It is amazing how statistics and data can sometimes answer questions that are very debatable and controversial, especially in marketing and advertising. Advertising for me is like an arrested person in court, with the exception that advertising isn’t afforded the presumption of innocence. It’s more likely to be presumed guilty, bearing the burden of proof to present evidence that it is not only an expense or cost of doing business, but also a driver for sales.
Advertising lacks the mechanism to prove its contribution. Even from a technology perspective, a universal method of capturing or measuring advertising’s effect still has not been developed.
While the only true way to know whether your advertising and marketing is profitable – and how much money it is making – is to measure and track your marketing ROI, there are some statistical models that could build a foundation for advertising credentials. I will review one interesting study I have discovered.
Marquardt and Murdock published their insightful research of the sales-advertising relationship in the Journal of Advertising Research in 1984. There is much research that discusses that advertising expenditures are not clearly linked to an increase of sales and profits. A link definitely exists, but it is difficult to isolate it from variables that present in all experiments.
Marquardt and Murdock conducted their study on the data of top department stores and supermarkets in the country. Their scope was mostly focused on three patterns: continue investigation of the sales-advertising relationship; estimate the coefficient of sales responding to the advertising; and investigate the consistency relationship between sales and marketing.
The study selected the top 25 general merchandisers and top 25 supermarket chains from Advertising Age’s annual report from 1973 to 1981, and then filtered the list based on consistencies present in all 8 reports. The final list consisted of 17 stores and 19 supermarkets.
Data inputs were:
- Average annual sales
- Average annual advertising expenditures
- Average % of sales spent on advertising for each firm
Researchers used the regression model y=a+b(x), where y= annual sales for individual retail organizations, in millions of $, a= estimated value of the y intercept, b = slope of regression line, x=annual advertising expenditures for each retail or organization measured in million $.
Their next step was ranking retail organizations into brackets or most consistent and least consistent advertiser categories using the criteria of % change in annual spending on advertising.
The comparison analysis between most and least consistent categories for stores and supermarkets were based on the calculated value of the coefficient of variation (CV), formula:
CV=σ√x.100, where σ = the estimated value of the standard deviation,
x= the estimated value of the mean.
Let’s compare major objectives of the study and actual findings.
- Determine if % of sales spent on advertising differs between major department store retailers and major supermarkets
- Determine the correlation between a change in advertising and sales
- Determine if consistency in advertising affects sales made by stores and supermarkets.
- According to the data, department stores obtained higher per firm sales than did major supermarkets. Department stores also spent more on advertising with average annual per company expenditure of $128M, compared to an average of $35M for the top supermarkets. The average department store spent 3 times more on advertising than supermarket.
- Analysis demonstrated a strong relationship between changes in sales and changes in advertising (correlation coefficient of about 0.9 for both groups of retailers). The regression coefficient for store and supermarket also significantly differed from 0. These regression coefficients indicated that on average, supermarket sales increase by $89 for each dollar increase in advertising expenditures. Department stores increased by $27 for each dollar in their advertising spending. So advertising is a good investment for both groups, but supermarkets would gain higher return. Investing more in advertising may a yield more rapid increase in profits for supermarkets than for department stores.
- The study discovered an additional benefit to be derived from being consistent in advertising. Department stores: The most consistent advertisers obtained the same 10% annual increase in sales by using an 11% increase in advertising. The most inconsistent advertisers increased advertising by an average 17% and obtained the same 10% increase in sales.
Supermarkets: The most consistent 10% averaged annual change in sales by using an average annual increase of 8% in their advertising expenditures. The most inconsistent experienced about the same increase in sales but with a 22% increase in advertising spend.
Conclusion: As the research reveals, there is a clear correlation between advertising spend, and increase in sales. And businesses yield the greatest ROI on spend when advertising is consistent. The best way to improve your advertising and marketing investment is to consistently measure and track your ROI.