By Steve Fajen
Now more than ever before, clients want to know if they got what they paid for, if the return on their advertising investment was fair and that transactions were transparent.
There are essentially four touch-points an advertiser can measure and monitor to answer these questions.
- What they pay their agency and what they get in return
- What they pay the media and what they get in return
- The rollup of these two expressed as a return on investment, ie. sales and…
- The value of their stock
Simple Media Math
To simplify matters let’s suppose sales are $100 and that the advertiser spends $5 on media ($0.75 cents to their agencies). The S&P 500 tells us that the stock valuation would generally be $186. The point here is that we need to keep an eye on all four of these touch-points. For example, saving 10% on agency fees amounts to 7 ½ cents, which we know “doesn’t buy a helluva a lot” when compared with growing the $100 in sales by even 1% ($1 gain), and what that woud do to stock price. We are not implying that you shouldn’t be prudent about what you pay your agency. We are saying that you need to pay attention to the media spend and the ROI as well and consider all four in tandem. There essentially represent the shared goals of the CEO (stock price and sales), CMO (sales and media value) and CPO (media price and agency fees).
So taking these one at a time, here is what Drexler/Fajen & Partners (DFP) asks you to measure, monitor and improve your situation, because we specialize in media money management.
Media Money Management
1-Regarding agency fees, we essentially want you to know what it should cost an agency to run your business, how that varies from what you are currently paying them and how that compares with industry norms.
With our many years of agency experience, specialized knowledge of media and a robust database, we can fully examine how an agency determines what it costs them to run your business. A scope of work is essential to determine the agency’s staffing plan and resources, which in turn you and/or we can analyze the same way an agency does internally. We benchmark salaries for every job title in the industry and then temper those on a Full Time Equivalent (FTE) basis, as well as by level of experience and expertise. We also have industry benchmarks for agency overhead and profit, so all that can be aggregated into a number that reflects the most reasonable estimate as to what it costs your agency to run your business.
2-Regarding media costs, we offer two kinds of assessments. The first is critical and should not be overlooked. That is a qualitative assessment, which examines and evaluates strategy as it relates to the development of a media plan and schedule. Industry sage Erwin Ephron once said that he “estimated that 35% of advertising is wasted because of mis-targeting and poor strategies.” It doesn’t matter how efficient the media buy is if it is predicated on the wrong strategy.
The second assessment tool is a media audit, which most major advertisers conduct on a periodic basis. This should measure what you spend and what you get in return in terms of working media. It does not overtly deal with the subject of rebates between media owners and the agency. More and more agencies have employed rebates because they feel that they have been squeezed by marketers who want more resources for less money. Since it is difficult to specifically “follow the money” trail”, we have interviewed several ex-employees of agencies and media outlets who have given us greater insight into the issue so we do have specific methods to help deal with the practice.
3 and 4 – Regarding return on investment and stock valuation, our approach is very practical. Sales, of course, are affected by a myriad of factors beyond advertising, not the least of which are price, promotion, distribution, competition, etc. However, these, like advertising are “drivers” of ROI, not the measure of ROI itself.
Advertising ROI can be most simply expressed as the advertising to sales ratio or A to S. These ratios vary by product, category, and then within category by timing, stage in a product’s life-cycle and budget. But A to S does have a history for each category so if your brand’s ROI (A:S ratio) is markedly different than the category, there is a reason for that, which you need to discover and deal with. Consequently, measuring ROI is not the same as measuring the drivers of ROI. Measuring ROI is pretty straight-forward. Adjusting the drivers may not be. Drexler/Fajen & Partners has worked with clients to model return on investment and help to define the elements that offer the best opportunity to increase yield. Likewise there are similar ways to model P to S ratios, relating stock price to sales.
Every client should have a disciplined approach to controlling these four major touchpoints, especially now, when the age of transparency is upon us.