Costs. Meh. Who cares? My agency handles that. What we like is some breakthrough creative. Oh, and a synergy-inducing 360 compendium of all media, old and new. That’s the stuff that gets us excited. 

If that’s what you’re thinking as you read this, then, we have some sympathy with your point of view. Econometricians are sometimes described as ‘the accountants of marketing,’ but we demur. We are not excited by costs. And we’re definitely not TV buyers, whose primary frame of reference, and favourite topic of conversation down the pub, is the latest CPT (cost per thousand, for the uninitiated). 

But, the fact remains, costs matter. So, file this article under “boring but important” if you will and keep reading. 

Why costs matter 

Costs matter, quite simply, because they are half the ROI. 

Media ROI is usually calculated in the following way: 

The sexy part, and the part that gets all the attention is the numerator (the bit on top). All that consumer insight, all that ideation, all those tissue sessions, the scripts, the mock-ups, the edits, the media planning, the optimising… all that results, we hope in a shed-load of extra sales that give you a nice numerator. 

But it doesn’t come for free. All that good stuff comes at a cost and feeds straight into the denominator. In fact, that’s the meaning of ROI – it’s a ratio, showing how efficiently each pound you spend on marketing converts into extra value (sales). 

Nothing rocket-sciency about that, so far. But it has some important implications. 

A small shift in media costs can nullify all your efforts 

You do your research. You identify an opportunity. You task your creative agency to develop a strategy. You find a campaign strategy that ‘nails it’. You develop the assets. Your media agency devises an innovative integrated campaign with a backbone of AV, amplified on social and digital media at key points…it gets executed. 

You deliver 20% more sales than the previous campaign. Success! 

Oh, but wait a minute, that’s what would have happened had you not had that buying problem with the TV which resulted in you paying a hefty premium of 30% on the TV part of the mix. Then, the digital costs came in much higher than their usual rates, not sure what happened there, maybe it was the new platform, or the new audience or something… I think you can see where I’m going with this. 

At one fell swoop, all your hard efforts were nullified by costs run awry. If this sounds like exaggeration to you, then I’m glad because it hasn’t happened to you, but we have seen it happen to some of our clients and, on those occasions, it’s not been much fun reporting back our findings. 

When you know your true costs and are totally on top of them as they escalate, you can either take evasive action or at the very least set your expectations accordingly. 

Pay what makes your ROI work  

Be prepared to pay the cost that makes this or that package worthwhile for your ROI – and if your negotiations fail, walk away or take it but accept you won’t get a return on your investment. 

Broadcast sponsorship is the classic case here. Sponsorship packages being what they are – lumpy, infrequently traded, each unique in its own way – the ‘market price’ for them is almost non-existent. Our findings suggest that they can work well in terms of pure uplift, or uplift per rating. 

However, our experience also suggests that as soon as costs are introduced, then the story changes, and what seemed to be gold actually looks a bit more, well, brown in the hard light of day. 

Our advice on these occasions has usually been to suggest to our clients the price they should actually pay so that they get a satisfactory ROI – and to go and negotiate. 

Beware: in the long run, media inflation is the real killer 

You may just have embarked the econometrics express (note: if you are about to embark, or even just planning your trip, call me), but think 5 years on.  

With the many valuable insights you’ve gotten out of your models you’ve argued successfully for more marketing budget, you’ve got the balance right between the channels in your mix, you understand how to use digital and social media in the best way for your brand, you’ve even worked out what VOD platforms work best for you (it’s possible – like I say, call me). And, as you can demonstrate with econometrics (once more, my number’s on the website), it’s all working very well. 

Then, bam. In your email this morning is a report from your media agency warning of double-digit media cost inflation across all AV media in the next 12 months. And double-digit media cost inflation means double-digit ROI decreases. We’re not suggesting there is a silver bullet for this problem (call your creative agency?), as it’s a market thing, but it is as well to be prepared or, if you’re nowhere near being fully optimised yet, to at least keep an eye on the future so you can manage expectations. 

 To conclude… 

Understanding your true costs and where they can surge allows you to control and manage them in the short and long-term. This allows you to be a truly effective marketer, consistently delivering ROI – or at least knowing when you won’t and why. 

 Sam Watts 

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