Digital Advertising isn’t the Problem
Digital ad spending doesn’t make a digital business
Two seemingly very different stories made their rounds through the digital advertising sphere last week. Procter & Gamble reported that they cut their digital ad spending by $140 million, apparently without any impact on sales. On the other end of the spectrum, the toy maker Mattel increased its digital ad spending by 40% over the past year and made an upfront spending commitment to YouTube Kids. The company is going to spend an undisclosed eight-figure amount with YouTube’s kids app.
In some way, Mattel and P&G are similar businesses. Both sell consumer goods and rely on advertising to drive demand. But once you look closer, some critical differences become apparent. And those differences are crucial when you want to assess a company’s ability to leverage the digital ecosystem to its advantage — or, vice versa, how well a company fits into the digital world.
First, though, the news. From Business Insider:
Kids are not watching TV the way they used to, yet marketers focused on advertising for kids and their parents have been slow to recognize that reality, keeping the bulk of their ad budgets in TV.
That may be starting to change.
Mattel, the maker of iconic toy brands like Barbie and new entrants like Dinotrux, is making its first “upfront” ad spending commitment to YouTube Kids, Google’s kids-only app that was rolled out in February of 2015.
And from AdAge:
Procter & Gamble’s concerns about where its ads were showing up online contributed to a $140 million cutback in the company’s digital ad spending last quarter, the company said Thursday. That helped the world’s biggest advertiser beat earnings expectations. Perhaps even more noteworthy, however, organic sales outperformed both analyst forecasts and key rivals at 2% growth despite the drop in ad support.
P&G didn’t call out YouTube, the subject of many marketers’ ire earlier this year, in its fiscal fourth-quarter earnings release, but did say digital ad spending fell because of choices to “temporarily restrict spending in digital forums where our ads were not being placed according to our standards and specifications.”
Those cuts amounted to nearly a percentage point of profit margin for the quarter, with cuts to agency and production fees further boosting profits.
P&G’s official reason for the cuts is the ineffectiveness of digital advertising — click manipulation and placements adjacent to undesirable content were advertising’s big topics this year — but the last sentence in the quote certainly matters as well. It has long been common practice among advertisers to reduce 4th quarter spending (P&G’s fiscal year ends in June) in order to protect profit margins.
Of course, though, P&G has been vocal about overhauling their digital media supply chain for a while now. So, the cutbacks weren’t just a means to protect profit. Quite likely, digital advertising wasn’t delivering the best bang for the buck (or rather: the unspecified parts that were actually cut; “digital” is a broad category and the really interesting information would be where the cuts occurred). As the world’s biggest advertiser — the company spent $7.2 billion on advertising in its fiscal 2016 — it ought to be among those with the most reliable data on ad effectiveness.
Quick and extreme conclusions are popular these days. But P&G’s case doesn’t show that digital advertising is inefficient. Instead, it shows that context matters.
Customers matter
P&G is the archetypal company of the mass market/mass media world. Their CPG brands were all designed to become category leaders in commodity markets. Thanks to the company’s superior capabilities in advertising, its brands were known to almost every consumer. Retailers willingly put P&G products on their shelves. All this was predicated on making products “for everyone”. Since the number of mass media channels was limited, reaching most consumers at once was comparably easy.
Contrast this with Mattel. While the basic principles of the company’s pre-internet business were similar, there is one key difference: A rather precise audience. While “kids” isn’t granular by internet standards — which are shaped by micro-targeting and the web’s global scale — it’s definitely more distinct than “everyone”. On the internet, that difference matters.
As I wrote in Rethinking “Advertising” for the On-Demand Economy:
In a broader sense, the pre-internet, mass-media era was characterized by people having to eat what they were served. Nowadays, people are used to being picky. It’s no longer a problem to get whatever you want, whenever you want it, wherever you are. As long as your internet connection is working, the world is at your disposal. Its collected content most easily of all. Media is the prime case study for the shift from scarcity to abundance. Calling this a paradigm shift isn’t overstating things.
This creates a tricky situation for companies. Just as in the old days, they still need potential customers to know about their existence and offering. When the internet came around, most assumed it was just another type of media. They added it to their media mix, branded it a below-the-line channel and by and large went with the same old basic mechanics of creating ads and buying placements. But as it turns out, things are more complicated.
