ROI increases when advertisers commit to increasing media spend, study finds

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The average return on investment (ROI) for every pound spent on media increases as advertisers spend larger sums, a new study reveals.

The biggest increase is between an annual media spend of £2m and £10m, where the return on investment increases from £2 to £8 (see chart below). ROI then steadily increases to a peak of around £13, reached when advertisers spend around £30 million.

However, ROI begins to decline as advertisers increase their spend above £30m, suggesting that this is on average the optimal annual media spend for advertisers. By the time advertisers are spending between £70m and £80m, the return on investment drops back to around £2 as the extra media is reaching either the same people or people who will never buy their product.

The analysis is based on the ARC (Advertising Research Community) database of daily campaign effectiveness results, which did not close or win any awards. It includes 343 cases spanning three years of data, produced by econometricians at Magic Numbers, OMG, D2D, IRI and VCCP Media.

Note: 343 cases, between 18 and 162 cases in each drop. The blobs are plotted at the midpoints of the spending brackets used in the raw data, £0-5m, £5-10m, £10-50m, and £50m+. The result that ROI is maximized with high media budgets holds even after controlling for the size of advertisers’ businesses (not shown).

Advertisers included in the database range from small to large advertisers, all of whom have invested in econometrics to measure the results of their campaigns. The conclusion that ROI is maximized with high media budgets holds true even after controlling for advertiser business size.

The “bump” is also visible when looking at individual sectors and categories, econometrician and founder of Magic Numbers, Dr. Grace Kite, told Marketing Week before unveiling the research at Cannes Lions 2022. Kite, who started the ARC project, says the plan is to thoroughly analyze the impact for each category in the future.

According to research, ROI also increases when a campaign uses more media channels. The average return on investment for £1 when one to two media channels are used is £2, rising to £2.50 for three to four channels, £4.50 for five to six channels and £5 for seven eight channels.

“[This research] gets to the heart of one of the biggest problems for CMOs: they can’t escalate budgets to the CFO and they can’t approve large amounts of money because it’s risky,” says Kite.

“I hope this helps frame this discussion with the CFO. I meet a lot of CFOs and business people in general…and they actually find it very compelling if you can say we have research that shows it [advertising] works, and then we have other research here that shows it will work better if we actually go for it. This is the kind of conversation that can be helpful.

However, Kite notes that £30million is “a lot of money” for any business. Three-quarters (75%) of ARC advertisers were “either unable or unwilling” to make this investment. Still, for some advertisers it will be a “mistake” not to spend at this level, Kite says.

“When you have enough availability to justify reaching so many people with your message, this data shows that it’s worth it. You could make a mistake if you have a great campaign but don’t show it enough to make it impactful,” she explains.

But companies are right to worry about the risks of advertising investments, Kite adds. Although some campaigns do well, the ARC database reveals that 70% of advertisers only generate £2 or less in revenue per £1 spent.

“The real bottom line is doing enough testing to be really sure you have the right creation and then putting a lot of money into it. That’s the vision and testing is part and parcel of what I consider the answer to this conundrum here,” Kite says.

Testing should also ensure that there are enough people in the market to buy the product and establish the best media channels to use.

Kite adds that the ARC is looking for more UK econometrics firms to join the initiative and contribute their cases to the database. Of the 17 econometrics providers in the UK, the project currently has five.

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