Ad Campaign Spending – Episode 5

This is CPG Insiders, the podcast that helps consumer packaged goods companies survive and thrive in business. Now, your hosts, Mark Young and Rob Taylor.

Welcome to another episode of CPG Insiders with me, Rob Taylor and Mark Young. Today, we're going to talk about something that comes up pretty much with every client, which is, you know, how much do I. I need to spend on my ad campaign to be successful? Most people don't say that, but I think that's an important part of it because you could spend billions of dollars and not be successful. But the number we also get the how little can I spend? Or what's the least I can spend? But we won't really approach it from that.

But that is often the question that comes up.

That's the question I hear almost verbatim.

So there's a lot of things to explore here, Rob. First thing we have to look at is we have to look at the category. So how much pressure is the category under? So if you're in what we'll call it, if you're in a quiet category. So let's say you are selling a product to reattach a missing cap or crown.

Yep.

Okay. Nobody advertises, so a dental product, but a really specific dental product niche dental. And no one is advertising. So the first thing we have to keep in mind is if you advertise at all, you have 100% share of voice. And by share of voice, what we mean is, any message that's being delivered to the public, of all messages being delivered to the public, what percentage of that voice do you have? So as an example, if there were five advertisers, five advertisers each spent $1 million, then each advertiser has 20% of the share of voice. Okay? Now, if no one is advertising in your category, then if you spend a dollar, you actually have 100% share of voice. Doesn't mean you're going to sell what you need, but you don't have to compete. Now, when you're in a more crowded category, let's say you're in. Let's say you're in hair care. So now all of a sudden, you're doing shampoos and conditioners. Well, in shampoo and conditioners, there's probably about 200 million, maybe 250 million in advertising being spent.

Yeah, that's an expensive one.

So it would cost $25 million to just have a 10% share of the voice. Now, why is the share of voice important? Well, the reason it's important is because frequency matters. So what happens is there's two things that we look at. One, how many times can we deliver this message to someone? And it usually takes about four deliveries for people to get the story. The first time they see it, it's like, what was that? The second time it's, oh, okay. The third time it's, is that something that applies to me? Is that something I need? And these are not questions you're asking yourself. This is very unconscious conversation. And it's the fourth, the fifth, the sixth time that you say, you know what? That's for me. I like that. I want to go get that. I want to try it. And by the way, after about 15 impressions, your brain tunes it out and says, I know what that is. I don't even need to pay attention anymore. That's why ad campaigns from big advertisers, like a McDonald's gets, they literally replace their ad campaign every three to four months.

Yeah. Or, or sooner. Right? Yep.

Because of the frequency. So we have to take that into consideration. The other thing that happens with share of voice is not only do they need to see my ad three or four times, but every time they see a competitor's ad, that what's the best way to say? It would liquidates my impact or dilutes my impact. That's right, dilutes my impact. So I need a strong share of voice. Now, one of the things that I will. Getting to the share of voice thing, I'm going to get a little wonky here with some math, Rob, and that is Nielsen, which most of our listeners will be familiar with. So Nielsen does research on product sales in store, but they also happen to be the company who monitors advertising. So what a great matchup for them to do this. So Nielsen did a study where they studied 68 different categories of CPG products across all retail, across all the front of the store in drug, let's say 68 categories. And the question, what the research set out to do was to find out what is the impact of advertising on the sales of a CPG product. So here's the math equation. The things they measured was share of voice, share of market, and excess share of voice and excess share of market. And I'll tell you where I'm going with that. What they discovered was that for a company to gain a half a point of market share, okay, so if you're in a category where there is $1 billion in total sales in order to pick up a half a point of market share, so 0.50 a billion, you need 10 excess points of share of voice. So what that means is let's say currently you have 10% share of voice. So we're going to say this is a ten million dollar advertising category. You're spending a million, you have ten percent share of voice. If you want to pick up a half a percent of the market share, you need to increase your share of voice by 10 points, which means for that particular company, they need to go from 1 million to 2 million in that 10 million environment. Now this is not what I want to say is this is across 68 categories. That means some categories it would be more effort. That means other categories it would take less effort. This also gets around to how good is the creative, because that has a major impact on this. And how strategic is the media plan? Because the better strategy that's being used, the more specific the targeting is done. And in many cases, as we try to do, if we can go after places where the competitors don't have a hold, we can get share of voices within niche groups.

