The importance of brand awareness is stressed in almost every marketing textbook. Yet you often hear: “I don’t need brand awareness, performance marketing is enough”. Let’s calculate how brand image translates into ad effectiveness and company results.
Brand awareness and PPC ad effectiveness
The effectiveness of well-known brands’ ads can be significantly higher compared with companies that are just entering the market or are little known. What can we expect in the case of well-known brands?
Higher CTR
It seems intuitive — but is it actually true?
Despite the lack of rigorous research in this area, many marketing publications indicate that well-known brands’ ads are clicked more often (see e.g. Larry Kim’s article in Search Engine Land).
The lack of studies may stem from the fact that even with data from many advertisers, it’s hard to eliminate confounding variables in the compared data (e.g. a weaker CTR may result not from lower brand awareness in a given market, but from stronger competition and a lower ad position). Nevertheless, our observations of our Clients’ ad performance in new markets, where brand awareness is lower, seem to confirm it.
Users (or at least a large share of them) decide whether to click a search ad based, among other things, on the name and address of the landing page. This is confirmed by the results of a poll (in Polish; 51% of respondents said they look at both the headline and the site’s name and address, 25% read everything including the description, 15% only the headline, and 9% only the site name and address):
Of course, this poll doesn’t meet the standards of a rigorous study, but it clearly shows that a significant share of users do care what site they’ll land on — even if the ad’s headline suggests it should concern the products or services they’re looking for.
Higher clickability of well-known brands’ ads therefore seems likely, and is supported by rational considerations.
Higher conversion rate
Well-known brands’ ads enjoy a higher conversion rate. Consumers decide more readily to buy products of brands they know. Fewer doubts (trust), the brand being in fashion, and individual user preferences (“brand lover”) all increase the chance of conversion. This is not only intuitive — it’s also easy to find numerous studies confirming the thesis, e.g. IJCRT, Cambridge, ResearchGate.
The ability to raise prices
Branded products don’t have to compete on price and can sell at higher prices than less renowned competitors.
A higher price means an even greater increase in margin, resulting from an even greater increase in the difference between the sale price and the cost of acquiring or manufacturing the product.
For example, if we raise the price by 10% (e.g. from 100 zł to 110 zł) when the margin was 20% (20 zł), then after the 10 zł price increase we earn 30 zł on every product — 50% more.
Lower cost per click
A higher CTR translates into a lower cost per click (CPC). What matters most to Google is the revenue per ad impression, so in practice this is a function of the form CPC = c/CTR (where c is some constant) — meaning 2x higher CTR means 2x lower CPC. High CTR is also one of the signals of high ad quality and its relevance to the user’s query.
The ad’s Quality Score also depends on the landing page experience. Higher conversions on well-known brands’ sites will, in a way, generate positive user experience signals — the user found what they were looking for. So we can expect that here, too, well-known brands can count on “extra points”.
Note. The site’s conversion rate is not in itself a ranking signal for Quality Score purposes, just as the mere presence of a keyword’s text on the page is not.
Nevertheless, if a user searching for a product on Google finds it easily on the ad’s landing page and then makes a purchase (and thus probably stops searching for it on Google), this gives Google behavioral signals indicating a good landing page experience — in contrast to users who return to the search engine to continue their search because the landing page didn’t meet their expectations.
This means well-known brands can count on a lower cost per click at the same ad position.
What does it all add up to?
The phenomena described above have a favorable impact on ad effectiveness. Added together (or rather: multiplied by each other), they can substantially increase campaign efficiency.
For example, suppose that thanks to a recognizable brand CTR doubles, the conversion rate also doubles, and thanks to a higher price the margin earned on a single conversion is 50% higher. This means ad efficiency (ROAS) grows 2 x 2 x 1.5 = 6 times.
But that’s not all.
Higher transaction volume
Higher CTR also means more traffic and, consequently, higher sales volume. This means fixed costs will now make up a smaller share of the profit on sales, which means a further increase in profit. Classic operating leverage kicks in.
Suppose that after deducting variable costs (including advertising costs) a company earns a profit on sales of 30,000 zł, but its remaining fixed costs are 20,000 zł. Profit is therefore only 10,000 zł. If sales can be doubled at the same share of variable costs (e.g. thanks to a 2x higher CTR), profit becomes 60,000 zł – 10,000 zł = 50,000 zł, i.e. 5 times more.
