by Michael Wolfe
Presently, most marketing-mix models are seriously under-estimating advertising ROI. Why is that? Because these models generally only consider and measure short-term lifts from media and marketing activity. Why is including these long-term ad effects into marketing-mix models and marketing ROI calculations so important? Based upon a study by IRI over twenty years ago, it is estimated that long-term advertising effects are about 2X greater than the short-term lifts currently measured through marketing-mix models. Clearly, these effects are significant in size and certainly would make a difference in the marketing ROI calculation. In CPG companies, in particular, marketing-mix models are finding that advertising spending is a money losing proposition. Is this a key reason why there has been a slow and increasing investment in equity destroying price and trade promotions? Perhaps so.
The key reason why some infer and believe that advertising spend is not profitable is because these calculations are based only on short-term lifts or advertising effects, to the exclusion of the long-term impact. For Bottom-Line Analytics, we include long-term ad effects as a regular course in our marketing optimization modeling. As a result and in most cases, we find that advertising returns are profit positive. Likewise, we have found that these long-term ad effects generally range from 1X to 8X greater than the measured short-term ad effects. Considering the long-term from your advertising investment is therefore critical!