For today’s marketing departments, new digital technologies are creating not only great opportunities but also considerable risk. They can enable more effective and cost-efficient customer targeting, but they typically also require new capabilities and introduce unwanted complexity. Developing digital marketing capabilities and the optimal operating model with the right agency partners can generate productivity and time-to-market improvements of more than 30 percent. In this paper, we take a look at the trends that have transformed the marketing landscape and share our view on how to boost marketing’s return on investment by using digital to create a competitive advantage.
The digital landscape
Over the past few years, three megatrends have radically changed the principles of advertising and marketing:
Digital channels have overtaken traditional media. In 2019, digital became the dominant advertising medium, accounting for more than 50 percent of global advertising spending. In many leading economies, including China, the United Kingdom, the United States, Australia, Norway, and Canada, digital has long surpassed traditional ad spending (see figure 1). According to the latest forecasts, most European countries will join that group this year. Meanwhile, in developing countries, including most of Latin America and parts of Southeast Asia, digital advertising investments have not yet surpassed their traditional counterparts, a trend that will shift in the foreseeable future.
Within digital media, programmatic media buying has been on the rise for several years, with today’s market share in Europe estimated at 75 percent, compared with around 85 percent in the United States.1,2 At the same time, investments in mobile advertising are booming, with more than half of digital expenditures allocated to mobile devices in the European Union.3
The combination of the growing share of digital in the marketing mix and the dominance of programmatic advertising within digital leaves many marketing organizations wondering whether to insource their programmatic ad buying. About 86 percent of European marketing organizations have already moved all or part of their programmatic buying functions in-house, a number that will continue to grow (see figure 2).
The domination of the online advertising market. Google and Facebook already command about 67 percent of this market. Today, most digital campaigns cannot happen without these two powerful players. However, large retail platform players such as Amazon and Alibaba have recently entered the market and are encroaching on the duopoly’s territory faster than anticipated. Additionally, local (mostly traditional) advertising sellers have joined forces to compete with Silicon Valley by offering cross-media targeting that combines traditional and digital approaches, a competitive advantage that Google and Facebook cannot offer yet.
An influx of data. Companies have been mining input by using sales, customer relationship management (CRM), and loyalty systems to accumulate huge amounts of data on existing and potential customers. This data is collected from a variety of sources, including Internet campaign cookies classified according to a variety of parameters. The data is then used for targeting and retargeting well-profiled segments of consumers, mostly via their own channels (email, apps, or social media) or via paid channels, such as programmatic media buying platforms. Special data management platforms (DMP) are used to store data, which then segment various cookie profiles along the customer’s online journey for potential further targeting. With DMPs, companies can also microsegment and classify customers based on demographic, psychographic, and behavioral traits.
DMP databases also help define customers’ preferences and needs, making it possible to approach targeted recipients with personalized messages. Companies that are further along in this process often install on-premise DMPs, typically cloud-based solutions, to maintain full control over them while enhancing the database with second- and third-party data. This facilitates communication with the customer based on a precisely defined path to purchase—from creating brand awareness to the close of sale. However, determining exactly when and where to target a customer (for example, when is he open for a sale?) and with what message (for example, when is he interested in specific content?) is not easy and only delivers a competitive advantage when done effectively. Today, many traditional companies have vast amounts of data but lack the capabilities to capture value from that data. These players stand to lose market share to their digitally savvy competitors unless they invest in their digital marketing capabilities.
Unlocking the digital marketing potential
With new digital technologies, companies can target customers and communicate more precisely. But when implementing these technologies, marketing organizations will need to take into account a variety of fresh challenges:
Complexity. The world’s more developed countries are home to hundreds of suppliers of technology, communication, and other marketing solutions, and there are thousands of suppliers on a global level. When navigating this complex world, marketing organizations can easily become bogged down.
Audience measurement. The ability to precisely measure an audience is problematic for both traditional and digital media. Despite huge technological developments and billions spent on media every year, efficiently measuring the viewing data is still a real challenge, especially when traditional and digital media are combined.
