It is intuitive to assume that companies investing in advertising and promotion will see uplifts in sales, profitability, loyalty or a combination of these outcomes. A recent study by Nielsen’s Marketing Effectiveness Practice reinforced that this relationship is not a given. Some investments may yield unintended negative consequences which will hurt a brand’s profitability and value. Advertisers looking to spend on these programs should consider how they can continue to generate a positive, balanced investment return (ROI).

Our studies show that above-the-line advertising can help brands command an average price premium of 16 percent and gain an average of 31 percent higher share of category spending, among other value generated.

Advertisers seem set to invest more in promoting and building their brands to convince consumers to spend. Nielsen’s research shows that in Southeast Asia, advertising spend (based on rate card) rose 8 percent in Q4 2011 to almost USD 5 billion compared to a year ago, with Indonesia showing the biggest increase of 27 percent.

As competitive pressures mount, a common pitfall is when companies lean towards price discounting to gain share as a short term strategy. This can have unintended longer term implications on brand health.

To achieve a balanced ROI from brand activities, advertisers need to utilise prioritisation frameworks and metrics to help focus the investments to ensure maximum effciency.

We recently evaluated 26 failing FMCG items across 6 common categories in 5 countries. 19 out of 20 items that used price discounting as a strategy to hold their market positions once their loyal buyer base had been eroded, were out of the market within 16-20 weeks. Only 1 item managed to save their position, with a relaunch. The remaining 6 items exited the market within 4 -8 weeks.

In this paper, we set out to discuss the merits of price discounting as a strategy and 6 key metrics that advertisers should consider when evaluating ROI. Finally, we present a framework to help companies (re)define their portfolio investment strategy.

Highlights

• While price discounting always yields a positive revenue return, it does not help brand loyalty and could even eat into margins. If a brand’s baseline of loyal buyers is eroding, price discounts will only buy the company time to put an alternative offer out
• Companies should consider repositioning a brand when its baseline volume share is less than its actual market share.
• Brands that advertise see stronger loyalty in the form of more category spending (+31%) by buyers and buyers reducing their brand repertoire (-23%)
   • Advertised brands get 32 percent more responsiveness to short term discount initiatives and encounter almost a third less resistance to longer term price increases
• 21 percent of brands that advertised 2011/10 failed to command a price premium over their nearest non-advertised competitors and as such their investments should be reviewed