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December 01, 2006

What Works In Radio Advertising, And What Radio Stations Fail To Understand

Granted, it's not specifically about direct response radio advertising, or actually even about radio advertising, but Mark Ramsey's recent post titled Radio Advertising: What Works and What Doesn't is about a new book called What Sticks? Why Advertising Fails and How to Guarantee Yours Succeeds which promises to provide "bold new" research-backed "insights" that can assist all marketers and advertisers, not just radio advertisers.

Most of Mark's post discusses a lot that is already known about advertising in general. I didn't see anything new about what, beyond radio advertising basics, specifically works. Whether the book delivers on its promise or not remains to be seen, but Jeff and I are intrigued enough to buy it, read it, and see for ourselves. We'll be back to report on that in a separate post.

But reading Mark's post brought something to the surface for me that I hope Mark and others in the radio industry will hear and maybe even respond to.

Something in Mark's opening paragraph struck me and it took a while for me to get a handle on what it was. But I think I've got it.

Here's Mark's opening paragraph:

"Yeah, you can wait to see how your ratings respond, but is there any better way to know what advertising works, "what sticks," and know before you spend the big bucks? And is there any better way to get improved results for your clients - and more of their advertising bucks in the bargain?"

Look at the first part of the first sentence.

"...you can wait to see how your ratings respond..."

Here, Mark is talking from the perspective of radio stations (owners, managers of) and he's really talking to those people also - not to the customers of those radio stations, the advertisers. But is this a book for businesses who advertise on the radio or for radio stations who are advertising to grow their listenership?

Mark reveals what I think is the main chasm between radio stations/networks and conglomerates and their paying customers, businesses who are radio advertisers. As a radio agency we're uniquely well-qualified to speak on behalf of radio advertisers. As a direct response radio advertising agency, we're even more qualified because we hold every dollar accountable for profit - which means we know empirically what works and what doesn't. We wouldn't have remained in business for so long if we didn't ensure our customers (radio advertisers) needs are being met.

THE fundamental axiom of marketing is customer-centricity. Start with the customer's needs, understand them VERY well, and build your business to meet those needs. Profit follows. My point is this: the only thing radio stations care about is their listenership and resulting ratings, because that drives their ad rates. Increase the number of listeners regardless of the kind of listener, and radio stations think they can charge more and thereby grow their profits. This focus is their downfall. It is what most limits the growth of the radio advertising industry. And it is a HUGE opportunity.

Quick review: Basic business math establishes that there are 2 ways to grow profits, all other variables constant: a) increase price, and/or b) increase quantity sold. This is because Profit = Revenue-Cost, and Revenue = Price X Quantity Sold.

Radio stations are focused on a to the exclusion and expense of b.

Let me explain.

Radio stations focus solely on increasing listenership and justify that focus with the FAULTY (or at best unproven) ASSUMPTION that increasing listenership will increase radio station profits. This is only true if advertisers don't hold their advertising accountable. Do you want to know why radio industry revenues are going sideways? Wall Street does. It's because, with more and more consistency, all businesses - not just direct response radio advertisers - are holding radio advertising accountable for profitable results.

Contrast the above faulty assumption with a PROVEN FACT that if radio stations were to focus on making advertising on their station the most efficient and effective way to reach their listeners, they would see much greater profits. This would mean a focus on both providing compelling content that aggregates a homogenous group of listeners and conducting research that shows exactly how advertisers can best talk to those listeners to entice them to buy.

To see why this approach is better requires approaching radio advertising from the perspective of a radio advertiser. Apparently this not so easy, so I'll elaborate.

What would radio stations get if say, WXYZ, provided Advertiser A, with a homogenous audience that matches the characteristics of people who really want what A is selling, and radio stations showed A which schedule and message will yield the best return on my A's ad dollars (based on sound research). What business results would radio stations see?

Let's follow the cascade of outcomes that would unfold: WXYZ would get a customer whose business is profitable and therefore strong and growing. As a result, A will want to do two things with WXYZ: 1) increase spending on WXYZ (why not, it's profitable), and 2) continue advertising on WXYZ on a consistent basis. Therefore, referring back to the sidebar above, WXYZ accomplishes BOTH an increase in price, AND an increase in quantity sold.

Contrast this with an advertiser who buys into the sales pitch of WXYZ, advertises, and gets 6 months down the road before he angrily concludes "radio advertising doesn't work". What are the business results for WXYZ in that situation? WXYZ has to replace that customer with another one just to maintain it's business.

So to summarize, in the current faulty assumption scenario, radio stations constantly have to replace their customers (who, by the way, are convinced radio advertising doesn't work and are unlikely to ever try it again). More money goes into sales and gimmicks to boost listenership in an effort to both increase listenership and replace the customers faster than they are leaking out.

In the proven fact scenario, radio stations grow fast and profitably because they have long term advertisers (increased quantity sold) who are willing to pay strong rates (higher price) because they can achieve profitability by advertising on WXYZ. Otherwise known as a "win-win" for radio stations and advertisers.

Now why on earth does the radio industry continue to operate under the faulty assumption? THAT's the book that needs to be written.

Where's the evidence that radio stations AREN'T focusing on what matters to advertisers? That they aren't focused on what works and what doesn't from the perspective of businesses that would use radio advertising to fuel their growth? The most obvious piece of evidence is that there is so little sound research on radio advertising effectiveness. Just do a search and you'll find nearly no published research that isn't of questionable soundness, reliability, or bias. But you will find ample information on how to market your radio station and grow your ratings.

The second most obvious bucket of evidence is that discussions with radio stations are dominated by the same topics: ratings, rankers the most recent Arbitron book... Sorry, but it's true. There's no discussion about their expertise on the topic of what works and what doesn't in radio advertising. Their focus is on driving ratings up, selling at the highest price, not delivering the greatest value to their customers. It's a battle, not a partnership.

When Clear Channel (NYSE: CCU) wants to really revolutionize radio advertising, or when Google Audio (NASDAQ:GOOG) wants to actually achieve something revolutionary in the radio space, you'll know about it because their entire language will change from the current vocabulary dominated by costs to one that reflects the perspective and needs of businesses who actually employ radio advertising to grow and sustain their business profitability. They'll focus on innovations that aggregate attractive customer segments and they'll invest in true independent research that uncovers what works and what doesn't in radio advertising - NOT research that is sponsored by an industry trade group essentially producing a thinly veiled sales pitch to lure in additional advertisers in an attempt to replace the water in the funnel faster than it is leaking out.

Posted by Brett Astor at 01:00 PM | Permalink