Why the ad market is holding up better than you thought

Why the ad market is holding up better than you thought
Industry analyst Ian Whittaker at last month's The Future of Media conference in London.
The Future of Media

“Businesses spend on advertising. We talk about consumer confidence, but it’s not consumers that spend money on advertising, it’s businesses.”

At The Future of Media conference last month, industry analyst Ian Whittaker explained that the current recessionary state of the economy should not necessarily scare the advertising industry, because businesses are by-and-large managing to do well.

He pointed out that corporate profits in the US market are at or near 70-year highs, and said there is “not currently evidence that is coming under pressure.”

In fact, according to Whittaker, more firms will continue to spend on advertising, especially in sectors like consumer packaged goods.

Why? Many companies have maintained profitability through the downturn by significantly increasing prices on their products over the past year, and they have done so “on the strength of their brands,” says Whittaker.

It is well understood within the media and marketing industry that much of marketing’s value for businesses derives from its capacity to help make consumers less price sensitive because they have built brand affinity. For Whittaker, the last 18-24 months have thus been a “vast unplanned experiment in showing how brand strength works.”

“You’ve got your evidence that [marketing] contributes to the bottom line and the share price,” he affirmed.

That would seem to be borne out by the latest AA/Warc Expenditure Report published this week, which forecast UK adspend to have grown marginally between April and June despite wider economic problems impacting the country such as Brexit and persistently high inflation.

Turning marketing into ‘intangible CapEx’

However, a gap remains at the executive level between CEOs and CFOs, and chief marketing officers, over the value of marketing budgets, especially amid a downturn.

In a recent McKinsey & Company study, two-thirds of CMOs surveyed said CEOs fail to understand modern marketing. However, the study also found that the relationship between CEOs and CMOs is positively correlated with companies’ performance.

The barrier between CMOs, CFOs, and CMOs was highlighted in a behind-closed-doors meeting at The Future of Media, where many industry leaders expressed concern that CMOs were not being given enough “ammunition to defend marketing because there is a lack of proof of effectiveness.” This comes as McKinsey & Company found that new C-suite roles, such as chief brand officers and chief customer officers, have created a “murkiness” as to who holds different responsibilities in boardrooms.

Marketing is still considered “expendable” by many CEOs and CFOs, which drew chagrin from one delegate, who said: “CFOs haven’t got a fucking clue about consumer behaviour.”

But Whittaker takes a more pragmatic approach and has called for marketers to get better at speaking the language of the CFO.

“The problem for the moment with marketing is that to CFOs, it’s lumped in with discretionary spending,” he explained. “CFOs generally see discretionary spending as bad and capital investment as good. The task is to get marketing considered in that investment category and not that cost category.”

He suggests transforming marketing into “intangible CapEx,” and that CMOs do better at making the argument that investment in the present will lead to tangible business benefits in the future, exemplified through consumers’ lack of sensitivity to price increases throughout the past year.

Agency-client relationships a point of tension among industry leaders

Whittaker further recommends marketers consider “where the key decisionmakers are coming from. What are their priorities? What are they thinking?”

That involves understanding the incentive structure in place for CFOs and CEOs. Executives often derive personal bonuses based on their company’s Ebitda (a common measure of profit).

“The easiest way to raise Ebitda is to cut their marketing spend,” explained Whittaker. “So if you’re dealing with a management that is essentially incentivised to do that, they key is to come back with arguments to say why you shouldn’t.”

The key hurdle to doing so is often in delivering well-measured and considered evidence of marketing effectiveness, as well as communicating clearly to CFOs what it means.

CFOs, according to Whittaker, are open to hearing arguments on budgeting they may not agree with, so long as they are credible and they can understand the CMO’s rationale.

“A lot of the problem is the language,” said Whittaker. “One of the biggest problems is that the CFO and CMO are speaking on totally different levels.

“I have seen time and time again that one of the things that people tend to focus on when they look at models is they focus on the output,” he continued. “What’s the end result, and so forth. What they don’t question, and what is actually key to any model are actually the inputs and assumptions that have gone into it. I think what has happened is that there’s not been enough work in stress-testing those assumptions and inputs to see how they tie in to what the firm is trying to do.”

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