Transparency. The complexity of the digital services supply chain can easily lead to a lack of transparency. Advertisers are often unaware of what the price they pay actually includes. Although they typically pay for services designed to manage digital technology based on an hourly rate, managing the number of hours spent on actually delivering the service is no easy task. Another model is commission-based remuneration, which is calculated as a percentage of media spend. The key drawback is that it provides a tempting incentive to inflate spend. An additional issue is poor transparency in the media pricing value chain, with media agencies often being paid not only by advertisers, but also by media vendors for allocating part of clients’ spend to them. This raises questions about spend objectivity. Lack of transparency also frequently occurs with programmatic buying when agencies use an arbitrage pay model—fixing cost-per-thousand impressions with an advertiser while buying audience more cheaply via real-time bidding—at prices that are not disclosed to clients.
Conflict of interests. In most advertiser–agency relationships, 100 percent of the advertiser’s spend becomes 100 percent of the agency’s income. Therefore, it is crucial to implement mechanisms that can ensure maximum spend efficiency while also encouraging agency performance via well-designed pay-for-performance schemes and key performance indicators. This becomes even more important when working with multiple agencies on a marketing campaign in which each agency has its own profit and loss, interests, processes, and tools.
To tackle these challenges, marketing operating models (structures, processes, capabilities, and digital technologies) must evolve rapidly. One major hurdle is deciding where to place digital solutions and determining how they should be operated: in-house or externally. To answer this, marketing departments should first determine which solution creates a strategic advantage and whether they can ensure sufficient scale and capabilities to operationalize them.
Our experience working with international advertisers suggests that the best way to boost the marketing return on investment (ROI) is to focus on three areas at the same time (see figure 3):
— Develop data-driven marketing capabilities to improve brand equity, media effectiveness, and targeting.
— Build an effective operating model, including an internal marketing organization with must-have capabilities, an ecosystem of external partners and a platform independent technology stack.
— Improve productivity and performance by creating value-chain cost transparency and linking the agency renumeration system to market success.
Develop data-driven marketing capabilities
Structured and analytics-driven creative approach. This is crucial, and today’s available data is the starting point for successful content creation. An analytics approach will speed up testing and learning within the creative development process and ultimately allows for much more personalized campaigns and target groups. A structured approach ensures repeatable creative success and consistent messaging across target groups.
Digital-first strategy shift. This is primarily about optimizing the marketing mix—in other words, deciding which activities or media types to invest in (such as television, billboards, or social media) and how much to invest. Another dimension is how to split investments across the conversion funnel. State-of the-art approaches combine traditional marketing mix models with real-time attribution models in a single tool. We recently built an operating model for a telecommunications operator in the Middle East that needed to optimize its media expenditures. Using our tools, we demonstrated that, despite significant investments (for example, in outdoor ads and sponsoring activities), some media were not producing the expected results. By reallocating funds to digital, the company achieved the same sales result while reducing media spend by 15 percent.
Path to purchase. Our research shows that around 90 percent of website visitors fail to complete transactions. To improve digital conversion marketing, organizations need to rigorously analyze the entire path to purchase, from creating visibility to convincing the customer to buy (see figure 4). For a company’s website, consider parameters such as website loading speed, layout clarity, search engine effectiveness, readability of information, user-friendliness, and payment methods. Applying best practices can fix any identified opportunities, such as tailoring landing pages to various cookie profiles derived from previous online experiences or leveraging advanced attribution models to evaluate all marketing channels in a customer journey and provide the most accurate analysis of ROI. With this approach, we have seen the conversion rate of people who complete a purchase rise by double digits.
Creative production and automation. Many advertisers are still developing marketing campaigns in a traditional way—from strategy to creative ideas and visuals, which are then adapted by digital agencies to various digital touchpoints. Working across a range of loosely connected agencies often creates inefficiencies, such as unnecessary iterations, as many issues surface farther down the line when the agencies cannot deliver the requested output. Organizations that truly want to implement a digital-first mind-set will need to change their creative process to verify ideas upfront, ensuring that they are relevant for the digital space. Leading advertisers automate the creative process to achieve “personalization at scale” by using new customer management platforms and allowing dynamic creative optimization and online ad testing, just to name a few. With this approach, we are seeing the benefits of a stronger creative process while shortening it by up to 30 percent.
