Don't slash ad spend just because ROI is low. Here's why

It might be natural for companies to slash their marketing spend when the ROI is low. While that might seem like an intuitive answer, Nielsen's ROI Report found that it is wrong most of the time. In fact, ROI can be low because a brand hasn't spent enough in a channel to break through.

Nielsen stated that 50% of planned media channel investments are too low for maximum payback and planned spend is about 50% lower than optimal spend levels. If marketing teams committed the ideal amount of resources, their ROI could jump 50%.

According to Nielsen, 45% of the plans in Asia Pacific are underinvested, performing slightly better than their counterparts in North America and Latin America. Should brands in the region increase their investment to the optimal zone, they will get a median ROI growth opportunity of 38%. At the same time, Nielsen also found that over half of global display and digital video campaigns are underspending. In fact, 66% of digital video plans and 60% of display plans are underinvested.

Underinvestment was one of the three key lessons that Nielsen uncovered after analysing nearly 150,000 observations of marketing ROI and its database of client-supplied media plans. Findings for the ROI Report were generated using a wide range of measurement methods including marketing mix models, brand impact studies, marketing plans and expenditure data, attribution studies, and ad ratings collected in recent years.

According to Nielsen, media spend needs to be between 1% and 9% of revenue for brands to remain competitive.

In Asia Pacific, brands reinvest 4.6% of their revenue into media and reap an ad spend ROI of 85%. While the percentage reinvested is higher than the global average of 3.8%, the region receives 15% less ROI for its ad spend than the global average.

Nielsen also found that most brands globally reinvest between 1.4% and 9.2% from their revenues into media. Smaller brands, however, would require more resources to compete with established players for market share. On the other hand, larger brands can afford to skew their investment to the lower end of the range.

The median under-investment level was 52% and according to Nielsen, this is a large gap that most brands won't be able to close in a single planning cycle. But brands that close the gap can improve ROI by a median of 50.3%.

Another problematic area is overspending, although Nielsen said it is not as much of an issue as underspending. When experiencing overspending, brands should optimise their channel mix instead of cutting their budgets. Nielsen also advised brands to find the right balance when it comes to investing in channels as opposed to cutting spend because brands may not actually be spending enough in the right channels to cut through the noise and drive real impact.

Imran Hirani, VP, media and advertiser analytics, Nielsen said brands can't afford to waste valuable ads on the wrong audiences. "By investing wisely and having a balanced strategy of both upper-funnel and lower-funnel initiatives, brands can reach the right audiences and maximize their ROI," Hirani added.

Photo courtesy: Shutterstock

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