Strategic Splits - Optimizing Your Marketing Mix For Lasting Impact

This article delves into the multifaceted impact of advertising strategies and channel mix on short-term and long-term brand growth.

Understanding how advertising channels influence brand perception and customer engagement is crucial. Brands must balance immediate marketing effects, like sales boosts and brand awareness, with long-term impacts for sustained growth.

A well-rounded marketing approach addresses the need for quick results and ensures that brands stay competitive over the long term. This discussion is essential for marketers looking to optimize strategies and make informed decisions for short- and long-term brand growth.

Definitions

• Short-term: The effect is weekly or multiple weeks. In this time scale, measuring the response to promotions is easy.
• Long-term: The long-term cumulative effect of marketing and promotion on consumers' brand choice behavior lasts several years. Often in the order of +2 years.

Effect of advertising on price sensitivity

What is price sensitivity? Price sensitivity reflects the extent to which the prices of goods and services impact customers' buying decisions.

One theory posits that advertising creates product differentiation, which in turn diminishes consumers' sensitivity to prices. In contrast, another theory claims that advertising fosters competition by supplying consumers with information that could enhance their price sensitivity.

In 1995, these two theories were integrated by proposing that advertising affects price elasticity through two main factors:

• A) Advertising can enhance price elasticity by broadening the range of brands that consumers consider.
• B) Conversely, advertising can reduce price elasticity by strengthening brand preference.

Despite differing opinions, scholars agree on the nature of advertising messaging. When a message is non-price-oriented and aims at branding, it tends to reduce consumers' sensitivity to price. Conversely, when ads emphasize price, they may heighten price sensitivity.

Research shows firms with higher prices favor non-price advertising and brand-building. This suggests that non-price-oriented advertising reduces consumers' price sensitivity over time. For example, this is the main playbook for luxury brands.

Brand-oriented advertising increases price elasticity, while price-oriented advertising decreases price elasticity. For instance, TV advertising is predominantly brand-oriented.

Risk of optimizing for short-term

A key use of marketing mix modeling (MMM) is optimizing channel allocation. MMM systems utilize predictive modeling to assess each channel mix's impact on sales and other KPIs. This predictive power, paired with a search algorithm, allows MMM to explore and recommend optimal allocations.

The claim is that if the brand uses the recommended allocation, they could see +X% growth in the revenue. The actual number depends on the category and industry, but it usually goes from 2% to 10%.

This is excellent news for CFOs or CROs. However, experienced brand managers and marketers understand that growth isn't simply about allocation. The laws of brand growth remain unclear, and empirical evidence repeatedly shows it's a long-term game.

Marketers face a dilemma: how to achieve short-term and long-term goals? They must meet ambitious short-term targets, while leadership and finance demand transparency and measurable resource allocation.

Balancing short-term and long-term success

The short-term response is typically defined in the order of months and quarters. On the other hand, when we discuss long-term, as the name suggests, we are interested in measuring effects longer than a year, and usually, and it generally tends to be in the order of several years.

Marketing tactics focusing on short-term responses can undermine long-term goals. Prioritizing immediate gains may diminish brand viability over time. Short-term campaigns often deplete resources and restrict funding for brand-building initiatives.

What are the short-term response tactics? One key tactic is price promotions, discounts, and coupons. While these can spur short-term brand growth, they risk long-term drawbacks. Excessive discounts increase price sensitivity, causing customers to wait for discounts rather than buy at full price. Over time, they may demand even higher discounts, jeopardizing long-term brand growth.

Moreover, short-term tactics involve spending more on "activation channels" and "performance campaigns". These channels include Paid Search, Social Media Ads, Direct Marketing, Sales Promotion, and couponing.

Budget cuts will reduce brand-building channels like TV, Radio, OOH, and PR, resulting in fewer brand campaigns. These campaigns are vital for sustained impact. By reaching a broad audience, brands can attract new customers, enabling growth in their customer base.

Channel mix for different time-scales

According to a report from Profit Ability 2 (see references), advertising's short-term effect constitutes about 40% of the total advertising payback, and the remaining 60% concerns the sustained effects of advertising.

Interestingly, the PA2 report shows that digital channels suffer from a small carryover effect, making them less ideal for long-term brand-building. This report defines the 'long-term multiplier', which is the extent to which channels deliver their value in the short term compared with the full term.

