Sunday, 7 December 2008

The Red Queen

It's all about return on investment. You can't blow millions on an advertising campaign without showing that it's had some kind of effect - so how do you show that sales have gone up and your TV spots were worth the money?

You use econometrics.

An analyst - somebody like me - builds a statistical model, which proves that while your campaign was on air, sales went up by 5%. Job done. Except that for the advertising to be profitable, sales needed to go up by 15%.

What's suprising is that this happens all the time. Econometrics 'proves' that advertising is unprofitable, companies worry about that for a month or so and then carry on running ads anyway.

Some of the time the stats are probably right and sales uplifts really are disappointing, but they can't be right all the time surely? Or a few companies would have worked out by now that they'd make more profits without advertising and the stock market would be punishing any who were still throwing their money away.

Econometrics must be missing something. The real sales effect must be larger than marketing models say it is.

This is where the Red Queen comes in. Econometric models measure things changing - it's how they work. The statistics are a complex way of looking at how much product is sold in a week when advertising is running, compared with when it isn't.

In a mature market, where everything is fairly stable and all the brands are advertising at about the same level, econometrics will say that advertising uplifts are small almost every time.
Is econometrics right? Lets think about what would happen if one of the brands suddenly stopped running ads. Nothing happens in the first week, or in the first month but after a longer period of time, sales might start to slowly slide away.

Econometrics can't see this bit of the return on investment. You could say that market mix models can only measure the aggressive bit of your advertising - the bit that's stealing from competitors and winning new customers. They can't measure the defensive part that stops competitors stealing from you. And that defensive part could be much larger.

Statistical models have their place, but they're just one piece of the puzzle. Before you had a model, you didn't know anything about your advertising ROI. Now that you've got a model, don't let the analysts pretend that you know everything about it.

Red Queen? You can run as fast as you like, but if you're staying still then how can we measure you moving?

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