When major brands make public media announcements, they will cut their non-working spending in their marketing budget and increase their investment in working spend. These announcements are primarily for investors and often respond to investor concerns about performance. They are designed to send a positive message to the marketplace that the company is working to increase profitability through top-line growth and cost control.
Many competitive organisations respond by following suit, so we have recently seen the planned implementation of AI in marketing across many major organisations. This is increasingly one of the critical drivers of the Generative AI transformation. AI promises to improve productivity and efficiency and reduce cost and time to market.
But I wonder if this is not just a huge confidence trick being performed on this company’s investors and shareholders, who most likely do not understand what reducing working and non-working expenditures means in advertising terms.
In our opinion, the terms have become irrelevant, much like the concept of above-the-line expenditure. However, this is unlikely to significantly impact the company’s performance and profitability.
What is working and non-working
It is interesting because, superficially, you would think you should invest more in working spending and nothing in non-working spending. After all, who would want to invest in anything that was non-working?
However, working spend is traditionally considered media investment, and non-working is regarded as the cost of creating the content that will run in the media. Therefore, the media cost of an online video is the working cost, and the cost associated with making the video that will run in those videos 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 work being done. Are the agency costs for the media strategy, the planning, and the cost of buying the media included in the working cost?
And is the agency cost for strategy, concept and supervision of the production included in the non-working cost?
If you were serious about applying these classifications to your advertising expenditures, you would include all costs associated with either media (working) or production (non-working) expenditures.
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.
I have never understood why media is considered to work and advertising production is considered non-working.
One of the attractions of the classification is 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; the benefit is inherent to the terms. Yet, their application does not necessarily deliver the promised benefit.
But is the advertising production non-working? In measuring advertising effectiveness, you need to consider both the efficacy of the message and how it is presented to capture the audience’s attention, persuade them to the point of view, and change 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 that allows 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 is that production-to-media ratios have been increasing over recent years due to media fragmentation.
As most advertisers use more media channels, the budget is becoming increasingly fragmented in each media channel than in the production of the content for each channel, effectively increasing the production-to-media ratio.
Before digital, when television was the dominant media focus, there was a rule that the production-to-media ratio should be about 10% of the media spend for production.
However, as media spending per channel decreased while production spending remained the same, the effective production-to-media ratio rose to the point that we saw ratios of 50% or higher. That is right, half of the television media spend was being spent on production, and this was without considering the associated costs in the mix.
Therefore, there can definitely be a case for aligning production budgets to the planned media investment or reducing 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.
However, it has also increased the opportunities for marketers to invest beyond paid media in owned media assets such as websites, 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 expenditures?
For instance, the cost of building a website or developing and deploying content in an inbound strategy. Since there is no paid media for both of these, is all the cost of this considered non-working?
Monitoring and responding to social media are the costs associated with being considered non-working, as there is no paid media related to either of these activities.
Where AI comes in
Generative AI will not only broaden the creative opportunities for content, but it will also reduce the cost of producing creative content and effectively lower non-working costs.
Automation will also deliver reductions in go-to-market costs by reducing the administration and management of many of the processes that support the advertising process, effectively lowering overheads and further reducing non-working costs.
However, many question whether AI efficiency will improve quality in advertising performance and return on advertising spend (ROAS).
While AI productivity improvements have the potential to reduce non-working spend, allowing an increased investment in media as working spend, this needs to be managed to ensure improved performance.
This is where the other big improvement is coming to marketing and advertising: in the form of AI-powered performance measurements, such as attribution or media and marketing mix modelling.
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 point, but marketing is changing, and never as rapidly as it is now with the transformative impact of AI.
These terms quickly become challenges in their usefulness as they describe an advertising process that is no longer the predominant practice.
It is time to retire terms like this or re-invent and redefine them to be relevant to current practice. Simply reducing what is defined as non-working is to fail to recognise the role of non-working expenditures in delivering the desired objective or outcome.
It is better to assess expenditures based on return on investment and efficacy rather than simply managing the spending level, which is increasingly available to marketers willing to embrace the technology available.
As W. Edwards Deming said, “Cutting costs without an improvement in quality is futile.” It would be best if you were careful not to reduce the expenditure component delivering the return on investment because you classified it as non-working.