Right. So we can own that group.

Correct. So an example of what we mean by that, folks, is let's say, let's say you're in a category, a very broad category where people advertise across a lot of different media and there's $100 million being spent and you need 10 points of share. So you need $10 million, but you don't have $10 million. So what we can do is we can find a piece of media where the competition may not have anybody have a stronghold. So as an example, I'm going to just, this is just random. I'm going to throw out the American Heroes Channel. So the American Heroes Channel on cable tv, small cable network, very loyal audience. So they have a very consistent audience. Now we could go to a network like that, which is very affordable, buy a lot of commercials on it, and our brand becomes the dominant brand with that audience. And this is why this is important. It is far more important to be well known and passionately desired by a smaller group of people than to be yelling into the abyss of 320 million people. A million people wanting your product is far better than 300 million people knowing who you are and not wanting you.

Yeah, in the larger group, that's where you're competing with the more traditional approach. So if you're talking Coke or Pepsi, they're advertising in the same places and you're just bringing up finding these little dark hidden corners where we can own that group. It doesn't necessarily answer the question of how much Do I need to spend? Which I want to come back to. But it's a good way to tactically use money if you have a very limited budget.

So let's get back to how much does someone need to spend? Well, as I said earlier, it's going to be very dependent on the category and what the competition is spending.

Hypothetically, we have a client or a prospect come to us and they say, how much do I need to spend? Where do you start with that client?

Well, the first thing we're going to look at, Rob, is where are they currently in distribution?

Okay.

So is this a client who is at all the majors? Is this a client who only has a test market going on?

Let's say, for argument's sake, because we're going to talk in another show about the regional versus national distribution approach. Say that they have the major drug. Okay, so let's.

So they've got sufficient distribution.

Yep.

So what we have to do is we want to sit down with that client. We want to carefully look at what their current sales are. We want to look at what the category sales are. So what I mean by that is let's say that this is a company with a. Let's say it's mouthwash. If they currently have half percent market share, then we know there's a lot of room for them to grow. Now, if they happen to be the company that sells the temporary cement for a cap, and they tell us we already have 60% market share or 80% market share, that's a different equation. Because they can't. There's not a lot of business to take from the competition.

Right.

So at that point, we have to look at the creative and say, okay, can we bring new people into this market, since we can't really go after what's out there. So. But for most of our clients, they're the challenger. They're coming in. There's some big multinational conglomerates that are in the category. They're a small business. So we have to look and say, what are we currently selling? The next thing we ask the client is, what's the Mendoza line? What is the line that all your major accounts are going to require you to have for you to be safe and not get discontinued?

Do. So if I'm from the client side, do the buyers make that number clear?

Most of them do.

Okay.

Most of them will tell you that, you know, within the next six months, I need you to be selling, you know, 0.75 pieces per week per store in my chain, or I need you to be selling a piece a week per store. So if a client comes in, so I'm going to give you different client scenarios. If a client comes in to us and they said we need to sell a piece per week per store and we're currently selling 0.25 pieces per store, then the budget's not always, in that case, the budget's not always based on what's the profitable budget. The budget is sometimes based on what do you need to spend in order to not get thrown out of these chains?

Survival budget.

Correct. We also have to keep in mind when we're advertising, there is acquisition cost and there is lifetime value. So when we're looking at advertising, we have to look at the job of the advertising is to get a first time trial.

Right.

But if you make a great product and people reuse it, what's the lifetime value of that consumer? So you're buying new consumers. So typically, here's what we see. We typically see a court and this is, I'm going to use Nielsen's, going to go back to Nielsen's numbers again. Nielsen says that on average a consumer packaged goods company needs to spend 15% of their wholesale dollars. So that's the revenue that comes into the manufacturer. They need to spend 15% of their dollars to stand still. Now let me clarify that. If a company is brand new or very new and they don't have a lot of sales, then if they spend 15%, they're going to see growth. So when they're talking about 15% to standstill, they're talking about a mature brand. So as an example, if Tresemme wanted to just stand still, they probably have to spend 15% to replace the people that other brands have drained off in order to not go backwards. So they probably spend 15% of their sales to stay in place. Now a brand that wants to aggressively grow, Nielsen shows those brands is spending anywhere from 25 to 33%.

And these are again established brands.

