The ROI from advertising spend

by Gavin Hinks

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27 Sep 2012

  • Financial Director
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Concept image of online advertising

THERE'S AN ADVERT ON TV at the moment with a voiceover by Sherlock Holmes star Benedict Cumberbatch that ends like this: “If you believe business can still be done on the strength of a handshake, and that promises are still worth keeping, then you are most definitely not alone. Hiscox insurance. As good as our word.”

Filmed by a production company owned by Ridley Scott, the director of Prometheus, Gladiator and Blade Runner, the ad has been widely praised by marketing experts as delivering highly effective messaging and firmly establishes Hiscox, the insurer, as a brand that definitely does not sell on price.

Dubbed “There is a light”, the ad has attracted much attention for the way it sells the company’s core values - essentially that it pays out on claims. Its 2011 results went some way to prove the point. Hiscox made pre-tax profits of just £17.3m after a year of natural catastrophes that included the Japanese tsunami. The previous year’s profits stood at £211.4m.

But campaigns like Hiscox’s don’t come cheap. In fact, the cost of production, followed by TV and print slots, for a project like Hiscox’s can run into the millions of pounds. That means marketing is going nowhere without the say-so of finance. Finance and marketing? Aren’t these two departments that could never agree? Marketing, extolling the virtue of intangible benefits, is surely at odds with the data-driven empirical world of finance and the finance director?

Well, yes, experts say there are always grey areas and that results are never guaranteed from a marketing campaign. Not least because other variables can change while a campaign is under way, potentially even rendering the effort futile.

Black magic

But it doesn’t mean it cannot work, or that there aren’t hard questions to answer before the big spend takes place. Questions that an engaged finance leader can ask with confidence and expect to be answered with quantifiable results for marketing and branding propositions.

“It can be viewed as black magic but there’s some very strong models behind it all. More people understanding that is very important,” says Penny McLouglin, an expert on marketing and an executive director at the Chartered Institute of Management Accountants (CIMA).

Of course, Hiscox is not alone in seeking ways to influence public perception. Experts cite the work of McDonald’s (in Europe, the red faces have been dumped for green ones; healthier options have been added to the menu along with higher-grade coffee) and Greggs, the high-street bakery chain which recently launched a new coffee shop, Greggs Moment, in Newcastle. Others mention Ford as a brand that is doing much to transform itself.

However, despite obvious successes, many view finance and the finance director as reticent to see the value of marketing and brand investment because of their focus on data and guardianship.

According to Stuart Bridges, chief financial officer at Hiscox, an element of that is indeed part of the function of finance - professional sceptic. The rest is more about asking fundamental questions about the kind of return that can be expected from a campaign.

“What’s the FD’s role in this? The FD’s role is firstly to gulp at the size of the marketing budget that’s been suggested, and then gulp again at where it’s going to go,” says Bridges.

“But then I think the key is to have a simple metric that justifies it. And the metric we set them is that if we could generate a pound of new business in our direct channel from a pound of marketing spend, then economically I’m in a good place.”

Make the “intangibles tangible”

And gulp he may if someone is asking for millions of pounds to spend. But Bridges quickly moves to a discussion about seeing the returns he wants to find. Or, as Penny McLoughlin might put it, making the “intangibles tangible”.

In most cases, however, the decision to spend on a big campaign would come only after substantial preliminary work. That work takes place in a number of phases - monitoring brand performance, figuring out if the brand needs work, and then implementing a repositioning plan. An expensive ad campaign, a launch of a new branded product or a complete overhaul of the look and feel of restaurants would be tactical steps to either combat perceived deficiencies in the brand or exploit opportunities that have been identified along the way.

According to David Haigh, a former finance director and now chief executive and founder of Brand Finance, finance staff may be intimidated by talk of brand performance but they shouldn’t be.

“Finance people tend to shy away from all this but it’s really just business planning,” he says.

Marketing can help by producing hard data on brand performance from the start. These would be short-term indicators, according to Penny McLoughlin, such as sales, customer satisfaction, repurchase rates and cross-selling performance.

She says: “The way forward is to have an enterprise-wide performance management system.” This might also include consumers’ “emotional” relationship with brands, which can also be quantified. Crucial to this is understanding the company’s value drivers - whether they be tangible or intangible. One example is the way Moonpig.com, the online greetings card company, owns its own print works.

This approach is important, says McLoughlin, not just because Moonpig controls printing but because - in doing so - the company can control customer expectations that it will deliver on its service commitments. Get those wrong and the reputation will suffer - and the customers might go elsewhere for their Valentine’s cards. That means an agreement on the value drivers of a company are vital. A CIMA study, Valuing the Human Dimension, found that 68% of value drivers were “non-financial”, including customer relationships and strategic visions, among others.

Risk blind

If service to customers is a value driver, finance directors will need to protect it jealously. Indeed, the Association of Insurance and Risk Managers recently produced a study looking at business disasters and why they occurred. Among the seven key reasons companies found themselves beset with troubles was: “Blindness to inherent risks, such as risks to the business model or reputation.” Undermining a brand and how it is perceived is the same as undermining the company’s reputation.

McLoughlin advises that companies also understand longer-term indicators and how these might affect a brand and its products. This could mean looking at changing attitudes to politics, the environment, social issues, health and law. These will be judgement calls, but they should be viewed alongside the quantifiable indicators.

Bring them together, using an assumption that existing products will not change, and the finance director can start to focus on some well-honed sales forecasts, feeding them through into the P&L to get a view of what could happen. It is unlikely McDonald’s would have moved to reposition itself without looking at its sales stats alongside knowledge about changing attitudes to health and the environment, says David Haigh. He adds that it is marketing working in tandem with finance that drives this kind of decision making.

“Increasingly, marketing directors don’t make any of these decisions on their own. They work hand in hand with the finance director. The best decisions are made where the FD doesn’t poo-poo the marketing effort,” he adds.

Once finance and marketing agree to move to a repositioning, there is further work involved. Here, Haigh recommends attribute research to reveal just what consumers think about the brand and products in order to build a quantifiable picture of their attitudes.

This should then give a basis for the changes that will be required. Costing proposed changes and building models for the uplift in revenues that should result can give a company a good idea of what the likely outcomes will be.

But this does require departments to work closely together. Haigh says the area of marketing and brand development demonstrates “the importance of cross-functional decision making”, and insists that increasing numbers of finance directors are “switched on” to understanding marketing and brand values.

Penny McLoughlin puts it slightly differently. After coming to a shared understanding of value drivers and ensuring that effective monitoring is in place for short- and longer-term indicators, marketing needs to understand finance, and finance needs to understand marketing, she says.

She does, however, add a note of warning: “A company can make significant investments in communicating and positioning - or repositioning - its brand with its external target market, but if the brand values, or the ‘what’s important around here’ messages, are not fully communicated and understood internally, there is a risk that these investments are wasted.” ■

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