Retail media, though popular, is in limbo as to whether it is just a conversion-driver, or whether there’s an opportunity for it to do more   WARC’s Paul Stringer considers the performance plughole.

The next big wave of digital advertising is here. In a relatively short space of time, retail media networks have established themselves as the “must-have marketing platform for retailers and the must-buy platform for marketers”.

That’s according to a recent report by the ANA titled: ‘Retail Media Networks: A Forced Marriage or Perfect Partnership?

The report is based on a survey of 138 ANA members conducted over the summer of 2022, and aims to provide a perspective and benchmark of how brands collectively are managing and utilising RMNs.

While the report makes for interesting reading, my overriding reaction is one of concern.

Before I explain, it’s worth briefly recapping the reasons why retail media networks are so appealing to advertisers:

  • Access to first-party data: The depreciation of third-party cookies is contributing to signal loss for advertisers and creating a need for privacy-compliant forms of insight and data. This increases the value of first-party data, which retailers have in spades.
  • Closed-loop measurement: Retailers can connect advertising with individual purchase data, enabling brands to draw direct links between marketing activity and in-store/online sales.
  • Connecting online/offline habits: Unlike other channels, retailers have the data to connect online and offline shopping habits, unlocking unique insights for brands.

Retail media is already the fourth-largest advertising medium, with ad spend forecast to reach $121.9bn globally in 2023. By 2025, if retail media continues on its current path, then it will become more valuable to advertisers than linear TV.

But there is a problem.

Yes, you might already be familiar with the term ‘performance plateau’, but have you heard of the ‘performance plughole’?

I’ve coined this phrase not to compete with Tom Roach and Dr Grace Kite, but to describe a slightly different but related phenomenon: the drain on brand budgets brought about by the growth of investment in retail media.

Why retail media is a performance plughole

If we look at funding sources for RMN programmes, then shopper marketing leads the way, closely followed by brand, then trade, media and e-commerce.

The majority of this investment (61%) is being “taken completely from existing budgets” with zero advertisers suggesting funding for RMNs is “completely incremental”.

Why then, are brand departments such a significant source of funding for RMN activity? One hypothesis is that RMNs are being used to drive upper-funnel metrics and build future demand. But looking at the data on goals for RMN campaigns we know this isn’t true:

Three quarters of advertisers rank conversion as the most important goal for RMN campaigns, with just 18% of advertisers selecting brand awareness. As the report notes, the fact that 89 percent of respondents ranked consideration as moderately important “suggests that RMNs have the potential [emphasis added] to move up the marketing funnel in terms of the strategic role they can play for advertisers”.

Potential is an important word. Because right now, it is clear that RMNs are still primarily treated as a lower-funnel performance channel. This is borne out in the data on the most used KPIs for RMNs:

ROI, ROAS and Incremental sales were the top three metrics while only 22% of marketers selected ‘new to brand’. This corroborates findings from another study, conducted by Merkle, which also found new-to-brand buyers much lower down the pecking order compared to the
use of direct response metrics to evaluate RMN success.

In follow-up interviews with participants from the study, a strong concern “was that budgets intended to drive brand growth from new consumers are being redirected to fund sales from known and existing shoppers”.

This is supported by evidence on the departments responsible for RMNs, with brand marketing bottom of the pile:

Brand marketers seem to be losing control. Budgets intended to build ‘future demand’ among the 95% of consumers out-of-market are being repurposed to target the small percentage of consumers in-market.

This strategy is not sustainable: by only focusing on converting existing demand, all brands will eventually reach a point where growth begins to slow, cost-per-acquisition creeps upwards, until finally they reach a ‘performance plateau’ (I refer you to exhibits A, B and C).

Add retail media to the mix and many advertisers will find themselves arriving at this plateau in lightning speed – so long as the trend of siphoning budget from brand continues.

How to avoid the performance plughole

So how do marketers avoid the performance plughole? I recommend focusing on three key areas, all of which relate to the need to build a better business case for brand-building internally:

1. Get better at demonstrating the value of brand

The need to invest in brand building is critical, but on this point not everyone agrees. In order for brand marketers to protect themselves from ongoing incursions, it’s absolutely vital they get comfortable talking about brand in a way that is meaningful to people who operate outside of brand marketing.

From an organisational standpoint, there are several ways to do this. One is to make sure brand metrics are aligned with your overall business goals. If the links between brand and business growth are clear, then you are much more likely to find support when brand budgets are under threat.

Of course, being able to demonstrate these links relies on a clear measurement plan. Not all metrics and methodologies can give a full picture on effectiveness, which is why a triangulation of Marketing Mixed Modelling (MMM), Attribution and Experiments is recommended.

2. Learn how to balance brand with performance

By now many marketers are familiar with the ‘60:40 rule’ introduced by Les Binet and Peter Field. The rule – only intended ever as a guideline – suggests that that 60% of the communications budget should be spent on long-term brand-building while 40% should be spent on performance activity.

While exact ratios vary significantly between brands of different sizes, spend levels, categories, and other variables, the general truth is that brands frequently underestimate how much they should be spending on brand and overestimate how much they should be spending on performance.

The performance plughole of retail media heightens the risk of this ratio being skewed.

One way to correct this is through quality measurement. A combination of MMM and ground-truth experiments can help you determine the most appropriate balance of spend between brand and performance for your particular brand, though keep in mind this ratio is likely to change over time.

If you’re an advertiser that lacks the resources to invest in an expensive suite of measurement tools, then there’s plenty of evidence out there that underlines the importance of investing in the long-term as well as the short-term. Not least the recent work by System1, which demonstrates that brand-building advertising can deliver short-term sales as well as long-term effects. Short-term sales activation, on the other hand, has a negligible impact on brand building.

3. Understand differences and synergies between channels

All media. Yes, all media are capable of delivering short and long term effects. At the same time, not all media are created equal. Some channels like television are clearly better at long-term brand-building than other channels. Likewise, channels like search and display are better at driving short-term sales.

Where retail media sits on this spectrum – at least for the moment – is quite clear. But this doesn’t tell the whole story.

All channels have a halo effect. Meaning investment in one channel can drive effects in another. This is as true of retail media as it is of television, as research by Analytics Partners and others has demonstrated.

Understanding these effects is key to brand marketers making the case to other marketers why investment in non-retail channels is important: Not just because non-retail channels drive long and short-term effects by themselves, but because non-retail channels actually help drive bigger impacts on retail channels, leading to higher sales spikes and more sustained, long-term demand.

To be clear, retail media has a critical role to play in marketing; now and in the future. But at this stage in particular – when most RMNs lack the capabilities to drive brand growth – it’s vital that marketers staunch the flow of budget from brand to retail, and remind themselves of the critical role they play in creating future demand.