Adstock and Diminishing Returns: non-linear advertising effects (2024)

Adstock is an important concept in marketing effectiveness. It was first quantified by Simon Broadbent in the 1970s. Its value lies in helping make marketing and media mix models more accurate by recognising that advertising and media investments have non-linear “carryover” response effects.

These non-linear effects are normally grouped into two areas:

  1. the delayed effect of advertising and
  2. diminishing returns in advertising.

Let’s look at each one in turn:

1 – Adstock or Carryover

The first type of non-linear effect we see in media investment is the carryover effect. When we advertise, we know that the effects are not always seen immediately. This is because advertising, well good advertising, gets remembered and the memory effect on consumer behaviour may be felt some time after the ad is seen.

So, for example if an advertiser buys 100 GRPs in a week, the full effects of that investment are not confined to that week. What happens in practice is that the effect of that advertising tends to “carryover” into the next week and the week after that. How do we know this? We know because when we build models (e.g. MMM) to quantify response to media investment, they tend to be much more accurate when we carry-over the effect of advertising into the following weeks. We call this carryover effect Adstock.

You might ask “how much do we carry over?” The answer to this is found by testing different Adstock carry-over levels and analysing how they correlate with sales response over time. The most commonly used analogy here is borrowed from nuclear physics (don’t worry it’s not as complicated as it sounds). In nuclear physics radioactive substances have a half-life, that’s the time it takes for their radioactivity to decay by exactly half. Marketers borrow this thinking and use half-life decay rates to model lagged advertising effects. We refer to the length of time required for advertising Adstock to fall by half as the ‘half-life’.

So, as an example, if in week 1, 100 GRPs create 1000 sales, a one week half-life might see that effect carry-over to 500 sales in the second week, 250 sales in the third week and 125 sales in the fourth week. Any model that counts only the 1000 sales in the first week underestimates the lagged ROI of those first 100 GRPs. That’s because over the four weeks those 100 GRPs delivered 1,875 sales (1000+500+250+125) rather than the 1,000 sales originally reported. We can see that by considering Adstock, the ROI of the first week’s 100 GRPs almost doubles.

2 – Diminishing Returns

The second type of non-linear effect we see in media investment is diminishing returns. The law of diminishing returns states that as more of something is bought, the less utility is gained from it. A frequently quoted example is agriculture – as more resources are invested into an acre of land, the yield of corn does not increase proportionally. A more day to day example I like to use is buying coffee. The first coffee of the day is wonderful and hugely satisfying. The second is less satisfying and by the time I venture to more than three cups I’m not getting much satisfaction at all. These are both examples of diminishing returns and the same patterns can be seen in media investment.

Let’s assume we are investing in media to drive web traffic. If we buy 100 GRPs in a week we might see 100,000 visits. But if we invest in an additional 100 GRPs in the same week we might see these incremental GRPs deliver only 50k visits. And if we invest in a further 100 GRPs in the same week we might only see 25k additional visits generated. We can see the visits we are generating fall by half for every 100 incremental GRPs we buy. This is a diminishing return and it applies to all channels from TV to PPC.

What’s the cost of this diminishing return? Given that 100 GRPs might cost £350k we can see how taking the spend over a certain level in a specific time frame starts to reduce ROI significantly. Whereas the first 100 GRPs generated 100,000 visits, 300 GRPs only generated 175,000 visits (100k+50k+25k). Our CPV has increased four times from £3.50 on the first 100 GRPs to £14.00 on the third 100 GRPs. When we apply these examples to large scale media budgets, we can see how diminishing returns can have a dramatic effect on media effectiveness. In the worst case scenarios budgets are set at levels so high that they risk producing no additional sales response at all.

What causes diminishing returns? Diminishing returns are usually caused by market size constraints. If a brand has a consideration pool size of 5m consumers, with ten percent actively in market in a week or a month, over-spending excessively against this group will not change purchase behaviour sufficiently enough to match your increased spend, you will simply spend more, sales will not grow at a proportionate rate and your media ROI will fall.

What does this mean for media planning and investment?

The challenge for media planners is to arrange media investment to leverage the carry-over effects produced by Adstock whilst reducing the impact of diminishing returns.

The main implications for media planning are around setting budget weights and phasing to leverage these two effects to maximise media effectiveness. Budget weights have to be contained within acceptable diminishing return limits while Adstock carry-overs can be used to fill gaps in a pulsing media strategy.

Further reading

Broadbent, S. (1979) “One Way TV Advertisements Work”, Journal of the Market Research Society Vol. 23 no.3

Joy Joseph, 2006, “Understanding Advertising Adstock Transformations” (independent)

Fry, T.R.L., Broadbent, S. and Dixon, J.M. (2000), “Estimating Advertising Half-life and the Data Interval Bias”, Journal of Targeting, Measurement & Analysis in Marketing, 8, 314-334

WE OFFER MARKETING MIX MODELLING TO OUR CLIENTS: FIND OUT MORE HERE

Post Views: 9,594

Adstock and Diminishing Returns: non-linear advertising effects (2024)

FAQs

What is the adstock effect? ›

At its core, the adstock effect is the idea that the effects of advertising don't just happen in the moment when an ad is seen or heard. Instead, the impact of advertising persists over time, even after the ad is no longer being shown or heard.

