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Jun 2024

Advertising in the Dark? Econometrics Lights the Way

Do you ever feel like you're throwing money at advertising without knowing what works?

John Wanamaker, a marketing pioneer, famously said, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." Sound familiar? 

Especially if you're managing large advertising budgets across multiple channels - how do you know what’s working best? 

Digital advertising measurement helps, but it's incomplete. Did your TV ad drive the surge in organic searches?

For large advertisers (spending over £3m annually), econometrics can be a game-changer.

What is Econometrics in Advertising?

Imagine statistics meeting economics to analyse advertising data. Econometrics helps you:

  • Measure campaign effectiveness: See how well your ads translate to sales.

  • Understand customer behaviour: Learn what makes them tick.

  • Optimise marketing spend: Get the most bang for your buck.

How Econometrics in Advertising Works

There are several steps in using econometrics for advertising:

  1. Data Collection - Start by collecting data on advertising spending, sales figures, market conditions, consumer demographics, and other relevant factors.

  2. Model Building - Econometricians develop statistical models that relate advertising spend to sales outcomes while controlling for other influencing factors like seasonality, competitive actions, and economic conditions.

  3. Testing and Refinement - Using historical data, the parameters of the model are estimated. These models are then tested for accuracy in predicting sales outcomes based on different levels of advertising spend.

  4. Interpretation - The results are analysed to understand the effectiveness of advertising spend. 

What Econometrics Can Tell Advertisers About Their Advertising Investment

Once the econometricians have interpreted the data, marketers can make a range of decisions and assessments:

  • Effectiveness of Advertising Spend: Quantifies how effectively advertising spend converts into sales, including understanding the incremental sales generated per unit of advertising spend.

  • ROI Analysis: Calculates the return on advertising investment, helping advertisers understand whether their advertising is generating enough sales to justify the costs.

  • Optimal Spending: Identifies the optimal level of advertising spend to maximise profits or achieve specific sales targets.

  • Campaign Adjustment: Provides insights into which aspects of an advertising campaign are working and which are not, enabling advertisers to tweak their campaigns for better performance.

  • Forecasting: Predicts future sales based on different advertising strategies, aiding in strategic planning and budget allocation.

Cost of Conducting an Econometric Study

Typically, econometric studies cost between £20,000 to £50,000 or more. Pricing is bespoke and depends on various factors such as the size and scope of the study (e.g. size of ad spend, number of markets, and number of products), the complexity of the model based on desired learnings, and whether third-party data needs to be collected.

Overall, econometrics provides a powerful toolkit for advertisers looking to maximise the efficiency of their advertising spend, although it requires a significant investment in terms of time, money, and expertise to implement effectively.

Interested in learning more? Contact us using our form or call 07802 449328.

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