There is a fair bit of academic research demonstrating that customer satisfaction (usually the ACSI metric) is a driver of firm profitability, and a recent paper from Journal of Marketing proves that customer satisfaction has a positive influence on a company’s future advertising and promotion efficiency. This is because customer satisfaction induces customer behaviors such as free word-of-mouth advertising making firms more efficient in future marketing communications investments. The authors also go on to show that the relationship is stronger in industries with high market concentration (less competition)

Two reasons the study is interesting and worth a read:

1. It quantifies the impact of customer satisfaction on an operational marketing metric, rather than a broad financial metric like ROI or return on assets, which are more difficult to manage from an executive’s perspective.
2. It uses Data Envelopment Analysis (DEA) as a technique to assess the efficiency of resource utilization. It is a simple yet powerful methodology to perform any comparative or benchmarking analysis across industries.

One of the classic studies on advertising effectiveness has been conducted by Erwin Ephron and Gerry Pollak, using a database compiled by MMA, a marketing-mix modeling firm.

They study the one-year ROI (short-term contribution) of advertising campaigns across various industries and media channels and conclude that in the short term advertising does not have a positive ROI. CPG companies are the worst performers averaging only 54 cents of payback for a dollar spent in advertising. The non-CPG brands studies return 87 cents which is a bit better, but still not positive. Of the 25 CPG brands studied, only one is able to achieve break even and have a positive ROI

Among other findings:

• Television as a media channel had the lowest payback for both CPG and Non-CPG brands. Magazines performed substantially better.
• ROI correlates directly with brand size. Larger brands have on average higher ROI.

As the authors note:

There is good evidence that first-year payback more than doubles over time through heightened awareness, saliency and repeat purchase. Yet the idea that you plant today to reap tomorrow is far less satisfactory than earn-as-you-go. It leaves advertising as an easy cut when dollars are tight.

As CPG companies like Kraft increase their advertising spend to gain market share (subscription required), it is key that they start putting together the right analytical skills and a ‘test and learn’ culture to evaluate the advertising ROI and ensure that their dollars are spent wisely

Hat tip: Alan Rimm-Kaufman