Why working and non-working spend analysis does not work anymore

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 market place that the company is working to increase profitability through top line growth and controlling cost.

The response for many competitive organisations is to follow suit and so we have seen recently a roll-out of both zero based budgeting for marketing across many major organisations and now exercises to reduce non-working spend.

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.

In our belief the terms themselves have become irrelevant, much like the concept of above and below the line expenditure. But also it is unlikely to have a major impact on the performance of the company and its profitability.

What is working and non-working

It is interesting because, superficially at least, you would think that you should invest more on working spend and nothing on non-working spend. After all, who would want to invest in anything that was non-working?

But working spend is traditionally considered media investment and non-working is considered the cost of creating the content that will run in the media. Therefore the media cost of a television commercial is the working cost and the cost associated with making the commercial that will run in those television spots is the non-working cost.

There is some confusion over what actual costs are apportioned to working and non-working. Costs such as agency fees for the working being done. Is the agency cost for the media strategy and the planning, along with the cost of actually buying the media all included in the working cost?

And is the agency cost for strategy, concept and the supervision of the production included in the non-working cost?

If you were serious about applying these classifications to your advertising expenditure then you would include all costs associated with either media (working) or production (non-working) expenditure.

The problem with these classifications

The terms themselves are grossly misleading. After all media without compelling and engaging content is a waste. But likewise production that no-one sees is also a waste.

So I have never been able to understand why media is considered to work and production of the advertising is non-working.

One of the attractions of the classification is simply to say you are reducing non-working costs, which would be seen as a logical action that would lead to greater returns. And the contrary would be to say you were moving investment from working to non-working expenditure, which superficially sounds crazy.

This is probably why organisations like to use this classification of advertising expenditure, because the benefit is inherent to the terms, yet their application does not necessarily deliver the promised benefit.

But is the production of the advertising really non-working? In measuring advertising effectiveness you need to consider both the efficacy of the message and the way it is presented in capturing the audience’s attention, persuading them to the point of view and changing either attitude or behaviour.

The second and equally important part is the efficacy of delivering the creative execution to the maximum percentage of the relevant audience in an environment, time and frequency for communication to have an effect.

To call one working and the other non-working is flawed as it misrepresents the interdependency of the two in delivering effectiveness.

In the world of media fragmentation

One of the issues we have previously reported on is the fact that production-to-media ratios have been increasing over recent years due to media fragmentation.

As increased numbers of media channels are being used by most advertisers, the budget is becoming increasingly fragmented, but more in the media than in production, effectively increasing the production to media ratio.

Prior to digital, when the media focus was television dominant, there was a spoken rule that the production to media ratio should be about 10% of the media spend for production.

But as media spend per channel has decreased, while production spend has remained the same, the effective production to media ratio has risen to the point that we have seen ratios of 50% or higher. That is right, half of the television media spend was being spent on production and this was without the considering the associated costs in the mix.

Therefore there can definitely be a case for aligning production budgets to the planned media investment, or reduce the non-working spend to the working spend if you wish.

But what about owned and earned media?

Digital technology has increased the number of channels and across these channels there are paid media options including digital display advertising, social media advertising and the like.

But it has also increased the opportunities for marketers to invest beyond paid media into owned media assets such as websites and content and earned media across social platforms.

But how do you account for working and non-working beyond paid media? Where does the cost of creating and maintaining owned media assets sit? Are these working or non-working expenditure?

The cost of building a website for instance, or developing and deploying content in an inbound strategy, for both of these there is no paid media, so is all the cost of this considered non-working?

Or monitoring and responding to social media, are the costs associated with this considered non-working as there is no paid media associated with either of these activities.

What can marketers do?

Marketing terms and concepts like above the line and below the line, working and non-working all had a reason at some time, but marketing is changing and never as rapidly as it is at the moment.

These terms quickly become challenges in their usefulness as they described an advertising process that is no longer the predominant practice.

It is time that we retire terms like this or re-invent them and redefine them to be relevant to the current practice. Simply reducing what is defined as non-working is to fail to recognise the role of the non-working expenditure in delivering the desired objective or outcome.

It is better to assess expenditure on the basis of return on investment and efficacy rather than simply managing the spend level.

As W. Edwards Deming said “Cutting costs without an improvement in quality is futile”. You need to be careful that you do not reduce the very component of the expenditure that is delivering the return on investment because you classified it non-working.

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