We recently argued that in the current earnings environment – where expenditures on advertising and promotions have declined at an average annual rate of 5.3% since 2007 – it is crucial that bank marketers be diligent about documenting the returns that they expect to receive on their investments. In addition to creating business cases for specific initiatives, marketers may want to place a copy of “Bank Marketing Investments and Bank Performance,” a paper recently published by friend of the firm Donald J. Mullineaux in The Journal of Financial Economic Policy, in the inboxes of the CEO and CFO.
Mr. Mullineaux and his colleague, Mark Pyles, analyzed quarterly bank earnings from 2002 to 2006 across four different tiers based on asset size to determine what, if any, relationship existed between increased marketing spending and increases in profits and/or deposit market share. “Marketing spending” was represented by two variables: advertising and promotion expense as documented on the call reports and the number of branches in a bank’s network (since a new branch represents a significant marketing investment). The analysis controlled for other drivers of profitability, such as interest rates, wages, credit quality, liquidity, capital, and competition (using the Herfindahl-Hirschman Index).
These gentlemen found that, on average, a 10% increase in marketing expenditures results in just over a 2% increase in profits and a 7% increase in market share. It should be noted that results varied by size – for example, banks and thrifts generally realize higher marginal returns on their marketing dollars as they grow in terms of asset size, until reaching a size of $10 billion. Branch network expansion has a similar impact on profits but a much larger impact on deposit gathering – on average, a 10% increase in the number of branches results in a 2% increase in profits and a 30% increase in market share. Returns on scale are, however, less evident when it comes to this form of marketing investment. This article (subscription required) in American Banker provides more detail on both the methodology and the results.
While the period under study was one in which the financial services industry experienced remarkably strong earnings performance, we spoke with Mr. Mullineaux and found out that he and his colleague estimated the relationship between marketing and profits on a year-by-year basis and saw similar results in 2002, when the industry was recovering from a recession, as in 2006, when the mortgage lending boom was in full swing. The results are certainly worth keeping in mind both the next time you are asked to justify an investment in the brand or prioritize branch expansion relative to other spending initiatives.