What is the formula for adstock? ›

Inside the loop, we use the geometric adstock formula adstock[i] = impressions[i] + r * adstock[i-1] to calculate the adstock value for each period.

What is the diminishing returns effect of advertising saturation? ›

Advertising saturation: diminishing returns effect

Typically, each incremental amount of advertising causes a progressively lesser effect on demand increase. This is advertising saturation. Saturation only occurs above a threshold level that can be determined by Adstock Analysis.

What is the adstock measure? ›

Adstock Formula

For an example of calculating adstocks, if the advertising results in 1000 additional sales in the first week, 600 in the second week, 360 in the third week, and so on, then the adstock rate would be 60% because each week has 60% of the sales of the previous week.

What is the role of adstock in advertising decisions? ›

This prolonged or lagged effect of advertising on consumer purchase behaviour, known as the Adstock effect, is an essential component of optimizing the marketing mix as it informs the advertiser how long they need to be in the market and how to find the right balance between long and short-term focuses.

What is the difference between carryover and adstock? ›

Adstock is a component of the broader carryover effect, which refers to the delay between consumers seeing an ad and responding to it. A gradual decrease in the ad's impact represents one form of this effect. A delayed response is another form.

What is the formula for advertising? ›

Average Cost Per Action (CPA) is a metric that is used to measure the average cost of acquiring a new customer or lead through an advertising or marketing campaign. To calculate CPA, simply divide the total cost of the campaign by the number of new customers or leads generated by the campaign.

What is the formula for return on advertising investment? ›

Calculating ROAS is simple. You divide the revenue attributed to your ad campaign by the cost of that campaign. For example, if you spend $1,000 on ads, and your revenue is $2,000, you calculate ROAS by dividing $2,000 by $1,000. This gives you a ratio of 2:1 or 200%.

How to calculate diminishing returns in media? ›

The point of diminishing returns turns out to be the coefficient for the log of spend from our linear model. We can generalize this to work for any last dollar ROI target: We simply divide the coefficient for the log of spend from the linear model by your target last dollar ROI.

What is adstock mmm? ›

Adstock is a concept that is commonly used in marketing mix modeling (MMM) to account for the carryover effects of advertising. Adstock refers to the amount of residual impact that an advertisement has on consumer behavior even after the advertisement has stopped running.

How to calculate diminishing returns? ›

The point of diminishing returns can be realised, by use of the second derivative in the above production function. Which can be simplified to: Q= f(L,K). This signifies that output (Q) is dependent on a function of all variable (L) and fixed (K) inputs in the production process. This is the basis to understand.

What is an example of diminishing returns in advertising? ›

Diminishing returns in CPA

Here's an example: a company increased ad spend from $500 per day to around $4,000, which saw their CPA rise around 80% from approximately $2.50 to $4.50. The company will likely see its CPA rise by around $1 for every $1,163 they spend.

Why is diminishing returns bad? ›

It is possible for diminishing returns to lead to a negative productivity curve as well. This happens when adding new input to the system doesn't simply reduce the system's efficiency, it reduces the system's output overall.

What is the difference between adstock and carryover? ›

Adstock is a component of the broader carryover effect, which refers to the delay between consumers seeing an ad and responding to it. A gradual decrease in the ad's impact represents one form of this effect. A delayed response is another form.

What is the adstock function in MMM? ›

Adstock is important in MMM models because it helps to account for the long-term impact of advertising. For example, an advertisement for a product may continue to influence consumer behavior even after the ad has stopped running, due to residual brand awareness or other factors.

What is the ads effect on the consumer? ›

Consumer awareness is a fundamental aspect of consumer behaviour – and advertising is a potent tool for raising awareness. Consider the effects of advertisements: not only do they raise brand awareness – familiarising consumers with brand names, logos, and slogans – but they also raise: Product awareness.

What makes an advertisement effect? ›

Advertisements that include relevant information for the consumer, such as a product benefit that is important to the consumer, are especially likely to attract attention. Information that is new to the consumer is also likely to obtain the attention of the consumer.

References

Top Articles
Latest Posts
Recommended Articles
Article information

Author: Greg Kuvalis

Last Updated:

Views: 6325

Rating: 4.4 / 5 (75 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Greg Kuvalis

Birthday: 1996-12-20

Address: 53157 Trantow Inlet, Townemouth, FL 92564-0267

Phone: +68218650356656

Job: IT Representative

Hobby: Knitting, Amateur radio, Skiing, Running, Mountain biking, Slacklining, Electronics

Introduction: My name is Greg Kuvalis, I am a witty, spotless, beautiful, charming, delightful, thankful, beautiful person who loves writing and wants to share my knowledge and understanding with you.