It’s true: You really do need to spend money to make money

Advertising is a commitment. It can also be expensive. And while we know that brands are prioritizing their brand awareness efforts in the coming year, there isn’t a marketer on the planet who’s not focused on the tangible returns that their spend delivers. And given that focus, it’s not uncommon for brands to pull back when the returns aren’t there. Somewhat counterintuitively, however, that’s usually not a good strategy. 

The knee-jerk reaction to reign in spending when returns are lackluster is logical. Why continue—or even increase—spending if it’s not generating positive results? As odd as it might sound, the answer is because you’re likely not spending enough to get the returns you want. In fact, there’s a spending threshold to generate the best returns, and if you don’t hit that, the returns will likely be underwhelming. And if you pull back, the problem could worsen.

In a recent deep dive into an array of cross-channel media plans, we found that 50% of marketers’ media investments are actually too low to drive maximum payback. And in terms of amount, they’re 50% below what they should be to generate the best possible results. When marketers embrace the premise of spending more to earn more—by committing to the ideal amount—they could boost their return on investment (ROI) by as much as 50%.

Armed with an understanding that maximum ROI depends on specific spending levels, marketers can dive into determining what the right spending amount is. Said differently, in order to get the best ROI, brands need to know how much they need to spend to break through.

Here’s an example: In a recent analysis, we found that when a brand spent too little, the vast majority of the audience (87%) were exposed to the campaign less than three times. This group accounted for 68% of the delivered impressions. That means that nearly 70% of the impressions might not have been as effective as they could be.

In a separate example where a brand spent a medium amount, approximately 40% of the audience was exposed at least three times, and only a small portion of the audience (8%), saw the ad eight or more times in a week, which suggests potential ad waste. In the example where ad spending gets very large, 75% of the impressions are attributed to the audience members who see that ad more than eight times, but even in this example,32% of the campaign audience saw the ad only once or twice.

In addition to looking at a few specific cases, we wanted to better understand—at a global level—how frequently brands underspend and in which channels. Through our analysis of ROI observations, we focused on three key questions to understand what spending and ROI looks like—as well as what opportunity is being left on the table:

• How much spending does it take to be competitive?
• How does this vary by geography?
• How do brands’ planned spend levels compare to the optimal spend levels for the media channel?

Based on our analysis, we found that the average brand invests 3.8% of its revenue on advertising¹. To stay competitive, we believe a brand needs to spend between 1% and 9% of its revenue on advertising. In our study, we found that most brands spent between 1.4% and 9.2%. Within this range, one-fourth spend less than 3.8% and another quarter spends more than 3.8%.

It’s also worth noting that to compete, a newcomer will need to spend proportionally more than an established player. Conversely, an established brand can trend toward the lower end of the range to stay competitive.

Given the correlation between spend and ROI, modeling is critical for advertisers and agencies interested in finding the right balance to achieve maximum returns. While there are pitfalls to both spending too much and not enough, underspending is notably more problematic.

Across a study of media plans that clients of all sizes provided to Nielsen, we found that 25% of channel-level investments were too high to maximize ROI. Within this group, the spend was 32% too high. Reducing spend would improve channel ROI, but only by 4%. That, however, would result in significantly reduced sales volume, since reducing spend will also reduce ad-driven sales.

The solve here isn’t to slash the budget. Rather, brands should optimize their channel mix. Finding the right balance ensures that spending is properly allocated for reach, efficiency and frequency. For example, an auto manufacturer recently increased its reach by 26% and its impressions by more than 39% by simply optimizing its media allocation. In this example, the brand reduced its allocation across linear TV, digital and CTV to accommodate for the inclusion of radio without adjusting its budget. 

Spending too little poses a greater challenge. On average, brands underspend by 52%. That’s likely too big a gap for many brands to close in a single planning cycle. But for those that can, the upside is significant: ROI improvement of 50.3%.

Globally, underspending is rampant. While most brands allocate most of their budgets to TV, there are many instances where the allocations are still too low to drive maximum ROI. And outside of TV spending, more than half of the media plans Nielsen reviewed showed under investment across display and video.

ROI is just one of the many factors that advertisers and agencies consider when they’re planning their media budgets. The budget, however, is what drives campaign effectiveness. And right now, 50% of global media investments are too low, which means a significant amount of ROI is being left on the table.

For additional insight, download our recent ROI report. 

Note

1. Nielsen Compass Database 2020-2021