Marketing ROI is one of the most poorly understood concepts in media and marketing. Personally, I hate when we confuse sales with profitability. The same people who critique VC backed companies with poor unit economics are often more than willing to chase market share with little regard to unit economics if it’s a major brand. The hypocrisy is frankly galling.

The market has been chasing share over profitability for the better part of a decade. That’s about to dramatically change.

The why on this is pretty clear to me - in a low interest rate environment, most businesses have been willing to take on debt financing to finance poor unit economics. We’re about to get a rude shock and awakening on that front, I suspect across most corporate balance sheets.

Growth capital has made unit economics largely irrelevant

Over the last five years we’ve seen an influx of growth capital from well-backed VC companies and private equity groups combined with cheap debt for large corporate balance sheets. The essence of growth capital is it ignores unit economics. It prioritises acquiring Customers over making money. That, in turn, means companies compete more and more on a growth basis rather than an ROI basis.

That’s a problem.

Most companies who compete purely on growth will need either cheap capital or debt to function. Cheap capital comes in the form of equity arrangements. Debt comes in the form of interest payments.

Both of those have been ‘cheap’ to get for both startups and big corporates. The result has been a lot of skewed user economics, and potential overexposure to external funding markets for a lot of companies.

I’m not saying that you should prioritise ROI over growth by any means. But there’s a spectrum. Growth just shouldn’t be buying losses in the market long-term for your business. And there are lots of businesses that in the hyper-competitive media market have forgotten unit economics in acquisition.

Interest rates are a forcing function on growth capital

Growth capital to some degree is fuelled by either debt or equity. Availability of both is basically determined by the cost of money, which is directly and causatively linked to interest rates. That plays out in two ways:

• In inflationary markets, the interest rate often exceeds inflation to make the cost of money higher. That makes debt expensive, less available and less able to fuel poor unit economics.

• In inflationary markets, that higher interest rate makes bonds more attractive. That means money is sucked out of other investments, meaning private equity and capital markets have far less to invest in pure growth.

Both of these forcing functions basically mean less money is available. And the money that is available costs more. That convergency places a particular pressure on the media market, and is probably more unique to the media market than most.

Remember - during the GFC, we had declining interest rates for the most part. So this is the first real test in a long time of how the media market responds to rapid interest rate rises.

The biggest challenge to companies will be cost of growth capital

With interest rates rising, most businesses with high debt loads (which is a lot of companies) are going to have bigger obligations to fulfil. They may have debt on their balance sheet that is variable and badly forecasted, or may have forecasted access to capital that no longer exists.

Both will remove reams of cheap growth capital from the market.

Overall, that means businesses have less money to invest in media off their balance sheets. They’ll be spending that money either on interest bills or trying to sort out unit economics on Customers that were acquired in an overheated market. That’s true of many companies, but is particularly pertinent to services/subscription markets as well.

The flow on effect to the media market is huge

In auction-based media markets this will impact particularly hard. Advertising that is ‘easier’ to switch off, or has less Committed Media Agreements in its makeup, will be particularly affected. You’ll see rising interest rate bills forcing companies to re-assess how they pay down debt, and the most obvious short term costs to cut will be media spend.

After all, reducing staff costs places short term cash pressure typically, versus cutting off an external contract. This will compound throughout the media market.

For people buying media that’s beneficial. Less competition means lower prices and less noise to cut through. But it’s less so the effectiveness of the asset that is at play here - it’s proving that buying media is necessary, when interest rate bills and less supply of money is literally forcing structural financial changes through companies.

But for marketers, proving that case is also harder

As that cost base pressure comes through, we uncover the paradox of this time. And it’s why those who understand marketing economics are uniquely placed to win.

Sure, it might be a better time to invest in media. But it’s also a time in which companies are more acutely aware of their cost base. The challenge for most marketers, particularly those who have been buying growth over profit, is to show the business that this is now an excellent time to be buying profits off the market generally.

The key here is proof. Marketers and media buyers will need to prove bottom line contribution in order to win budget. In a more competitive market, proof and analytics become defensive measures as much as optimisation tools.

What’s next in the media market

Broadly, I’d say there are four big things I’m expecting to flow on from this:

1. The media market will go into a flat or deflationary cycle as growth capital dries up, at least on a CPM basis (maybe not on a total market basis).

2. The digital sector will be hit hardest simply because of the buying mechanism. Media channels with heavy weightings of Committed Media Agreements will survive a bit and weather the storm better.

3. Marketers will seize on low CPMs to try and strike. But they’ll struggle to do so without really strong MROI articulations, as Boards are fearful of cost of capital.

4. Those who have MROI analytics win, those who don’t lose market share correspondingly.

One thing: the above is a totally biased view said by someone who literally lives, breathes and sells MROI analytics. So there’s something to be said for my bias. But I think the substance of the argument makes sense, and that’s why I expect interest rates to have a correspondingly high impact on the media market across the globe.

This is a piece written by Mutiny's Henry Innis for his newsletter, Marketing economics.