Performance-based Advertising Models: Extending the Principles of Profit-Driven Advertising

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Corporate marketing departments are increasingly looking for performance-based advertising models in which the ad price is linked to more transparent, accountable returns—not only from online channels but from traditional media too. This requires three parties—corporate marketing, media outlets, and agencies—to adopt more sophisticated analytics and information technology to deliver measurable return on investment (ROI) across all media markets—even TV, radio, and print.

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Performance-based Advertising Models: Extending the Principles of Profit-Driven Advertising

  1. 1. Perspective Dr. Michael Peterson Dr. Florian Gröne Dr. Karsten Kammer Julius KirschenederPerformance-BasedAdvertising ModelsExtending the Principlesof Profit-DrivenMarketingCorporate marketing departments are increasingly looking forperformance-based advertising models in which the ad price is linked tomore transparent, accountable returns—not only from online channelsbut from traditional media too. This requires three parties—corporatemarketing, media outlets, and agencies—to adopt more sophisticatedanalytics and information technology to deliver measurable return oninvestment (ROI) across all media markets—even TV, radio, and print.This Perspective is one in a series of four articles written to accompanyThe Four-Pillars of Profit-Driven Marketing, a book by Booz & Companypartners Leslie H. Moeller and Edward C. Landry.
  2. 2. THE NEW Performance-based advertising has to date focused on the online world, ADAPTINGPERFORMANCE- where the technology lends itself ONLINE METHODSDRIVEN to more sophisticated tracking and measurement models. But online is TO TRADITIONALMARKETING only one of many advertising formats. MARKETSMODEL In a recent survey of leading European corporations, more than 90 percent ranked TV as their preferred medium for product launches. The same survey, however, noted that more thanThe growth of online advertising half of respondents would prioritise Fast-moving consumer goodshas demonstrated the power of ROI analytics and measurability when companies, such as Henkel, Nestlé,performance-based advertising. New choosing how to spend their advertis- and Unilever, are early adopters of thistechnology, click-through sales, and ing budget over the next three years. trend. They are beginning to requiresophisticated analytics are allowing Companies with an excellent market- that their marketing budgets delivercompanies to identify more precisely ing reputation are leading the way. In measurable gains from traditionalwho their customers are and how fact, on average twice as many mar- media. This is particularly truethey respond to marketing campaigns. keting leaders as non-leaders have for campaigns that promote singleMedia companies are beginning to already invested in a variety of capa- products, primarily because it isadopt pricing that reflects this ability. bilities to help them better assess mar- relatively easy to quantify the impactIn the current economic crisis, where keting performance (see Exhibit 1). on an attributable outcome such asthe advertising spend is contracting In this way, performance-based adver- sales. The result is a different kindby as much as 13 percent, there is tising is no longer limited to online of cooperation between clients andeven more pressure for ad prices to be channels; companies are beginning to providers to develop the tools and datalinked to specific goals such as new demand similar models from tradi- analysis capabilities that can measurecontacts, new customers, increased tional media. performance accurately enough tosales, or a combination of all three. price ads according to how consumers respond to them. In this context, there are three critical requirements of all parties—corporate advertisers, agencies, and media companies—in determining the cost of advertising:Exhibit 1Key Steps Leading Marketers Are Taking (% of Respondents) 45% 31% 30% 22% 22% 16% 12% 5% Use predictive modeling Have dashboard to Recruiting specialists Adding an analytics to impact marketing mix measure ROI for analytics department Leaders Non-LeadersSource: Marketing & Media Ecosystem 2010 survey; Booz & Company analysis2 Booz & Company