Room for advertising expansion
And that’s still not the end of the benefits well-known brands enjoy. When ROAS grows, performance campaigns can be run even more aggressively than before. This results from the shift of the maximum profit point, in line with the ROI > 1/E rule (see the article on maximizing advertising profit).
At a lower ROAS, increasing advertising intensity quickly produced marginal losses. More aggressive advertising now means not only higher revenue: despite the ads’ lower ROAS, it starts generating higher total profit on sales and even higher operating profit (thanks to the aforementioned operating leverage from fixed costs).
Impact on financial results
Let’s see how better ad effectiveness can translate into a company’s financial results. The table below shows example performance metrics of a strong brand (column 2) compared with an unknown company (column 1). Column 3 factors in advertising expansion, which wouldn’t be profitable for a company without adequate brand awareness.
| 1 NONAME | 2 STRONG BRAND | 3 STRONG BRAND + AD EXPANSION | 4 CHANGE (3) vs (1) | 5 NONAME + AD EXPANSION | |
|---|---|---|---|---|---|
| CTR | 1% | 2% | 2% | x2 | 1% |
| CPC | 1.00 zł | 0.50 zł | 4.00 zł | x4 | 1.50 zł |
| Conversion rate | 1% | 2% | 2% | x2 | 1% |
| Revenue per conversion | 800 zł | 1,000 zł | 1,000 zł | 25% | 800 zł |
| Unit margin | 200 zł | 400 zł | 400 zł | x2 | 200 zł |
| Units sold | 1,000 | 4,000 | 32,000 | x32 | 1,500 |
| Revenue | 800,000 zł | 4,000,000 zł | 32,000,000 zł | x40 | 1,200,000 zł |
| Total margin | 200,000 zł | 1,600,000 zł | 12,800,000 zł | x64 | 300,000 zł |
| Cost per conversion | 100 zł | 25 zł | 200 zł | x2 | 150 zł |
| Ad spend | 100,000 zł | 100,000 zł | 6,400,000 zł | x64 | 225,000 zł |
| Profit on sales incl. advertising | 100,000 zł | 1,500,000 zł | 6,400,000 zł | x64 | 75,000 zł |
| Fixed costs | 80,000 zł | 80,000 zł | 80,000 zł* | 80,000 zł | |
| Operating profit | 20,000 zł | 1,420,000 zł | 6,320,000 zł | x316 | -5,000 zł |
| ROAS | 2.0 | 16.0 | 2.0 | x8 | 1.3 |
*) With such a substantial increase in turnover, some growth in fixed costs should be assumed.
The data in the table is illustrative, to make the leverage mechanism at work here easier to grasp. Even if a company’s profits don’t grow as in the example above (316 times), it’s clear that brand awareness can significantly improve a business’s financial metrics.
If you’d like to see how this simulation changes for other values, you can do so in this Google Sheet (make a copy to modify the values).
Look at column 5 as well. It shows what the results of a company without brand awareness would look like if it decided to spend more on advertising. Increasing advertising intensity produces an operating loss in this case — even though revenue remains far below what a strong brand achieves with lower ad spend.
Direct traffic
These calculations don’t include revenue from direct traffic.
Higher brand awareness means growth in direct traffic from users who, for example, type the site’s address straight into the browser. Add to that traffic from searches for the brand’s keywords, which should be treated on a par with direct traffic (rather than counted as performance results). Spontaneous direct traffic is a stream of additional income at practically no cost — so revenue and profit will be even higher.
In the example from the table above, e.g. 30% additional sales from direct traffic means revenue rises to 41.6 million and profit to 10.16 million.
The multi-leverage effect
This multiple leverage — resulting from higher CTR plus higher conversion values and rates — means a multiplication of sales-generating efficiency. It can mean a transformation from a company that generates losses or barely covers its costs into a profitable business — or from average profits into an extremely lucrative venture.
Of course, building a brand is a significant investment — and not only a capital one. To build the awareness and image that make a brand’s product an object of consumer desire, you need a well-thought-out communication strategy executed consistently and at the right scale — which, however, doesn’t boil down solely to big advertising budgets.
And it’s an investment that has to be made and amortized out of future profits.
The mechanisms described here have been presented in simplified form, and certainly not all the benefits of high brand awareness have been included — such as a potentially better negotiating position with suppliers and in the labor market — nor additional costs, e.g. fighting counterfeits.
And although these calculations don’t include the spending on building brand awareness, they clearly show that it’s an investment that can bring a multifold return.
Also read our article on how price optimization can increase the effectiveness of advertising campaigns.