Well, these are, this is across all brands. So you got a mix in here. So they measured anything from a startup with a product on the shelf to tide. Okay, so but for brands that want to get aggressive and grow, we're looking at a 25 to 33% number of sales. And the thing we have to keep in mind here, Rob, is this is excluding the trade figures. So remember when we're talking trade, when we're talking about, you know, you've got bogo deals, you've got, you know, circular deals that you've agreed to, that's not part of the ad budget. This is what you're spending the other thing. And here's one comment I want to make Rob Ned is. And you've seen this over the past 20 years, there's been more campaigns, infinitely more campaigns that failed due to underspending than have ever failed because of overspreading. 100% underspending always is what kills it.

Underspending always kills it. Not spending money on advertising. And when we've seen downturns in the economy, that's the first thing that goes. Is advertising one of the first thing that goes and you're setting yourself up for failure. That said, we've seen some pretty new ish clients overspend because the creative's wrong or the media mix is wrong and fail just as hard or harder.

Yeah, it's think of this as a, you know, as a slot machine, you know, in the casino and everything needs to come up to match.

Right?

By the way, interesting story of some research that was done. So P and G. P and G is, you know, hundred plus year old company. They go all the way back to making soap. After the Civil War during the Great Depression when, I mean everything went bad, management at P and G decided they were going to go all in on advertising. So you can imagine you're in the Great Depression and here's a company that decides we're going to bet everything on advertising. Now here's what happened. This is why P and G is the behemoth.

I was going to say, did they stick around? Did that work for them?

They did survive.

Huh?

Here's what happened. When they spent heavy in the downturn and we have had clients do this not in the Great Depression, but in recent downturn. When they spent money during the Great Depression, they were spending in an environment where their competitors were afraid to spend. So their share of voice was enormous, which meant they gained enormous market share. When the economy turned around, the market share stayed the same. So now that they had this enormous market share and all of a sudden more people are buying more stuff, their numbers went up exponentially because the market share didn't dilute when people had more money. That's the reason PG was not a big company prior to the Great Depression. The reason they became what they are is because they grabbed market share when no one else tried to do it. And when the economy turned around, no one could catch up with them. They were just so far down the tracks at that point that there was no stopping them.

That is a great example of how to do it right.

And it took Some big cajones to do it.

We've seen a handful of downturns in the last 20 or so years and we've seen people pull their ad budgets instead of aggressively go after the market. People still buy stuff when the economy is bad. People still buy detergent, they still buy milk, they still buy pretty much the same stuff they buy now. They just economize in certain areas. And if you're not there, you're what they economize out.

Well, if you think about the experiences we've had during the 2008 crash and as an agency, as you know, we did very well.

Yep.

What happened during that time is the ad budget was the first thing that people cut. The short sighted people, oh, we need to save money, cut the ad budget. Some of our clients said, nope, we're in, we're going to stay with it. Those clients grabbed up infinitely more market share. They quickly grabbed up market share. You may also remember the ad deals they got were better because the price of advertising went down. So TV commercials were cheaper, radio commercials were cheaper because there was less demand. Media is very supply and demand based. So they were able to get more media for the same number of dollars and their brands grew. And here's the other thing, keep mind people don't buy the lowest price. People buy the best value. And it's an interesting thing when you look at, we've talked on this show before about pricing and David Berenbaum and I talked on a previous show where David was saying he prefers high priced products over low priced products. Higher priced products take much less of a hit in a downturn than low priced products. And the reason is because the premium part of the marketplace, those individuals in the marketplace who can afford the better products are the least impacted by a downturn. So during the 2008, 2009 drop, did your shopping habits change that much?

Not really.

You still bought the same stuff?

Yeah.

It didn't really change because the market that came down. But your income didn't come down.

No.

So it didn't bother you, but it did bother somebody at the very low end who lost a job or works for $10 an hour or whatever the case is. So appealing to that higher end of the market is actually a big safeguard. But getting back to what do I need to spend? Well, there's another thing that I want to bring up on this too, Rob, and that is what do we hear from people often? Well, we'll spend a little bit of money and if we see the results, we'll increase It. There's a risk to that. The risk to that is, and let's assume for a minute you're not in danger of being cut at any products. But let's assume for a minute that you have a product that is selling 10,000 pieces a week. When you have a product that's selling 10,000 pieces a week, the fluctuations in your sales from week to week can be as much as 500 to 1000 pieces just affected by sales, another competitor having a sale, a holiday weather, bad weather. So sometimes when the budget isn't large enough, the issue of attribution becomes questionable. So the client looks and says, well, yeah, we've only spent a small amount of money, and it looks like we're up 500 pieces a week. But. But I don't know that the ads did that. Maybe something else did that. So it's always good that you're in enough that attribution doesn't become a question. Where the numbers went. We've been selling 10,000 pieces a week, and we just moved to 13,000 pieces. And the only thing that's changed in our business is the ad campaign. Now the attribution becomes pretty easy to figure out. Otherwise, you see, how many times have you seen good campaigns that were killed? Because I'm not sure that did it right.