  3. 3. Resources Leslie H. Moeller and Edward C. Landry, with Theodore Kinni, The Four Pillars of Profit- Driven Marketing: How to Maximize Creativity, Accountability, and ROI (McGraw-Hill, 2009).• Agree on a key reference point or set of reference points to determine Michael Peterson, Volkmar Koch, Florian Gröne, and Kiet Vo, “Online Customers, Digital success—for example, the number Marketing: The CMO–CIO Connection,” http://www.booz.com/media/uploads/Online_ of units sold in various markets in a Customer_Digital_Marketing.pdf. given time frame after the launch of Matthew Egol, Harry Hawkes, and Greg Springs, “Reinventing Print Media,” s+b, Fall 2009, the campaign. http://www.strategy-business.com/article/09308.• Define calculation methods to Dr. Michael Peterson, Dr. Florian Gröne, Dr. Karsten Kammer, and Julius Kirscheneder, determine the success attributable “Multi-Channel Customer Management: Delighting Consumers, Driving Efficiency,” to the campaign. For example, the http://www.booz.com/media/uploads/Multi-Channel_Customer_Management.pdf change in sales compared with a previous period and/or with regions Endnotes where the campaign was not run. 1 The others are to reinvent the content delivery model, to seek revenue streams beyond advertising and circulation, and to deepen relationships with readers around target inter-• Agree on a pricing scheme or est areas. schedule linked to performance. This can be a simple fixed-rate price plus incentives for measurable performance, as determined by the established reference point, or a multiple pricing model that is linked to subsequent campaigns PERFORMANCE- nies. The more accurate the measure, the easier it will be to price advertising and a variety of products. BASED RISKS AND on a performance basis. The pricing ofFor example, let’s say a corporate REWARDS gross-reach marketing for raising brand awareness—those full-page glossyadvertiser and a media company ads on the back of top magazines, foragree on a fixed price for an ad—the “Controlling (measurable return) is example—will remain distinct fromsuccess-independent variable—and a much more involved in the media models that will require informationschedule of additional payments based purchasing decision than before, so systems to quantify tangible returns. Inon subsequent sales data (the success- we pass that pressure on to our agency this setting, the relationship betweendependent variable). This arrangement and the media providers,” says the the CIO and the CMO has never beencan be further developed to incorporate media director of a leading telecommu- more important; the data collected andmore complex payment schemes that nications company. analyzed by the former ensures that theinclude discounted rates on subsequent latter can develop profit-driven market-advertising if the campaign fails to A company’s data collection and analyt- ing strategies.deliver. ical capabilities will drive its ability to identify the attributable success of indi- The demand for these new modelsThis model allows all parties scope vidual campaigns and therefore put it is already here. What is novel todayfor greater creativity and complexity in a stronger negotiating position with will become standard across morein price negotiations. Ad pricing is advertising agencies and media compa- and more market segments. To thrive,no longer limited to market-reach corporate advertisers, agencies, andstatistics to determine cost; it is linked media companies must understand theto actual performance data. A number new complexities and opportunities ofof large European media companies pricing advertising in the profit-drivenare starting to pilot these agreements marketing universe.in their traditional print businesses.This innovation through new pricingmodels is one of four viable strategiesfor future print-media success thatBooz & Company has identified.1Booz & Company 3
  4. 4. The most recent Worldwide Officeslist of our officesand affiliates, with Asia Bangkok Helsinki Middle East Houstonaddresses and Beijing Brisbane Istanbul Abu Dhabi Los Angelestelephone numbers, Delhi Canberra London Beirut Mexico Citycan be found on Hong Kong Jakarta Madrid Cairo New York Cityour website, Mumbai Kuala Lumpur Milan Dubai Parsippanywww.booz.com. Seoul Melbourne Moscow Riyadh San Francisco Shanghai Sydney Munich Taipei Oslo North America South America Tokyo Europe Paris Atlanta Buenos Aires Amsterdam Rome Chicago Rio de Janeiro Australia, Berlin Stockholm Cleveland Santiago New Zealand & Copenhagen Stuttgart Dallas São Paulo Southeast Asia Dublin Vienna DC Adelaide Düsseldorf Warsaw Detroit Auckland Frankfurt Zurich Florham ParkBooz & Company (www.booz.com) is a leadingglobal consulting firm, helping the world’s topbusinesses, governments, and organizations.With more than 3,300 people in 60 offices aroundthe world, we work closely with our clients to createand deliver essential advantage.Contact InformationBerlin MunichDr. Florian Gröne Dr. Karsten KammerSenior Associate Principal+49-30-88705-844 +49-89-54525-558florian.groene@booz.com karsten.kammer@booz.comLondon/DüsseldorfDr. Michael Peterson Julius KirschenederPartner Senior Associate+44-20-7393-3310 +49-89-54525-576michael.peterson@booz.com julius.kirscheneder@booz.com©2010 Booz & Company Inc.

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