How Facebook Helped Screw Up P&G's Ad Budget

A year ago, Procter & Gamble CEO Bob McDonald told Wall Street that a key part of his cost-savings program would include cutting 5,700 jobs and using more social media like Facebook and Google, which deliver "free" ad impressions.

He hoped to chop $1 billion in costs off P&G's massive $10 billion annual ad budget, the biggest on the planet.

A year later, and the experiment isn't going so well. McDonald actually managed to get rid of 6,250 jobs, most of them brand managers, according to his most recent presentation to Wall Street. That's the "good" news.

The bad news is that those "free" social media impressions have not cut $1 billion in costs from P&G's ad budget. Ad Age estimates P&G still spends nearly $10 billion a year. But while that number may be roughly flat, it's become less effective over the year.

Now, P&G's ad budget is set to rise again — and in part it's because Facebook ended the free ride for advertisers in the middle of last year.

McDonald and his CFO, Jon Moeller, both said the company had begun increasing paid marketing spending again, even to the extent of super-traditional door-to-door sales.

According to a Seeking Alpha transcript of the call, the pair were asked:

Michael Steib - Credit Suisse: Good morning. You made several references towards investing behind marketing spending, could you be a bit more specific please? What does that mean, does that mean that ad spend for example is up sequentially in absolute terms and as a percentage of sales?

Bob McDonald: Yes.

Jon Moeller: Yes.

Michael Steib - Credit Suisse: Okay.

Bob McDonald: It also means we are investing in things like sampling – door to door sampling, selling, things that will generate trial and awareness of the new innovations.

Ad Age noted that P&G's year has thus far left investors unimpressed. One analyst accused the company of fudging its numbers upward:

Dara Mohsenian - Morgan Stanley: Hi. Bob, I just wanted to focus on the top line. The two-year average organic sales growth decelerated in the quarter versus Q2 and last year despite the higher marketing and the greater innovation. And it looks like it was even rounded up to get to 3%. …

Ad Age notes that while P&G cut U.S. spending 5% last year to $2.8 billion, its rivals stepped in to the vacuum. L'Oreal increased spending 1.9% to 1.5 billion and the beauty category as a whole saw spending rise 5% to $6.8 billion.

So why did P&G's free-on-Facebook experiment fail? One reason is that Facebook changed the rules mid-year. It altered the news feed algorithm (which some refer to as "Edgerank") so a brand's page posts are only seen by about 15% of a brand's fans. If companies wanted to guarantee reaching their entire audience, they had to pay for ads inside Facebook.

The free ride — in which brands with big fan bases could reach a large percentage of them without paid media — was over.

P&G now also appears to be rediscovering the need for paid advertising.