In some ways, advertising is one of the riskiest industries. For every ad you buy, there is rarely anything close to a guarantee that you will get a positive return on your investment – even if such an investment had paid off in the past. Below is diagram showing the main sources of risk that can affect advertisers (note: this is just one of the many ways to diagram risk in advertising).

Risk 1) Reach: For your advertising have a positive effect, step one is that it must reach your target audience. This is the least risky part of the equation because advertising is typically purchased based on guaranteed reach. Some metrics that apply to this step of the process are: reach against your target audience, average frequency, GRPs, and impressions. Risk level: low – this is typically guaranteed by publishers.

Risk 2) Impact: Reaching your audience is one thing, but having an actual effect on them is another. When the people you want to see your ad, see it – it has to change the way they feel. This element is typically measured by survey, with measures designed to evaluate brand opinions, favorability, and brand associations. Risk level: Medium.

Risk 3) Action: The advertising doesn’t only have to change the way your target audience feels, it also has to change the way they behave. This typically happens after you’ve given your target audience all the information they need to make an informed decision about purchasing your product. This step of the equation is largely immeasurable except possibly by survey of consumer sentiment. Risk Level: High.

Risk 4) Positive Return on Investment: All prior steps must add up to a positive ROI for the advertiser. The amount of money expended on the advertising must not exceed the amount of money, or tangible goodwill, that the advertising has earned. This is somewhat measurable by lift in sales, but it can be very hard for larger advertisers to isolate exactly which programs led to their sales lift. Risk level: High.

In most advertising scenarios, there are three main parties involved: the Advertiser (who has a product or service to sell), the Agency (who helps that advertiser with creative messaging and media placement), and the Publisher (who helps the advertiser’s message reach consumers).  In most industries where there are multiple stakeholders, the risk is shared. By sharing the risk (and also sharing the reward) all parties are better hedged and therefore better positioned for long term success. However, in advertising this is not typically the case – instead all of the risk is usually piled on the advertiser.

How could we restructure to share risk more efficiently? That is the thought for this week.

Advertising: The Risk Equation.