It was the Yellow Pages.

Yeah, the Yellow Pages.

That's my favorite.

Yellow Pages are always a big help. So kind of the bottom line is you need to spend enough money that you can attribute the results. You need to spend enough money consistently. Not. I'm going to advertise for a week and see what happens. And in the CPG business, you need to be looking at a number that's probably between 15 to 30%, depending on how aggressive you want to be.

Yeah, I mean, I think that takeaway. So if you're listening to this part of the show, you need to spend at least 15% to standstill. And if you want to grow, which all of our clients want to grow, nobody comes to us and says, hey, how do we stand still next year? You need to spend more than that. And you need to do a realistic look at your business and say, do I want to grow at retail? Do I want to get more doors, or do I want to lose the ones I have? So there are a bunch of factors there. The rule of thumb, though, is that 15 to 30.

And let me. I want to throw two more thoughts in, Rob, if I can, before we go. One of them is when we sit with the client, we're going to Ask the client, what's the goals for the year? Preferably, what are the sales goals? You know, by sku, what is the goals for this year? What's the two year goal, three year goal, five year goal? Let's say that the client says, well, our goal for 2019 is $10 million. When we set the budget, let's say we're going to use that 15% and our goal is 10 million. Our budget's a million and a half. Now, we're going to look at the product, we're going to look at the calendar, and we're going to account for seasonality. So if I'm selling tanning lotion, I'm not going to advertise 12 months out of the year. But we need to make that 15%, 15% of the goal number, not 15% of the current sales. So if my goal is 10 million and my sales are currently 5, then my goal isn't I'm going to spend 15% of 5 million and expected to deliver 10 million in sales, I'm going to spend 15% Of 10 million because that's the goal I'm after. Now the good news is I don't have to spend it all today so I can adjust my budget up and down. If I'm getting great results, I can take it up. If I'm not getting results, I can take it down. But I need to set my budget based on the goal. Because one of the things that happens, Rob, is we see people say next year's budget is 10 million, but we're going to spend 15% of last year's sales. Well, that's not 15%, right? In some cases it's seven and a half percent, depending on what their goal is. So we have to make sure what are we spending against. The other thing that I want to get people to understand is if we spent a million dollars this year and we grew sales by 20%, that does not mean that if we spend a million dollars next year, we're going to grow business by 20% again. Because first off, you're now a bigger company, so spending the same thing means you're spending less. And we have to keep in mind that the bigger a brand gets, the more money they need to spend to backfill. When you're new and have very low sales, you have no backfill.

Right?

So we're not selling anything. So I don't have to worry about somebody stealing my business. When I'm selling 20,000 pieces a week at retail, I'm losing business. There are other brands that are advertising. There are other brands that are taking it away. Some of my customers died. Some of my customers no longer have the issue that I, that I provide a remedy for all kinds of reasons that people peel off of the brand. So the bigger the brand becomes, the more money I need to spend to replace my lost business. Does that all make sense?

It does, but it also, if you have 60% market share, you're fighting for that next 40% is just tougher to get, which is the other side of it, which requires more spending.

Well, absolutely. And there comes a time, and this sounds weird coming from a guy in the ad business, but there comes a time when you tell a client, don't spend anymore because you've got this percentage of market share and it's the balance point that we look for that you already have X percentage of market share and to get any more is going to be too costly. It's not worth going after more market share. It's time to make new product now. It's time for a new sku for some innovation. Put the money, don't put the money into more advertising, put the money into more innovation.

Yep, that's good advice. That is the show for today. If you want to learn more, go to cpg insiders.com you can listen to more shows there or you can find out about Jekyll and hyde@jekyllhyde labs.com There are links on both sites to get back and forth so it's pretty easy to find us. That's it for today. Thanks, everybody.

Thanks, Ralph.