One of the reasons cited for WPP plc’s revenue slow down and subsequent 13% drop in share price yesterday (after the full year results announcement) was the impact of “the short-term focus of zero-based budgeters, activist investors and private equity [….]”. We can all imagine companies cutting ad spend to meet short term profit and cash flow targets and this may bounce back if companies see revenues falling and/or market share losses as brands lose mindshare. However, if zero-based budgeting is done properly and is underpinned by a robust and accurate analysis of ROI for each component of promotional activity it may be that ad spend will fall further and the exploration of digital channels accelerate (see chart above). This is inevitable because zero-based budgeting, if done with the required analytical rigour, will reveal where promotional activity is simply wasted because the ROI is below zero. Few people doubt that that 30-50% of promotional spend is wasted but without smart analytics no-one knows which 30-50% to cut.
In high margin industries like pharmaceuticals the tendency has been to adopt a belt and braces approach just in case. Witness the rapid exploitation of digital promotional activities because technology allows it. In reality there are no guarantees that digital channels will boost sales. Indeed, some studies have revealed that digital promotion can confound the impact of traditional activities.
For digital to be effective or indeed to supplement some traditional channels we need to pass three practical tests.
1. Is our customer base homogeneous or, as some studies suggest, are digital responsive customers a completely different cohort or sub-group?
2. Do our digital activities reinforce and complement our traditional messages or in fact detract from and confound our traditional marketing efforts?
3. Are our digital activities producing an additional sales return or in reality are we lulled by the perceived cost advantages of digital into polluting our market with unwanted noise and in fact confusing or switching off our customers?
If zero-based budgeting is to have any meaning it must include analysis of all promotional activities, including digital. Not to do so is equivalent to launching yet another “have you got PPI initiative?” to an already overworked and increasingly sceptical customer base.
In conclusion, the shift to zero-based budgeting is welcome only if done in conjunction with rigorous analytics. The move towards digital channels of promotion is subject to exactly the same caveat. The pharmaceutical industry has an additional motive for considering zero-based budgeting; surely it cannot be seen to waste resources on unnecessary promotion when its product pricing to tax-funded payers is under so much scrutiny.
The author was a Pharmaceutical Analyst at Lehman Brothers for 23 years as well as being involved with the PharmaFutures projects www.pharmafutures.org but is now writing independently. Stewart Adkins is a Director of Pharmaforensic Limited www.pharmaforensic.co.uk a company that uses leading edge statistical methods to quantify the impact of promotional activity on sales.
Stewart Adkins was a Pharmaceutical Analyst at Lehman Brothers for 23 years and was involved with the Pharmafutures projects.