand, both of which maintain vast databases of brand value information on thousands of companies. Both firms track these values over time to help their customers make brand investment decisions and to track their success.
James Gregory, CEO of Corporate Branding, in Stamford, Connecticut, says that the return from advertising and brand communications is measured not just by increases in revenue and brand values, but also from boosts to a company’s stock price. “Corporate brand plays a real role in stock performance,” of about 5 to 7 percent, says Gregory. “While it’s not a major driver, it’s significant enough that we can actually measure ROI for it.”
Ad Agencies Weigh In
Some companies simply look to their ad agencies to prove that advertising works. “We’ve always had gross measures of effectiveness like awareness,” says Austin McGhie, president and CEO of Young & Rubicam San Francisco, a full- service ad agency, “but we’ve never been able to diagnose what is going on inside a campaign. I wouldn’t say our clients are holding our feet to the fire, but that’s going to happen soon.”
When it does, Y&R says it will be prepared. It has long used a technique called the brand asset valuator, a method similar to those used at Interbrand and Corporate Branding, which is based on field research of consumers on thousands of brands. The results of a Y&R study that quantified the motivators of the buying decision and the role brands play indicated that brands are built when the consumer believes the product is different in a relevant way. Y&R is able to track how well various advertising campaigns have differentiated brands, and the degree to which they have thereby improved brand value.
In addition, ad agencies are increasingly creating ad campaigns that include “response components.” Such mechanisms as toll-free numbers or Web addresses incorporated into print, radio, and television advertising enable consumers to get additional product information and advertisers to gauge response to ads. Companies are growing accustomed to this type of data, due largely to the advent of “click-through” ads on Web sites. Soon, says McGhie, interactive technology will expand to television, print ads, radio spots, and other media that currently offer no such insight. These additional sources of data will further bolster a company’s ability to create advertising ROI methodologies. “Advertising and direct marketing are all starting to come together,” says McGhie. “It’s all brand response data now.”
The key issue, says DuPont’s Gee, was that CFOs saw the brand as “soft.” “It’s not going to be soft going forward. What we’re doing at DuPont is a sign that the softness of a brand is going to turn into hard numbers.”