This result mirrors the results from the Databank, measuring the proportion of campaigns that achieved any significant brand effects using a channel. TV and posters stand out as channels with the highest brand-building effect.

Linear TV demonstrates a robust sustained effect and generates over half of all media-driven revenue. This explains why TV constitutes 40% of media spending in the UK.

Channels with short-term performance

As shown above, digital channels lack a persistent effect over a long time scale. Because of the relatively short attention span in the online environment, digital channels tend to offer a lower carryover effect, translating in shorter impact.

The following figure shows the relationship between reach in the UK and each channel's involvement (average hours spent with the channel). Therefore, channels on the bottom-left corner have relatively small reach and involvement, indicating short-term impact for these channels.

In contrast, when we move to the top-right corner, we see channels with high reach and extensive involvement. The position of TV indicates its long-term performance over digital channels.

Channels with long-term performance

TV is a unique channel. The share of spend on TV across the UK brands is about 40%, a figure that has hardly changed over the past decades. Whether we live in the digital age of advertising or the Mad Man era, TV remains a prominent channel for advertisers.

As shown above, TV demonstrates a robust, sustained effect, significantly improving marketing ROI (MROI). In fact, it is shown that TV is effective over all time scales. It is shown that it can hold its own value over the short term and excel in the long term. It's worth mentioning that although TV viewing remained constant, the cost of TV advertising has dropped by half over the last decade, which increases TV's ROI.

TV is classified as a brand-building channel, leading to persistent and long-term brand growth. However, this is not the full story, on a short time scale, TV can generate immediate opportunities. This is because TV offers the broadest reach and enables messaging and signaling to a large audience cohort.

Brand-building TV ads often have a negative short-term impact. To improve their effectiveness, we recommend combining them with other strategies, especially search and direct marketing. This synergy can lead to higher success rates for campaigns that include TV compared to those that don't. Integrating TV with digital advertising, like search and social media, significantly enhances the effectiveness of these channels.

Finally, let's emphasize the signaling aspect of TV. Unlike messaging, signaling is the value attached to the message. Imagine sending an identical message to two groups of audience: One group receives the message by Email, and another group receives a printed message on a high-quality paper and via FedEx. Which group is more prone to take action?

Risk of short-term overoptimization with MMMs

MMM systems package our choices and ideas through math and algorithms. The math part makes them difficult to argue against, and may be seen as the truth. But it's not! They reflect our choices and even our mistakes.

One of the critical mistakes that the brands may make is to emphasize short-term gains and embed this choice into the MMM system. So, the optimized channel mix offers +5% increase in sales because of an adjustment to the mix for the time period of a quarter or even a year.

But what happens under the hood is that the MMM system, by looking at the historical pattern, detects channels that excel at driving short-term sales. So, the MMM allocates a larger portion of the budget to short-term channels at the expense of channels that, while ineffective in the short term, excel at long-term growth.

Perhaps this is why most out-of-the-box MMMs recommend high spending on digital channels like Meta and Search, along with excessive promotions. This misguides brand managers into overinvesting in short-term channels and losing sight of long-term brand-building objectives.

A few years pass, and as brand leaders, finance, and the C-suite celebrate unprecedented brand growth, they realize their long-term performance relative to their competitor brands is abysmal. The bad news is that it's too late. It's too late to turn the tide, and as the name suggests, long-term growth takes, well, a long time. In this case, it will take a very long time to overcome the negative impacts of short-term thinking.

Balancing short-term and long-term

As a solution, brand managers must pay closer attention to the assumptions and inner-workings of their MMM system. The idea is to measure long-term KPIs, such as marketing share, and optimize over a combination of KPIs, ensuring a balance between short-term and long-term brand growth.

Brands that balance short-term and long-term campaigns can be successful in both time scales. This is achieved by deliberately allocating a part of the marketing budget to brand campaigns while keeping performance campaigns to drive quarterly sales.

40:60 Ratio mix for short-term and long-term

Over the past decade, the media landscape has undergone significant changes, with traditional marketing methods shifting online. Despite these changes, a consistent 60:40 split between brand-building and activation activities has been maintained.

Based on IPA's report "Long and Short of It", brands are advised to allocate around 60% of their budget to brand-building and 40% to activation for optimal efficiency and effectiveness.

