Click here to view a 13-minute video of the key takeaways.

Click here to view or download the full Profit Ability 2: The New Business Case for Advertising deck.

Click here to view or download the slides.

Profit Ability 2: The New Business Case for Advertising, a significant new study on marketing effectiveness from measurement firms Gain Theory and Ebiquity, along with media agencies EssenceMediacom, Mindshare, and Wavemaker UK, was released last week. The study reveals how advertising drives profit over time.

Key findings:

• The just released Profit Ability 2: The New Business Case for Advertising study reveals nearly 60% of advertising profit effect occurs between fourteen weeks and two years.
• The 24%-18%-58% rule: 24% of advertising pays back in the same week. 18% of advertising profit impact occurs between week two and week thirteen. 58% of advertising return occurs between week fourteen and two years.
• Advertising impact occurs over an extended period of time because very few people are in the market in the next three months.
• Overall, a dollar of advertising generates $5.19 of profit (all media over two-year period). In the short term, one to thirteen weeks, advertising generates $2.36 of profit.
• A dollar invested in audio (AM/FM radio, podcasts, or streaming) will generate $3.12 of profit within one to thirteen weeks. Over the entire two-year period (one week to two years), a dollar invested in audio will return a total of $6.29 of profit.
• Of ten media, audio ranks second in short-term return on investment (ROI) and third in overall ROI, beating all digital platforms.
• Audio is #3 in conversion of investment to profit generated, beating all digital platforms. Audio punches above its weight. At 1% of the media budget, audio generates 1.12% of the profits generated.
• Audio profit payoff occurs equally in the short and long term.

How the study was conducted

The original study was conducted in 2018 was and was groundbreaking in proving the business benefits of advertising. Profit Ability 2: The New Business Case for Advertising was a massive undertaking that involved:

• $2.2 billion in media spend analyzed (2021-2023)
• 142 brands
• 14 sectors
• 10 media channels
• 53 brands matched pre- and post-COVID

Profit Ability 2: The New Business Case for Advertising is a meta-analysis of econometric benchmarks to understand the short- and long-term payback of advertising to business profit. All of the analysis in the new study was post-pandemic, examining advertising business effects from 2021 to 2023.

The study uses marketing mix modelling (MMM) to link advertising spend to incremental profit. Marketing mix modeling is the gold standard for understanding media effectiveness. It’s a statistical modelling approach that isolates the contribution of advertising from other factors that drive a business (pricing, distribution, seasonality, etc.).

The 24%-18%-58% rule: Nearly 60% of advertising impact occurs between 14 weeks and two years

Via significant media mix modeling and econometric analysis, the study found:

• 24% of advertising pays back in the same week. Thus, a quarter of advertising’s overall contribution to profit occurs immediately.
• 18% of advertising profit impact occurs between week two and week 13.
• 58% of advertising return occurs between week 14 and two years.

If you think the impact of your advertising will impact sales and profits mostly in the next few weeks or months, think again. The vast majority of the sales effect of current advertising occurs four months to two years from now. Why? Few people are in the market for products and services in the short term.

Advertising impact occurs over an extended period of time because very few people are in the market in the next three months

Erwin Ephron, the father of modern media planning, explains, “Most advertising usually works by reminding people about brands they know, when they happen to need that product. Ads work best when the consumer is ready to buy. Reminding a lot of consumers is better than lecturing a few.”

The 95/5 rule: Only 5% of consumers are in the market at any time

The prestigious Ehrenberg Bass Institute of Marketing Science reports a very small amount of people are in the market for a product or service at any time. Whether it’s a home repair, an automotive purchase, health care need, or furniture, most people are not in the market.

Marketing has two equally important jobs: Converting existing demand and creating future demand

Advertising needs to form around these two key strategies. First, convert existing demand by reaching the five percent who are in the market. Usually that takes the form of a sales event.

Second, create future demand. Often this is called brand building. It focuses on the 95% of consumers who are not in the market, not thinking about the category, and not interested in a sales event.

