There Is No “ROI vs Brand” Dilemma When You Know Your “Profit Horizon”.
January 6, 2012 1 Comment
Far too many “smart” (aka self-conciously cool) agencies these days proudly seek talent from anywhere EXCEPT business backgrounds. They believe, they say, that these fundamental skills for understanding arcane concepts like “profit” get in the way of true creativity. (More on this mis-direction in a future post about an ad biz culture I call “creative correctness”.)
But this outright avoidance of business skills in the agency business has led us to the endless (and frankly silly) discussion about deciding between “ROI” and “brand”.
Bunkum. There’s no contradiction between these two – not when you think like a business. The needs of your business must be met – and that means creating advertising which brands AND delivers ROI.
ALL advertising must return an ROI. Brand is meaningless if it doesn’t generate profit. I don’t care when you need it, at some point brand MUST return an ROI or you shouldn’t be building a brand.
Sadly, this means that all those arcane sociological wonderment theories surrounding brand ONLY have value if they help create profit. Otherwise, they are lovely little theories that agencies use to get their next work – but which clients should ignore.
Of course, it can be tricky to craft an ironclad calculation of ROI. And the reality of a vitally active market makes it difficult to separate an unchallenged advertising profit out of numbers affected by a wide range of efforts. But that’s no excuse. You must create a reasonable approach for estimating ad profit.
ROI Proponents are Also Wrong. It seems that the primary reason we talk about ROI these days is that online enthusiasts are desperate to find a way to steal budget from brand efforts.
As a result, massive venture capital investments have funded a plethora of content claiming that ROI oriented efforts trump long-term brand work. But they don’t. Brand building is extremely valuable.
“Profit Horizon”. A More Useful Construct. As agencies, we need to plan our every activity with a clear understanding of what I’ll call our client’s “profit horizon”.
In other words, if they spend $X today, when and how must profit from revenues driven by that spending cover the cost of the advertising and how much additional profit must result?
There are different types of simple approaches to this…
1. A few companies must have an instant profit horizon. Think of the traditional DRTV phone sales plays. Or, the direct mail instant profit needs. But also, a great many retail situations require advertising to drive immediate sales via store traffic.
2. Quite a few more companies will have a 6 to 24 month horizon. If they spend the money in this year’s budget, it must turn a profit soon. Not in 5 to 10 years, but in the next x months.
3. Very Large Companies May Be in a Position to fund long-term brand development. In these cases, full profit may not need be returned for 5 to 10 years. But even in this case, we should be developing ways from the first day to estimate profit created through advertising.
More Complicated Profit Horizons. Agencies and their clients will be far more successful if they can look at more complicated scenarios – perhaps like this:
Must recoup 30% of advertising cost within 6 months.
Must recoup another 30% of ad cost within the following 12 months.
Remaining ad cost plus a 40% profit on the revenue driven by advertising must be recovered over the following 2 years.
The advertising business serves companies with a 6 to 24 month profit horizon worst. These companies know that their long term health will be better if they step away from hard sell advertising. But as soon as they offer this wiggle room, agencies snooker them into failure. Perhaps agencies refuse to accept business reality. Or, too many agencies may know only one type of advertising. In either case, agencies recommend to these companies the same type of work they’d deliver for Budweiser and Coke – long term branding. And if the company agrees, then they usually go out of business.
Regardless of Approach, Agencies Must Learn Business. I heard a former W+K guy speak a few years ago and suggest that the problem in advertising is clients don’t “get” creative. So he recommended that clients need to learn all the creative subtleties he espoused. In truth, he just sounded frustrated that clients won’t approve just anything – that they ask for results.
I think the opposite: Agencies need to learn how to plan and speak in business terms. And, they should modify their operations in two ways:
1. Add “Profit Horizon” to Creative Briefs. It’s not always easy to describe or calculate. But it must begin to live in the mind-space of your creative and account teams. And that means adding it to the brief.
2. Start Hiring Trained and/or Experienced Business People. Your agency will never succeed at viewing Profit Horizons unless you can engage a healthy discussion about business, with businessmen and women. And that requires being able to read a P&L while talking in terms that the business understands.
Fortunately, when your advertising returns better business results, your agency business should grow. And that helps us all.
Copyright 2012 – Doug Garnett – All Rights Reserved