Data indicates that this division optimizes efficiency and effectiveness, as efficiency can double when the budget is appropriately balanced. Effectiveness reaches its highest point at approximately 40% activation. Nonetheless, this division can differ by category, and brands should take their spending habits into account. A common recommendation is to synchronize the brand's share of voice with the activation share of voice, paralleling competitors' distributions.

Content and messaging are important considerations in this area. Selecting channels and their intensity is just one aspect; the type of content and messaging for each channel is equally important. While we've observed that TV is a major long-term channel, the messages conveyed can differ widely. Therefore, brand managers need to thoughtfully blend the appropriate types of content.

Brand Response Campaign

Brand response marketing is an advertising technique that combines performance marketing with brand campaigns in a single campaign. It is effective in driving both short-term response and long-term brand building.

When done well, brand response campaigns are effective ways to drive marketing response. They offer both long-term and short-term benefits at the same time.

The 2008 Sainsbury’s case study illustrates moving from a brand idea to a brand response strategy. Jamie Oliver's slogan, ‘making life taste better,’ was initially successful but lost impact by 2004. In 2005, Sainsbury's launched ‘try something new today’ to encourage customers to try new products, boosting basket value and revitalizing the brand and engagement.

Implications of long-term Share of Voice on Share of Market

Share of voice (SOV) remains one of the most important drivers of long-term growth. The following figure shows the relationship between SOV and share of market (SOM).

Most established brands stay close to the vertical line (equilibrium). But the brands that lie above (below) the equilibrium line tend to grow (shrink) their market share.

Another essential metric for assessing a brand's position in the SOV is the Extra Share of Voice (ESOV). The ESOV measures how much a brand's SOV deviates from the equilibrium line. The ESOV of a brand can be translated to an increase in SOM, using a simple formula. The following formula shows how much a brand gains in SOM, with a given ESOV:

$\triangledown(SOM) = \alpha \times ESOV$

In this equation, $\alpha$ defines annualised ESOV efficiency. On average, based on IPA data, the annualised ESOV efficiency is about 0.05. But, note that there is a variation around this value and the value can be highly category specific.

The main interpretation of the annualised ESOV efficiency when it's 0.05 means that every 20 points in ESOV translates in +1 point increase in SOM. If, for instance, the service category has 0.1, then every 10 points of ESOV translates into +1 increase in SOM.

Unlike some arguments against ESOV's importance, it's interesting to note that the data from IPA shows that the value of annualised ESOV efficiency has indeed increased since 2004.

Another interesting phenomenon is the compounding effect of ESOV. If a brand manages to keep its ESOV at a high value, the annualized ESOV efficiency accumulates. This is similar to the carryover effect of advertising.

Conclusion

Since the 1970s, economists and marketers have debated advertising's long-term effects. This post reviews advertising's impact on short-term and long-term brand growth.

Excessive promotions create price sensitivity, negatively affecting price elasticity, while brand-building ads, mainly on TV, enhance it. Generally, short-term tactics and long-term growth conflict, making it crucial for brand managers to balance their marketing mix. Digital channels primarily drive short-term growth, while TV and offline channels offer strong long-term results. A recommended split of 60:40 between short-term and long-term channels is advised.

Marketing mix models (MMM) targeting short-term growth can risk long-term competitiveness. Thus, designing these systems for both short-term and long-term optimization is vital.

At ELIYA, we provide tailored MMM services to boost your brand's success in both time frames. Our approach ensures alignment with your brand's long-term objectives, and if you're eager about AI-driven marketing optimization, we can provide exceptional MMM solutions tailored to your needs.

References

• The Long and the Short of It: Balancing Short and Long-Term Marketing Strategies
• Ataman, M. B., Van Heerde, H. J., & Mela, C. F. (2010). The Long-Term Effect of Marketing Strategy on Brand Sales. Journal of Marketing Research, 47(5), 866-882. https://doi.org/10.1509/jmkr.47.5.866
• Mela, C. F., Gupta, S., & Lehmann, D. R. (1997). The Long-Term Impact of Promotion and Advertising on Consumer Brand Choice. Journal of Marketing Research, 34(2), 248-261. https://doi.org/10.1177/002224379703400205
• Profit Ability 2: The new business case for advertising