Perhaps no area of business decision

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1 M A R K E T I N G R E S E A R C H F O R U M Making Ads Profitable In-market research now guides advertising decisions at Frito-Lay. By Leonard M. Lodish and Dwight R. Riskey Perhaps no area of business decision making is as rife with uneertainty as the domain of advertising. John Wanamaker's famous quotation, "I know that half of my advertising doesn't work. The problem is, I don't know which half,'" may be an understatement of the actual degree of uncertainty with which most firms struggle to effectively manage their television advertising. Although advertising is the largest part of most marketing plans, it is also often the first component of a marketing plan to be sacrificed when revenues or profits fall short of expectation (usually in the final quarter of the fiscal year). This is rational behavior when poor revenues are die result of ineffective advertising. Decisions to cut advertising, however, are more commonly made without the benefit of anything but the weakest form of information regarding the advertising's effectiveness, in faet, almost all other aspeets of the marketing mix are regularly measured with greater rigor, precision, and confidenee. As a result, television advertising is the first marketing element to suffer cuts not because it is inherently less effective, but rather beeause its effectiveness is inherently more difficult to assess. Rather than struggling with the assessment of advertising effectiveness, some firms rely on TV advertising "rules" of questionable veracity, such as: To increase market share, TV advertising share of voice must be larger than eurrent market share. At least three exposures per person are required to make a significant impact. More TV advertising is obviously better than less. TV advertising takes a long time to work. Yet these rules need not be accepted at faee value. Powerful methods for evaluating advertising efficacy exist. During the last five years, Frito-Lay has been using those methods in a unique and robust way to evaluate its advertising effectiveness rigorously. The firm used the information to develop guiding prineiples to better manage the uncertainty around its television advertising as a component of the marketing mix. Other firms can put this research to work by doing a better job of managing the costs and the value of advertising, testing, experimentation, and research. ADVERTISING EFFECTIVENESS In 1989, Information Resources Inc. solicited industrywide support for an in-depth analysis of its historical Behaviorsean database. Behaviorscan is a household purchasing panel comprising approximately demographic ally representative households from each of six geographically dispersed markets. All supermarket purehases are recorded via seanners and linked to individual household identification to measure preeise purchasing behavior. In addition, households reeeive all of their television transmissions via cable teehnology. and advertising can be directed to or removed from individual households on a targeted basis. This eapability has allowed the execution of numerous 38 Winter 1997

2 S T A T E O F T H E A R T IN Q U A N T I T A T I V E R E S E A R C H carefully controlled advertising experiments. Media weights, media plan configuration, and many other advertising variables have been experimentally tested using this technology. A study called "How TV Advertising Works" was undertaken to analyze a subset of these experiments and derive underlying principles for how advertising works. Study sponsors included most of the major packaged-goods television advertisers, the three major TV networks, and some major ad agencies. The objective was to improve knowledge of how, when, and why TV advertising works in affecting sales revenues using two major databases: The Behaviorscan database containing test results, category and brand purchase data for 389 split-panel tests, and media plans for some of the tests. A sponsor questionnaire to gather supplementary strategic, media, and copy information. Surprising Conclusions A detailed description of the "How TV Advertising Works" study and all its conclusions appeared in the May 1995 issue of the Journal of Marketing Research and the August 1995 issue of Marketing Science. The analysis supporting the single most important conclusion from the study is illu.strated in Exhibit 1. Each point represents a different test in which an increased level of advertising was tested for a different brand over one year. No relationship is apparent between the percent change in the target gross rating point (GRP) level and the percent change in sales volume attributed to advertising. A lack of relationship was also apparent for other measures of advertising weight, including GRPs, share of voice, and other competitive measures. Only 33% of the established brands and 55% of new products showed a statistically significant increase in sales as a result of an increase in TV advertising. The study demonstrated compelling evidence, therefore, that TV advertising weight alone is not enough to drive incremental sales. There is no simple relationship between changes in TV advertising weight and changes in sales, regardless of whether the changed spending is compared to competitive levels of advertising. The three TV spending "rules" mentioned earlier are severely contradicted by this data. Additional findings from the study include the following: Exhibit 1 Percent Volume increases associated with target GRP increases for established product weight tests 80% -40% % 50% 75% 100% 125% 150% 175% 200% 225% 250% Total plan target GRP-% change A = 1 observation B = 2 observations The "status quo" is not enough for brand or copy strategy. An increase in sales effect is more likely when the brand's objective is to increase penetration, where copy strategy has changed, or where copy is intended to change attitudes. New brands or line extensions tend to be more responsive to TV advertising than are established brands. Smaller, less-well-established brands tend to be more responsive to TV advertising than are larger, well-established brands. As they arc used in practice, it is unlikely that there is a strong relationship between standard measures of TV commercial recall and persuasion for established products and the sales impact of the copy. When TV ads worked, they produced big volume effects (a mean increase of 18% in sales), the effects lasted for a period of over two years, and they emerged surprisingly fast (within 6 months in most cases). The impact of these findings on TV advertising management and decision making has been somewhat disappointing. Perhaps because the investigation's conclusions were drawn from a composite of product categories, managers have not shown confidence that the resulting conclusions can be applied to their own businesses. Tn MARKETING RESEARCH 39

