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Misallocated ad dollars cost brands 28 percent in lost sales

January 21, 2014

Major brands may be losing out on more than 25 percent in additional marketing-driven sales by not optimizing their media budgets and misallocating their advertising dollars, according to data from marketing mix optimization software company ThinkVine.

The ThinkVine analysis of customers with average annual sales of more than $1 billion found that the companies were spending too much or too little on specific media 85 percent of the time. More than a fifth of the time, spending in a single marketing category was off by more than 60 percent from an optimal level.

As a result, the companies missed out on anywhere from 7 to 81 percent in additional revenue attributed to marketing activity — an average of 28 percent. ThinkVine CEO Mark Battaglia said the miscalculations stem from brands relying on outdated marketing mix techniques or previous years' plans that don't take rapidly changing consumer behavior into account.

"Many marketers have started using big data to improve their campaigns, but very few are taking advantage of consumer data to optimize their marketing spend and determine the best media to reach their targeted audience," Battaglia said in an announcement of the study. "Consumer media habits are changing so rapidly that the traditional approach to putting together a marketing plan no longer works. Backward-looking marketing mix methods leave money on the table."

To conduct its analysis, ThinkVine looked at the marketing budgets of large customer brands before and after using the company's marketing mix optimization software. Instead of using backward-looking methods, ThinkVine said it builds simulated marketplaces using real-world consumer behavior data to forecast how different customer segments will respond to changes in marketing tactics — an approach known as agent-based modeling.

Collectively, the brands in the study were underspending on digital media by 4 percent in favor of traditional media like television. But a breakdown by industry shows that the optimal marketing mix varies for each company:

• Retailers were relying too heavily on coupons, spending 51 percent of their budgets in the category. After optimization, that number decreased to 43 percent, with most of the money shifting into search marketing (from 13 to 18 percent).
• Banks and other financial services companies were drastically underspending on print advertising. The average print allocation went from 13 percent to almost a third of their budgets using agent-based modeling.
• Consumer goods brands were spending too much on TV ads (72 percent instead of 66 percent). The virtual marketplaces forecast the best ROI if those companies instead invested more in print (from 4 to 11 percent) and online display ads (from 5 to 8 percent).
• Consumer services companies were putting too much money into online display ads (23 percent instead of 17 percent) when they should have been buying more radio spots (26 percent compared to 19 percent).

Companies should be looking at how their specific audiences respond to different marketing tactics when deciding the best way to reach them, Battaglia said. The results will look different for each brand based on factors such as media consumption habits, the consumer decision-making process, company market share and the success of previous marketing efforts, he said.

"There's no clear winning tactic or one-size-fits-all marketing plan," he said. "Because each audience is different, marketers need to focus on how media tactics affect consumer preferences and purchase behavior instead of only looking within individual channels when determining their ideal marketing mix."

The companies included in the ThinkVine study have a combined annual marketing spend of $880 million, and the average marketing budget totals 5 percent of overall sales. The average sales volume for the brands and product lines studied is $1.1 billion.

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