P&G decreasing its digital advertising budget doesn’t mean digital advertising is broken. Neither does Mattel’s case mean that it’s superior. The reality isn’t black-or-white but nuanced. We are living in a heterogeneous world. There are all kinds of people with all kinds of preferences, needs and habits. While we are living through a fundamental transformation of the media — and, in extension, attention — landscape, such a transformation takes time.
People who grew up in a mass media world don’t suddenly change all their information and consumption habits simply because new technology emerges. Habits are resilient. The key to efficiently allocating advertising budgets is: know thy customer! Or, to be more precise, know your customers, their habits, and understand the context in which your products are being bought. If your product is geared towards everybody, there are only a few places on the web that can deliver on that promise.
If, further, your product is mostly bought in stores (as I assume is the case for most P&G products; the company doesn’t report sales from online vendors separately), you’re primary concern is to create awareness and get your product in as many people’s relevant set as possible. That is, you need to do brand advertising — which further decreases the number of viable online advertising options. Without further details becoming public, it’s totally reasonable to suspect that P&G is simply (and smartly) focusing its digital advertising and cutting down on inefficient channels. Anything else would mean trouble for the company.
One-size doesn’t fit all
The Mattel case, on the other hand, nicely illustrates the future direction: the young generation is forming its habits right now, centered around the web and mobile in particular. So, any company that wants to reach those customers in the future needs to do so online. One possible interpretation is that web companies need to build infrastructure which allows brand advertisers to do what they always did, only on the web. As I’ve written about in-depth, the battle for the brand advertising dollars is well underway indeed.
But that’s only part of the challenge. Also from Rethinking “Advertising” for the On-Demand Economy:
But technology and platforms are only one part of the equation. They take care of the distribution of ads. The other half, however, is the real challenge: The selective, on-demand user who lives inside a few very specific content bubbles which are tailor-made for him — by algorithms he trained himself and networks he build. Trying to describe this user with broadly aggregated data like Sinus Milieus is almost offensive to him. Getting this person’s attention takes more than simply knowing what targeting criteria lets you enter his bubble. What good does it do if an ad shows up in his feed only for him to skip it?
If you look at the internet and the market structure it created, you can at least be skeptical of the notion that stuff made “for everybody” will do well there. In order to cut through the noise that is created by abundantly available information and products, it’s a good idea to offer something that is meaningful and relevant to consumers. Toys certainly resonate more with their users than dish soap, which makes it a product class better suited for the online environment.
But what does this mean for true commodities — for products people need but don’t particularly care about? I can only speculate about this, but a few current developments might be somewhat indicative. Store brands are increasingly popular with retailers and consumers. In some categories, subscription services a la Dollar Shave Club (which P&G competitor Unilever acquired last year) have created a superior customer experience: getting a commodity delivered without even thinking about it. In other categories that used to be owned by a few large, made-for-everybody companies, a new class of small, often regional and somewhat artisan brands emerged. A good example for that is the beer market, where craft beer is growing in popularity and market share in many countries around the globe.
If this indeed is any indication, consumers might care less about old school brands and either go with the less pricey option (store brands), the superior experience (delivery), or with focused brands that are more attuned to their lifestyle. Which, in turn, would mean that the primary challenge for CPG companies weren’t figuring out digital advertising but creating things that resonates with customers who no longer grew up in a mass market world of one-size-fits-all offerings.
The broader takeaway is this: change takes time. A certain class of digital evangelists likes to point out that the internet and related advances in tech change everything. That isn’t wrong per se, but they often overlook time. Time matters, though. The world is still populated by many people that aren’t digital natives. This stands to change. For now, however, certain companies can correctly conclude that their present profits are made from different consumers.
Those companies will eventually get in trouble if they don’t manage to create offerings that appeal to the younger generations. It’s Christensen’s Innovator’s Dilemma in full effect. The challenge is to identify those opportunities while maintaining the business that once made them successful. That’s difficult enough as is. And it only get’s tougher when time and resources are invested in ways that neither benefit your old business nor create the new one.
In that light, P&G cutting back on inefficient digital advertising makes sense. Unlike Mattel, its customers aren’t exclusively the next generation. Thus, the company won’t be judged on its ad spending in 2017. What’s going to matter eventually is whether or not it manages to build an entire business that is optimized for a digital world.
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