3 Exhibit 2 Advertising effectiveness as a function of brand size and ad context Big Small Total Base News Total 13% (n-8) 71% (n = 7) 40% (n-15) 67% (n-3) 100% (n-5) 88% (n = 8) 27% (n-11) 83% (n-12) 57% (n ^ 23) Percentage of advertisements showing significant volume increases over no-advertising control groups. Results are classified according to product and brand characteristics, that is, "base brand" advertising vs, "news" (product innovation) advertising; big brands (e,g,, Doritos, Lay's) vs, smaller brands (e.g,, Rold Goid). addition, conclusions were derived from a variety of split-panel test designs including "heavy-up" tests and media plan configuration tests. No single experimental stimulus was eonsistent across business categories. AN IN-MARKET TEST At Frito-Lay, these issues v^ere addressed with a single split-panel test design within a single product category. The results were used to develop "guiding principles'" for managing the firm's TV advertising program and setting priorities for ad campaigns. Tbe experiments were designed to be a robust yet realistic test of the effectiveness of TV advertising across brands. The basic design was an ad/no-ad split-panel Behaviorscan test in which each brand's advertising was tested in at least two markets for a full year. Media plans for each brand were those previously approved by management during the annual planning cycle, and were not modified during the year. (The full study appeared in tbe May 1997 issue of tbe Journal of Marketing Research.) Each brand's media plan was made up of at least 1,500 GRPs, but was otherwi.se unconstrained in makeup. Brand managers and ad agencies were responsible for devising the media plans, and no constraints other tban those mentioned above were applied to those plans. At the end of each year, markets were reassigned to brands to ensure no brand was tested in a given market for more than one consecutive year. Households were assigned to advertising or no-advertising conditions on the basis of a methodology that matched households on a variety of purchasing characteristics including category and brand penetration and purchasing rate. Once household pairs were identified in each market, households were assigned randomly to tbe ad or no-ad conditions. For households in the no-ad condition, the brand's ads were cut and replaced with various public service advertisements. Cable, radio, and outdoor advertising were not manipulated as a part of tbe experiment. Tbese forms of advertising, however, represented only very small portion of the marketing mix. Promotional activities also were not nianipulated, but because of random assignment of consumers to conditions and statistical covariance analysis, it can be presumed tbat this factor did not differentially influence tbe two treatment conditions. Results Across four years of testing, 57% of television commercials (12 of 23 ads) demonstrated significant volume increases among advertised households, compared with a matched "no-advertising" control group (see Exhibit 2). Commercials were categorized into "news" or "base," depending on whether the content of the commercial included a significant innovation such as a line extension, new brand or feature, or whether the commercial focused on existing brand attributes of an established brand. Tbe findings show that 88% of the ads focusing on some new feature or innovation drove significant volume lifts. When categorized by brand size, ads for the largest brands bad much lower likelihood of driving significant volume gains: only 27% of the ads showed significant volume increases associated witb advertising. In contrast, tbe smaller brands had a much higher likelihood of showing significant volume increases from advertising. Nearly 88% of the ads showed significant volume gains due to advertising. Note tbat commercials for innovations on smaller brands showed significant gains from advertising in each of the five commercials represented in the study. Two other features of the data deserve attention. First, the sales volume effects of tbe ads tested, if tbey generated a significant effect witbin the first year, showed that effect witbin six months in every case, and al! but one within three months. Second, the volume effect contributed by tbe commercials tbat caused significant volume increases averaged 15%. Implications Frito-Lay's results display a bigh degree of alignment witb the findings from the original 40 Winter 1997

