Commentary

Advertising: A Fixed Cost Of Doing Business?

by Dave Morgan , Featured Contributor, July 9, 2009

What is the "real" value of advertising to business enterprises? Is the ad business dying? Will advertising ever bounce back to what it used to be? Between the financial crisis and the TV upfronts, a lot of folks are asking a lot of fundamental questions about advertising these days.

It is certainly frustrating to have the fundamentals of the industry that provides your sustenance called into question so often, with such intensity. However, I do believe there are some real lessons that need to be learned here, some of which just require a better understanding of a few acronyms.

Here is what I mean:

ROI. I know, we are very tired of this one, but it is inescapable. Now that the entire business enterprise has been digitized -- from supply chains to manufacturing to inventory, to sales to customer service to accounting -- it is being quantified as well. Understanding and being able to communicate and prove the incremental return on investment of advertising expenditures is no longer a "nice to have"; it is a "must-have." Ignore this at your peril.

CFO. In times of financial distress, it is the financial officers who control most decisions companies make, not their chief executives. This is a reality that cannot be ignored. CFOs' questions are different than other line officers ask. CFOs may seem overly simplistic and backwards, as if they think with the wrong side of their brain, but their questions need to be answered. They are the ones who run the cost-cutting exercises. If they aren't comfortable with advertising and marketing expenditures, such expenditures won't happen. You have to have the patience and the listening and communications skills to make sure that CFOs understand.

SMGA v. COGS. "Sales, marketing, general & administrative" versus "cost of goods sold." The distinction between these two accounting treatments for costs in an organization may be the single most important issue influencing the long-term role of advertising in business. Costs lumped into the former category are typically seen as fixed cost centers. Bulk adverting buys tend to be accounted as fixed costs. Direct marketing and cost-per-lead advertising tend to be accounted as variable. When budgets are tight, guess who wins out? CPM-priced display ads on premium sites, or Google AdWords?

The role of advertising in the business enterprise isn't really this simple, of course, but in the end, it certainly is becoming more and more about math -- and acronyms. What do you think?

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3 comments about "Advertising: A Fixed Cost Of Doing Business?".

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Andy Giordano from Terri Bennett Enterprises, LLC, July 9, 2009 at 4:14 p.m.
"You have to have the patience and the listening and communications skills to make sure that CFOs understand."
the same can be said for my tweenage daughter.
Reply

Tom Cunniff from Combe Incorporated, July 9, 2009 at 4:43 p.m.

Advertising builds brands in the heart, not in the brain or on the spreadsheet.

Brand preference and purchase are stubbornly irrational things. As consumers, we fall in love without thinking and we don't really know why we buy.

I'll bet the Evian "Roller Babies" will sell WAY more bottled water -- at full price -- than all the "Buy it Free" campaigns in the world. (If you're the last person on Earth to not see this, it's here: http://www.youtube.com/watch?v=_PHnRIn74Ag)

IAG research has demonstrated time and time again that likeability of a commercial message is a very reliable indicator of marketplace success.

Without our very human and irrational love of brands, everything becomes a commodity. Pricing power vanishes, and with it the capital needed to improve products.

Here's an argument a CFO can understand: advertising doesn't always make sense, but good advertising will usually make dollars.

Paula Lynn from Who Else Unlimited, July 9, 2009 at 5:58 p.m.

Your CFO paragraph had me smiling. Time and again, the CFO used to "meet" with us dumb ol' salespeople at the newspaper to cut down on makegoods. Since we were on 100% commission and we did not get paid on m/g's, we were on their side. Time and again, we proved to him that the problem was in production. Point? ....to be able to direct the CFO to the cost effective measures rather than just cost cutting and hope you got through. Chopping an ad in half was not a solution. ;)