Exploring new frontiers

By The Drum, Administrator

August 12, 2005 | 9 min read

The idea of econometrics is long-established as a proven basis for business models. By studying the actual behaviour of consumers as opposed to the subjectivity of what they ‘say’ they’ll do, a more strategic template can be created for companies to work from, and to plan growth with, but few companies have applied it to their advertising.

Mediacom Explore, the new division launched this week, aims to integrate the concept of econometrics with traditional media research and planning disciplines and offer the service to non-clients. Although the service has been in existence for the last three years, the agency has made the move to brand it separately and push the offering to companies outwith its client roster. “This [Explore] has evolved out of the planning team,” says Euan Ross, associate director of Mediacom and who’s heading the new division. “For years we have been offering clients research, strategy, communications planning and effectiveness. Essentially we’ve launched Explore because we think we’ve got something new and different to offer.”

The process of econometrics looks at the many factors that convince consumers to make purchasing decisions, and advertising is but a small part of it.

“We all like to think that advertising works, and it does work, but it’s not the only element in the mix, which is going to drive sales,” says Ross. “If you’re trying to sell a product, sure advertising is going to raise awareness, but also what’s going to drive a purchase is the price of that product. If you lower the price, you’ll sell more, if you raise it, you’ll sell less. That’s basic economics. If you price-promote, or BOGOFS, your distribution will help sales, if your competitors raise their prices, that may help you. Other things like if the weather changes, if the weather gets really cold, people will buy more soup, if it gets really hot, people will buy more ice cream. Your competitors’ spending – whether they’re spending more or less [on advertising] – that will affect it.”

Econometrics differs from advertising awareness or effectiveness research, as all the elements that contribute towards a sale are being taken into account. Once the complete data is captured, individual elements can be analysed and their impact on sales can be determined. Advertising’s impact can be singled out, and even individual executions’ effectiveness can be analysed, something which can lead clients to spend more effectively (see case study).

“Econometrics is based on multivarient linear regression, so you need data points going back a minimum of two years,” says Ross. “But you do need a minimum of two years, as you’re comparing what happened from one year to the next. Econometrics does lend itself to some sectors more than others, such as FMCG. All the data you can track through EPOS and we source a lot of the external data. A lot of clients don’t use data to its full extent. We can track if a product has had 10p off, or was promoted ‘buy one, get one free’ or if there was a competition on the pack. We’ve got temperature data going back years. Depending on the sector we’re looking at, we can track down different data. With finance clients, we can track down data such as consumer confidence levels and things like that.”

Identifying where advertising is being wasted is key for clients, and although it can mean that they cut spending Ross believes that more clients will use different mediums to drive sales, rather than concentrate on TV or poster.

“More and more is being demanded of marketers that they’re accountable,” he says. “We’ve combined the disciplines of econometrics, effectiveness, research and strategy. Once you’ve built a model, you can then forecast it. Once you’ve got a variable you know how it interacts with a sale, so you can plan that forward. Assuming all things stay constant, you can then start laying down scenario plans for advertising.

“If you put a specific weight of TV advertising in plus some outdoor, it will then model what’s going to happen to the sales going forward. The aim of this is to optimise the efficiency and effectiveness of advertising activity, so in doing that we strip out what isn’t working too well or you cut it off at a certain level, where you’re ceasing to go into wastage. In all these little elements you’re saving money for the client and driving them more effective.

“We know that, for one advertiser, the consumer does not have to see their message more than two times. Anything beyond that is wastage. So we can feed that back into the planning tool when planning television, which allows us to maximise the coverage at two-plus. They’re not spending as much on TV as they used to but their return on investment has gone up by about 20/25% just by cutting out the 50% that doesn’t work.

“We’ve also identified stocking level issues, which in turn internally for them has put into place a different process for them ordering their stock and having stock at certain levels, because when it falls below a particular level they start losing sales and profit. It does stretch into all areas of the business, because it doesn’t just give you insight into the marketing. That’s clearly where we start from, but because you’re looking at all the different other elements – how temperature affects you, how distribution affects you, how price promotion affects you – we can start giving them advice there.”

At the moment, Mediacom Explore generates 10% of the agency’s total income, and its aim is to generate a quarter.

“Accountability is at the forefront of every marketer’s decisions and the board are looking more and more for their advertising spend to be justified,” says Ross. “Econometrics is a tool that can allow them to do that, because they can go straight to the finance director and say ‘your £100,000 worth of advertising money has delivered back a return on investment of xx to the business’. We have already had clients who use this separately, which is why we’ve set this up as a separate division of Mediacom.

“I’m very keen to work with clients up and down the country who already may have a strong and satisfactory relationship with their existing media buyer or they may indeed do their own media buying. What we’ve got is resources here where we can work with them on a project basis, without actually looking at doing their media buying. Outside of London, there isn’t really any other agency that has got the experience we’ve got in doing this and has got the resource to do it.”

Mediacom Scotland is running a free seminar on econometrics at its offices in Dock Place in Leith, Edinburgh on 17th August from 4pm. To attend, contact Euan Ross, at Mediacom.

CASE STUDY

Two clients that used the econometrics model include a financial institution and a men’s consumer magazine. The financial institution looked at applications for loans and credit. Mediacom Explore worked out that from a top figure of around 600 applications, which was the base level of applications, meaning the number that would have come in whether the company did any advertising or not, only 10% were actually signing a deal for a loan or credit card.

“It’s those 10% of people that we’re interested in as being more profitable,” says Ross. “We went on to find out whether the company was getting more value from someone who came in via a statement mailer or direct mail, as opposed to through the television. So we drilled right down to what their profitable driving communication routes were and planned ahead, based on that. With direct response advertising, you can tell that someone has seen an ad and come in through that phone number. What you can’t tell, is when someone’s responded to the direct mail has it been a direct result of seeing that piece of direct mail or has the TV influenced them? You can through this, as you can tell how all the communications channels layer up and interact.”

With the magazine, one of the big problems was circulation dropping, in particular when Euro 2004 was on.

“When the football was on, this magazine – which was aimed at men – was finding its readers were not interested in reading the magazine,” says Ross. “For this client, that was a particular useful insight, as a lot of their activity was geared around these events. The problem was, the audience for this sector, because they were so intrigued about the football, so they weren’t interested in this other sector. Traditionally the client was of the view that it was a good place to advertise as the audience was captive. We can put a figure on it, so we could say exactly how much money they had lost on sales.”

Another project for a FMCG brand, looked at the effect of seasonality and temperature on sales. “The accepted wisdom before we undertook this was that sales were driven by temperature, but what this actually showed was there was a seasonal influence,” says Ross. Even though the winter hadn’t been remarkable weather-wise, there seemed to be a seasonal shift in consumers’ minds. “What that did for us was it allowed us to identify a period in the year where we could be driving profitable sales where we weren’t currently active, because previous wisdom had said ‘it’s not cold enough then, we should be waiting until the colder months of January or February’,” he says. “But actually the season begins in November.”

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