| Advertising proven to boost sales and share prices |
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| UK and Irish case histories show that effective advertising campaigns can give measurable increases to sales and market capitalisation, writes John Fanning |
A recent series of articles on marketing in the Financial Times noted that ‘the function of a marketing plan is to arrest the intelligence of the finance director long enough to take money off him’. The implication of this business equivalent of an urban myth is that the marketing director is regarded as part showman, part charlatan and part spendthrift. But if marketing departments in general are regarded with mild suspicion advertising expenditure is seen as positively profligate.
Conscious of the louche image of advertising among the financial community the UK Institute of Practitioners in Advertising (IPA) instituted an award scheme in 1980 where the awards were given to case histories which could prove the success of advertising in terms of sales or profits. The vast majority of advertising award schemes had until then been based (and still are) on highly subjective judgements by members of the creative community on the supposed ‘creativity’ of individual advertisements. The IPA Advertising Effectiveness Awards were given to agencies who could prove that a given level of advertising investment had produced a given level of increased sales and profits. In 1996 the Irish Institute (IAPI) followed suit and there have been two sets of awards published, the first in 1996 and the second last year, resulting in 17 case histories showing the economic dividends that can be achieved by investing in advertising. Among the Irish award winners are Bulmers, Surf, Smithwicks, AIB, Club Orange, Statoil and Eircell. All of these businesses have recorded significant sales increases in recent years and the award winning papers were able to show the contribution made by advertising investment.
Bulmers is a particularly interesting example - the long running ‘Nothing Added But Time’ campaign has changed the perception of the whole cider category resulting in huge sales increases for the dominant Bulmers brand. Between 1993 and 1996 sales more than doubled, the only factor that could have accounted for this increase was the advertising investment.
However, Irish businesses are much more reluctant than their UK counterparts to reveal detailed sales and profit figures.
A good example from the UK is the BMW award winning paper from 1994. The case history covered a 15 year period from the late 1970s to the early 1990s. The campaign employed the same strategy throughout the 15 years. Four core attributes of the cars were featured - performance, quality, advanced technology and exclusivity. The tone of the ads was equally consistent - cold, clinical, efficient. People were never included on the grounds that people can make mistakes - unlike BMW’s. During the period under review sales trebled. The paper goes to great lengths to eliminate all other possible variables that could have caused the sales increase:
Price - not possible because the strength of the Deutschemark against Sterling during that time made BMW’s more expensive compared to other marques.
Distribution - the number of BMW dealers remained more or less static.
Share of voice - BMW advertising expenditure remained consistent during the period.
Superiority of the cars - BMWs were the same throughout Europe but Britain was the only European country to record sales increases of this level and the only country to run this particular campaign.
The paper concludes that the advertising investment during the period of over £90m was directly responsible for creating sales increases of between £2.7b and £3.2b.
The award winner which may be of most interest was published in the latest (1998) awards dealing with Orange, the UK mobile phone company. The judges had announced in advance that they would be interested in papers which not only showed the effect of advertising investment on sales and profits but which would also dealt with ‘the manifold effects of advertising’. The winning Orange paper was based on the contribution of advertising to the share price of the company between April 1996 and April 1998. These were the first two years of Orange as a FTSE 100 Plc. The paper has a highly sophisticated analysis based on a formula devised by Lehman Brothers, who have created a method of calculating the implied value of a public stock. The difference between implied value and real value is the basis on which Lehman Brothers decides whether to recommend a buy, sell or hold. When the paper was written Lehman Brothers equity market valuation showed Orange to be a ‘buy’ with an implied share value of 528p compared to a current market value of 443p. The paper calculated the effect of advertising during the two year period on net subscriber growth, revenue per customer and the level of customer retention - and Lehman Brothers then reworked their implied value per share formula, this time assuming that the advertising effects had not occurred. As a result, the implied value per share went from 528p to 279p - a gap in market capitalisation of £3b which was achieved with an advertising investment during the two year period of £44m. |
John Fanning is managing director of McConnells Advertising, Dublin
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| Article appeared in the November 1999 issue.
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