GDPR-proof targeting capabilities with operational DMP. Many companies struggle to assemble all of the data about their customers in one location. Often, sales, marketing, and customer service departments maintain separate databases, and customer data from signed agreements is often not used. At the same time, ongoing digital campaigns bring millions of cookies with data-rich histories about customers’ Internet paths. A DMP is designed to bring all of this information together in one place—creating one source of truth. This allows companies to microsegment and then personalize messages as well as defining the frequency of ads displayed to individuals and groups. All this enables the digital marketer to reach the customers with the most promising profiles. There are different types—and even generations—of DMPs, so choosing the right one should be backed by robust due diligence. The next challenge is to create a professional analytical team to manage the platform and drive incremental value from the investment.
Building an effective operating model
An effective operating model has two main structures: the internal marketing organization and a combination of external marketing partners, together forming an integrated ecosystem.
When establishing an internal marketing structure, companies consider the following questions:
— Which competencies will help to most efficiently and effectively build market share?
— Which of those competencies should be built internally, and which should be outsourced?
— Which recent digital solutions can be taken advantage of?
— What’s the best way to balance roles and responsibilities between central and local offices?
Once these questions have been answered, companies will be in a position to develop an appropriate operating model. Today, mainly as a result of the rapid rise of digital solutions and lagging internal capabilities, most large organizations rely on external marketing agencies for their digital marketing. However, the share of digital marketing is rising quickly, and the strategic importance of having digital capabilities in-house is becoming much more apparent. In this new environment, advertisers will need to redefine their insourcing versus outsourcing strategy. Figure 5 shows how a telecom operator we worked with structurally changed and reorganized its internal marketing capabilities.
Although the outcome of this type of exercise will be different for every marketing organization, the resulting operating models generally fall into three groups. We are seeing the still-prevalent best-of breed agency model being replaced by a one-stop shop model. At the same time, large advertisers in business-to-consumer industries, where marketing is crucial, will lean toward insourcing models.
Organizations with smaller, less-crucial marketing spend will gravitate toward outsourcing most of their digital marketing.
Improve productivity and performance
Optimizing the efficiency of digital marketing activities encompasses many approaches. First and foremost, advertisers will need to maximize transparency to avoid hidden costs and link the agency remuneration system to market success. Three topics are especially relevant:
Full value-chain cost transparency. Most companies that buy media in a programmatic way use purchasing platforms that belong to media agencies. The primary benefits are that specialists manage the platform and programmatic campaigns are coordinated with other media campaigns. This is convenient, but there are two drawbacks. Because of the typical lack of transparency, this model can generate unnecessarily high costs. Also, a company’s lack of access to campaign details at so-called “log-level data”—with a detailed customer profile and information about the real-time bidding purchased price as well as where the ad was displayed and at which time of day—prevents efficient analyses that could optimize programmatic buying at a customer level. One solution is to enter into an agreement directly with a supplier of programmatic technology, or demand-side platform (DSP). However, few organizations do this because of the inconvenience, a lack of required skills and resources, or limited time. For advertisers that do not own a DSP license, we strongly recommend maximizing transparency on programmatic purchases to avoid hidden costs (plus gaining full access to log-level data), which reduces the programmatic budget by up to 25 percent. In Figure 6, we map out five programmatic models along with their advantages and disadvantages.
Agency renumeration system. Advertisers should target a minimum of 15 percent value-based renumeration and move away from the traditional hourly rate card. When working in an ecosystem of agencies, the performance of the entire ecosystem can be linked to actual achieved business results (see case study). The remaining fee structure can be output-based, making the entire system easy to manage while driving productivity and performance improvements jointly with the agencies.
Standardized deliverables. This is particularly useful for creative campaigns, where defining campaign packages on a granular level can significantly improve the quality of deliverables while creating cost transparency and reducing overall complexity. This approach enables a like-for-like comparison between agencies. With digital campaigns accounting for the majority of creative campaign activities (more than 100 per year for larger advertisers), having standardized campaigns in digital marketing is the only way to go.
The bottom line
By investing in digital solutions, marketing departments can demonstrate that their budgets can contribute to a company’s ROI—an important move since many still view marketing as primarily a cost unit and therefore assign marketing a lower priority than the sales or digital departments. Armed with effectively applied digital solutions, a marketing department can launch and measure its investments much more precisely, reinforcing the vital role it plays.
However, capitalizing on the full potential of digital solutions will require keeping up with rapidly changing tools and technologies. This knowledge, combined with flexibility and openness to change, has the power to transform digital marketing from a challenge to a true source of competitive advantage.