4 study: Slightly more than half of the ads tested showed significant effects in (driving sales volumes compared with matched control groups. Moreover, innovation and brand size were salient features tending to distinguish effective from ineffective commercials. These results suggest that just as innovation and brand size are important factors predictive of ad efficacy across product categoties, diey are even better predictors for the Frito-Lay categories. Another implication is that it pays to test "small" or "big" brands without "news" to differentiate and run only those TV ad campaigns that work. For big brands with or without innovation, for example, split-panel pretesting would be quite valuable in terms of its implications for increasing profits. Let's assume a fictitious, but typieidbig brand ' has revenues of $300 million, an ad budget of $10 million, and incremental gross margin for each sales dollar of 40%. If only 13% of the "big" brand TV advertising increased sales, it is likely a company would choose not to run such campaigns. However, the data suggest further that 13% of those commercials would actually increase sales by an average of 15%. How much is it worth to fln(i that one ad in eight and run only it? If the sueeessful TV campaign increases revenue 15%, then $45 million in potential increased revenue (15% of $300 tnillion) are at stake. That amounts to $18 million in incremental gross margin (45 x 40%), md after advertising expenditures of $9 million, a net profit increase of $9 million! Testing eight big brand campaigns in order lo find one that "works" would thus be worth approximately $9 million, (dramatically more than the cost of any eight spiitpanel experiments for each of 8 brands. This analysis is actually very conservative, because the evaluation does not take into account the long-term impact that successful TV advertising evinces. The earlier stu(iy showed that, when TV a(jvertising had an impact on sales in one year, the sales impact was appropriately doubled, on average, by the impact in the following years. The results also support the prior finding that the effects of advertising oceur quickly. Of ihe 12 ads showing a significant sales effect sometime during the 12 months of the experiment, all but one showed that effect within the first three months of the beginning of the media plan. 'Guiding Principles' Perhaps the most important learning from this research, however, has been the lesson in how the.se types of findings might be used to manage advertising more effectively as part of the marketing mix. Rather than rely on TV spending "rules," whieh are contradicted by research, some "guiding principles" can be derived from the research and applied across the management of the advertising decision-making proeess. From the research, three management principles can be employed; Always advertise against "news" for smaller brands. Acknowledge that advertising on big brands, espeeially if tiot associated with "news," is unlikely to drive sales increases directly. Although there might be other objectives to advertising these brands (e.g., sales force rnotivation, retail trade support), the likelihood is low that advertising will affect consumer purchases directly..^however, it still makes sense to test large brand campaigns in market to find the ones that will significantly affect sales. Because ad effects occur fast and last long, it is feasible to "rotate" ad support for key brands on the basis of (1) availability of news, (2) prior year brand performance, and, (3) split-cable test results. From a strategic management point of view, after five years, the benefits of this program are now clear to the firm. However, how tnany companies will take such a long-term perspective to learning how their TV advertising investments should be managed? This program had serious management commitment and support because it was a very rational way to begin to control the large uncertainty inherent in managing TV advertising budgets. The costs of this program were in the hundreds of thousands per year, but the benefits were in the millions. THE 'PROOF' For researchers, these studies clearly call into question assumptions of a monotomically increasing TV advertising response function for established brands. Also, given the wide dispersion of TV advertising sales effect, it rnakcs lots of sense to postulate separate model parameters for different copy platforms for different competitive brands when doing market response analysis. This author has estimated market response logit mod- MARKETING RESEARCH 41

5 els and fonnd wide differences in sales impact for different copy and different brands. Frito-Lay is not unique. The same program of continually testing advertising in-market and only going out nationally with campaigns that have a high probability of working is appropriate for most major TV advertisers. The same costs vs. benefits of in-market TV advertising testing that we did for Frito-Lay will probably be applicable in general to most firms. Concurrent with the in-market tests of different advertising campaigns, companies should implement various alternative pretesting methodologies that measure persuasion, likability, recall, etc. After testing a number of campaigns in-market, firms can statistically evaluate which pretest items or combination of items (if any) are valid for the specific situation. If a firm can find pretest methodologies that demonstrate predictive validity for its particular circumstance, it can then eliminate the significant time and expense of having to do in-market tests. The expense of concurrently doing redundant pretests along with in-market tests is dwarfed by the large potential value of finding valid pretesting methodologies to use on an ongoing basis. The Frito-Lay findings, along with those from the prior investigation, begin to provide important insights inlo how advertising works, and how it might be managed more effectively. Although it seems unlikely that advertising will ever be employed on a strictly "empirical" basis, deriving management principles from empirical studies of efficacy seems a reasonable and wis? method to improve overall marketing impact. If the "proof of the pudding is in the eating," at least one firm is now routinely continuing its advertising program in its last fiscal quarter. Lodish, L.. M. Abraham, S. Kalmenson, J. Livelsberger, B. Richardson, and M.E. Stevens, (1995) "How TV Advertising Works: A Meta Analysis of 389 Real-World Sptit-Cabte TV Advertising Experiments," Journal of Marketing Research. 32. (May), ADDITIONAL READING Lodish, L., M. Abrahatn, J. Livelsberger. B. Rich;irdson. and M.E. Stevens. (1995)-A Sunimarv' of Fifty-Five In-Market Experimcnial Estimates of tbe Long-Term Effect of TV Advertising," Part 2, Marketing Science. 14 (3). G Riskey. Dwigbt R., (1997) "How TV Advertising Works: An Industry Response." Journal of Markeling Rf.search. XXXIV, (May), Leonard M. Lodish is the Samuel R. Harre! Professor, Marketing Department, University of Pennsylvania's Wbarton School, Pbiladelpbia. Dwigtit K. Riskey is Senior Viee President, World Wide Marketing, Frito-Lay Inc., Dallas. 42 Winter T997

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