89% of financial analysts believe marketing should be viewed as an investment, but 45% of marketers say their organisation sees it as a cost. Where is the disconnect? Billy Ryan, Head of Analytics and Effectiveness at the7stars looks at where analysts’ understanding of advertising driven value creation differs from marketers; and proposes three ways to bridge the gap between the City and the C-Suite.

the7stars recently conducted quantitative (n = 103) and qualitative (n = 18) research of the senior marketing community, diagnosing common challenges and opportunities in marketing effectiveness. 

Our research found: 

  • 8 in 10 agreed that effectiveness has ‘never been more important, or higher up the CFO’s agenda’. 
  • The top challenges faced were ‘data silos’, a ‘lack of holistic measurement frameworks’, and a ‘disconnect between marketing investment and objectives’. 
  • And the big opportunities were seen in ‘harnessing AI’ and ‘the combination of data and creative’.

But the standout insight came from comparing our survey results with others to understand how different parts of the ecosystem view marketing.

Lost in translation

Last September, as part of the IPA’s Effworks Conference, Ian Whittaker and Brand Finance surveyed 200 financial analysts’ sentiments towards marketing and brands. 

Financial analysts are the intermediaries between companies and investors, evaluating their financial and management performance. Their guidance often makes or breaks company valuations and perceptions of management performance.  

As a collective, they are your boss’ boss. 

The findings of the survey were extremely positive for the industry. 

89% of analysts believed marketing spend should be capitalised (treated as an investment in intangible capex) some or all of the time. 

79% believed ‘strength of brand/marketing’ was the most important component of their appraisal and analysis of companies; higher than leadership quality (76%) and innovation (72%). 

In the7stars survey, we posed a similar question to senior marketers with much more pessimistic outcomes. 

As many as 45% of marketers believed their organisation saw marketing as a cost rather than an investment. 

If your boss’ boss believes in the power of brands, but you think your boss doesn’t; it's a fair assumption that something is getting lost in translation.

City analysts are primed to support investment in brands, seeing brand equity as a key differentiator in company performance; however this isn’t reflected in marketers’ beliefs or investment strategies. 

Leaving profit on the table

Nielsen’s 2022 ROI Report, ‘Scared money doesn’t make money’ used their databank of econometric modelling studies to understand how many brands were over- or under-invested in media, or had their investment level just right.

Their analysis found that 50% of brands modelled were leaving profit on the table. In other words, if they invested an additional £1m in media, they would generate more than £1m in incremental profit.

Thinkbox’s recent update of their ‘Profitability’ study reinforces this; with the average Profit ROI of advertising recorded at £4.11. 

Looking at the investment data, it’s clear that the market is not heeding the Nielsen or Thinkbox insight. During a period of household consumption growth and high inflation; growth in advertising investment has been weak. Conversion-focused channels like Retail Media and Search have driven the headline growth of recent years and when these are stripped out - a nominal growth rate of only 1.2%-2.1% per year remains. 

Speaking a different language

Financial analysts see the commercial value of brands and the advertising efforts that support them. They see this to the point that there is a desire to change how it is accounted for on the balance sheet.

But there is a disconnect between the value-creating effects financial analysts see from advertising and those that brands talk about in their business cases. 

When analysts look at strong brands they see pricing and distribution power, sales persistence, and high barriers to entry for competitors. But when brands put forward the business case for advertising these metrics rarely show up; replaced instead by a basket of custom brand metrics, in-year sales, or more problematically - attributed outcomes.

These former effects are harder to assign value to with traditional methods; but are where marketing departments create real shareholder value.

An excellent recent paper by Shuba Srinivasan (Boston University) and Dominique M Hanssens (UCLA) “The Impact of Advertising On a Company’s Stock Price”, reinforces this. 

Their paper summarises the academic literature on how advertising effects stock price. Not only does the paper provide a solid backing for the effect of advertising on stock price via increasing transactional data; but also demonstrating two additional mechanisms through which advertising more directly impacts stock price:

  • ‘Brand Assets Create Future Cash Flows’ - advertising not only increases cash flows but also reduces their volatility; a key attribute for investors. 
  • ‘Signalling’ - advertising investment indicates management confidence and reduces information asymmetries between a business and investors. 

