The Myth of Working vs. Non-Working Dollars

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A new way of thinking for marketers of high-end brands

Recently, I was asked by a client to lower the fees on a targeted digital campaign because the ratio of “working dollars” to “non-working dollars” was out of whack. The problem wasn’t that the fees were too high; rather, the media dollars were 60% lower than what the competition spends for a similar campaign. Didn’t matter, said the client, I’m being judged on the working dollars formula.

There was a time not so long ago when marketers relied on a formula, whereby they would devote 80-85% of their budgets to so-called working dollars (think paid media) with the remaining 15-20% devoted to non-working dollars (agency fees, production, and other non-paid or non-traditional media costs). In the era of interruption-based traditional marketing, this formula probably worked. But no longer.

“The premise of working vs. non-working benchmarking implies that all paid media is working (i.e. adds value) and that all other marketing expenditures are non-working (i.e. do not add value),” wrote the 4A’s Tom Finneran in a recent column in Advertising Age.

He’s right. Allocating your marketing budget based on an outdated formula can result in disastrous consequences. It’s as ill-advised as building an agency fee structure based solely on the old 15% media commission from decades ago. Heck, even the term “non-working” is ridiculous, especially when some of these “non-working” expenditures actually drive higher ROIs compared to traditional campaigns.

In today’s agency world, we think in terms of what is needed for the client, not in terms of working vs. non-working dollars. The media and digital space is no longer “set it and forget it”. Today we manage our media, delivery, audiences and targeting almost by the hour. Yesterday’s ads did not change or react to consumer input.

“Clients are shifting spending allocations away from mass-reach paid advertising platforms toward targeted media and web platforms,” said Finneran. “The cost of developing, producing, planning, buying, analyzing and stewarding an expanded array of targeted advertising messages results in improved overall return on marketing investment. However, the ratio of agency fees and production costs to paid media may well increase.”

The rise of search, social, mobile, native, and programmatic – along with a surge in software subscriptions – is wreaking havoc on these historic guidelines. According to research from Exane BNP Paribas, newer forms of media have a much higher percentage of non-working costs,” wrote Bob Gilbreath, CEO at Ahalogy. “Traditional media non-working spending holds at 12% of the total, but newer forms push the ratio up significantly. Search and Display (e.g. banners) rise to 15% to 20%, and recent efforts in Mobile and Social shift up to 55% to 60%.”

Sixty percent non-working dollars? That’s going to cause some serious heartburn among those who are still slaves to this myth. And believe me, there are still plenty of people who subscribe to it.

Darren Woolley, founder of the marketing consulting firm Trinity P3, wrote, “Recently there have been a few very public media announcements by a couple of major brands that they are going to cut their non-working spend in their marketing budget. These announcements are primarily for the investors and are often in response to investor concerns on performance and designed to send a positive message to the marketplace that the company is working to increase profitability through top line growth and controlling cost. But I am wondering if this is not just a huge confidence trick being performed on the investors and shareholders of this company, who most likely do not really understand what reducing working and non-working expenditure means in advertising terms.”

I called my friend and former client at Viking Range, Bill Andrews, who is now a consultant with the fractional CMO consulting firm, Chief Outsiders. According to Bill, “Tactics are judged individually based on merits and this old formula is never discussed, as it just does not apply anymore.”

Of course, as Bill points out, just because the formula is no longer valid, that doesn’t mean that we should stop measuring the efficacy and efficiency of marketing spend. Thankfully, today’s ROI measurement tools give us real-time results of our strategies and tactics – and can help marketers optimize their campaigns on an ongoing basis, which in turn, should help them establish even better decisions on future allocations.

At the very least, this practice will help you ensure that you aren’t cutting the ROI-generating part of your budget simply because someone once labeled it as “non-working.”

Chris Ray

Chris Ray is founding editor of Upward Home, an online resource for marketers of high-end home brands.
Find more information from Chris on Twitter and LinkedIn.

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