Advertising yields higher ROI than sales promotion; study results are contrary to most marketing plans

Folio: The Magazine for Magazine Management, July, 1989 by Kevin Sghia

Advertising yields higher ROI than sales promotion

New York City--Advertising produces a greater return on investment than sales promotion, according to a recent study completed by the Ogilvy Center for Research & Development together with the Strategic Planning Institute (SPI).

Although the study does not distinguish between print ads and broadcast, "I think the Ogilvy study is right on the mark," says Gloria Scoby, publisher, Crain's Chicago Business, and marketing director for the Association of Area Business Publications. "When a study like this is published, sales representatives throughout the country pick up the ball and run with it."

The study measured both the amount of money spent and the profitability of advertising and promotion for 314 consumer nondurable businesses. SPI's consumer goods database includes both marketing and financial information over the past four years.

Results showed that companies spending 66 percent of their marketing dollars in advertising had an average return on investment (ROI) of 30.5 percent; firms that spent 77 percent of their budgets on promotion had an ROI of 18.1 percent. Companies with a mixed budget, spending 44 percent of their dollars on advertising and 56 percent on promotion, enjoyed an ROI of 27.3 percent.

Most businesses, however, spend most of their marketing dollars on promotion. A 1988 Wall Street Journal article found that businesses allocated 60 percent of their budgets to promotion and only 40 percent for advertising.

"It is clear that there is a positive relationship between the emphasis on investment in advertising and profitability," says Alexander Biel, executive director of the Ogilvy Center for Research & Development. "Conversely, those businesses that allocate most of their marketing budgets to promotion tend to have lower profit margins and rates of return on investment."

PHOTO : Although return on investment is clearly higher for advertising, most businesses spend 60 percent of their marketing budgets on promotion.