We know that the investor community is warm to advertising as an investment; that brands are leaving profit opportunities on the table through under-investment; and that advertising directly and indirectly impacts share price. However, budget approvers in the C-Suite remain uncertain.

3 ways marketers can bridge the gap between the City and the C-Suite

  1. Nurture your ‘effectiveness generalists’
Building a business case that captures the total value-creating effect of advertising is hard. It takes a jack of all trades, not a master of one.

The measurement community has begun to converge around the idea of ‘triangulation’. This is the concept that there are no silver bullets in measuring marketing effectiveness; it's only by building a portfolio of evidence across multiple methods that we can approximate advertising’s total value creating effects.

But the problem is that knitting together seemingly disparate forms of evidence is hard. Most analysts, researchers and data scientists are specialists in a chosen field; as are the third party consultancies that advise them. 

There is no easy solution but it’s certain that a jack of all trades or ‘effectiveness generalist’ needs to play the key role. 

In-house effectiveness teams are of course the best solve for this; bridging the worlds of research, MMM, digital analytics and financial planning. However these teams are only viable for the largest advertisers and the talent pool is small. 

Marketers can achieve similar benefits by creating forums for the necessary experts to converge. 

Third parties, internal specialists, finance teams and agencies all need to work together on common questions and challenges; fusing their expertise and insights towards the common objective of creating advertising driven value.  

The multidisciplinary nature and long term incentives of agency teams means they are often the strategic glue required for this.

  1. Add a layer of social proof to the business case
Case studies can increase the risk tolerance of C-Suite.

Modelled outputs, however robust and however well triangulated; can be abstract and tricky for non-technical audiences to feel fully comfortable with. This uncertainty reduces risk appetite and damages the business case. 

Using case studies can mitigate this by adding a layer of social proof.

‘No one wants to be first to the party’ 

This old adage holds true for strategic decision making and the more C-Suite can be reassured of a path well trodden; the more comfortable they will be with the business case. 

Often this will mean building case studies that are category adjacent; focusing on identifying cases that are relevant to the marketing task and scale of business ambition rather than anchoring directly against category peers. This has the further benefit of highlighting shareholder value effects like pricing power (see recent trends in CPG holding companies quarterly reports) or creating a barrier to entry (e.g. how food delivery aggregators like Deliveroo, Just-Eat and Uber Eats have created a brand barrier to entry where the product barrier to entry is low).  

  1. Show your receipts
CFOs are risk averse and this needs to be actively managed by marketers.

CFOs are obliged to be risk averse but we don’t always recognise this when making the business case for advertising. They have a responsibility to optimise return across different business areas; subject to a certain level of risk tolerance.

This means we not only need to project the value creating effects associated with marketing investment; we need to show the range of possible outcomes too. 

This means a regular and rigorous reconciliation of past performance vs. that previously forecasted in order to build credibility overtime. 

Regular check-points should be signposted as part of the business case; with a pre-agreed measurement framework and decision criteria for altering the plan.  

As it stands, advertising returns are perceived as risky and this is a barrier to growth. For this very reason, channels with live attribution and optimisation signals ‘built in’ (e.g. PPC and Retail Media) continue to grow their share of advertising budgets. The same culture of consistent reporting and performance reconciliation is key to building credibility across the full advertising mix. 

Unlocking the growth opportunity

Influencing advertising investment level is arguably the single most impactful thing marketers can do to influence their effectiveness. 

Hannsens and Srinivasan’s paper and the IPA’s survey show that investors are warm to the business case for advertising. And with the Nielsen data showing the market is under-invested; confidence and bravery in advertising investment has never represented greater competitive advantage.

Proactive steps to bring the business case closer to that valued by financial analysts and reduce the risk profile of advertising will ensure this opportunity doesn’t get lost in translation.