John Dawes from the Ehrenberg Bass Institute recommends:

• Expect sales results mostly in the long term, not in the short term.
• Develop creative that will be remembered mostly by future buyers, not current buyers.
• Maximize reach mostly against out-of-market buyers, not in-market buyers.

Of ten media, audio ROI ranks second in short-term ROI and third in overall ROI

ROI determines the profit payback from a dollar of advertising.

According to Profit Ability 2: The New Business Case for Advertising, a dollar invested in audio (AM/FM radio, podcasts, or streaming) will generate $3.12 of profit within one to thirteen weeks. Overall, a dollar invested in audio will return a total of $6.29 of profit from over the entire two-year period (one week to two years).

The study finds audio has the second highest short-term return on advertising spend (within one to thirteen weeks). Audio ranks third in overall return on advertising spend (week one to two years).

Audio punches above its weight in driving profit, ranking third in profit generation and beating all digital platforms

Profit Ability 2: The New Business Case for Advertising reveals at 1% of the media budget, audio will generate 1.12% of profit volume. Audio generates 12% more profit than its share of the media budget.

Overall, AM/FM radio ranks third of ten media in this ratio of share of profit generated compared to the share of media investment. Audio beats seven other media including all digital platforms.

Audio profit payoff occurs equally in the short term and the long term

Performance tactics like generic pay per click or online display mostly pay off in the short term (one week to thirteen weeks). Media platforms like linear TV, broadcast video on demand, print, and out of home see the majority of their payoff in the long term (weeks 14 to year two).

Audio is very well balanced in the time horizon of profit payout. Half occurs within one to thirteen weeks and the remaining half pays off from weeks fourteen to year two.

Creating future demand creates sustained long-term sales and profit growth and pays back beyond four months

The notion that 40% of advertising pays back in the short term (1-13 weeks) and 60% returns over the long term (four months to two years) reminds us of the famous “60-40” rule of Les Binet and Peter Field, the two godfathers of marketing effectiveness. The famous Binet and Field chart below visualizes the sales effect of converting existing demand from sales events and the long-term impact of creating future demand via brand building.

The grey line represents the sales effect of converting existing demand, which takes the form of sales events and short-term performance tactics. The blue line represents the sales effect of creating future demand with brand building advertising, which pays back in the longer term.

Binet and Field recommend marketers allocate 40% of their marketing budgets to converting existing demand via sales events and short-term performance tactics. They recommend 60% of marketing budgets be devoted to creating future demand via brand building advertising.

Creating future demand is the protein of advertising and sales events are the carbs

Converting existing demand with performance marketing and sales events generates a sugar rush of short-term sales followed by a sharp crash. Creating future demand via brand building is the protein of advertising with long lasting benefits for the business. As a business becomes better known, its brand grows stronger, leading to long-term sales increases and reduced-price sensitivity.

Key findings:

• The just released Profit Ability 2: The New Business Case for Advertising study reveals nearly 60% of advertising profit effect occurs between fourteen weeks and two years.
• The 24%-18%-58% rule: 24% of advertising pays back in the same week. 18% of advertising profit impact occurs between week two and week thirteen. 58% of advertising return occurs between week fourteen and two years.
• Advertising impact occurs over an extended period of time because very few people are in the market in the next three months.
• Overall, a dollar of advertising generates $5.19 of profit (all media over two-year period). In the short term, one to thirteen weeks, advertising generates $2.36 of profit.
• A dollar invested in audio (AM/FM radio, podcasts, or streaming) will generate $3.12 of profit within one to thirteen weeks. Over the entire two-year period (one week to two years), a dollar invested in audio will return a total of $6.29 of profit.
• Of ten media, audio ranks second in short-term ROI and third in overall ROI, beating all digital platforms.
• Audio is #3 in conversion of investment to profit generated, beating all digital platforms. Audio punches above its weight. At 1% of the media budget, audio generates 1.12% of the profits generated.
• Audio profit payoff occurs equally in the short and long term.

Click here to view a 13-minute video of the key takeaways.

Click here to view or download the full Profit Ability 2: The New Business Case for Advertising deck.

Pierre Bouvard is Chief Insights Officer of the Cumulus Media | Westwood One Audio Active Group®.