Advertising firms face crucial decisions this year

ARTICLE | February 21, 2024

Authored by RSM US LLP

Advertising firms reach an inflection point

Advertising firms have seen significant changes in the marketplace over the past year. But 2024 is shaping up to be the year in which some firms differentiate themselves—primarily through technological innovations—from others that fall behind.

Investing in technology

As we’ve said time and again, the firms that will rise are those investing in technology, whether in digital advertising or tools that deliver value-added services to their clients. According to Dentsu’s biannual CMO Navigator report, chief marketing officers (CMOs) who see digital transformation playing a bigger role in the marketing and advertising landscape are more likely to have experienced revenue growth in the last 12 months.

Optimistic outlook

All of the major firms are forecasting ad growth in 2024 that ranges from 4% to 7%. Three factors will drive this growth: major cyclical events such as the Olympics and the presidential election, digital evolution and economic stabilization.

As shown in the chart below, Olympic and presidential-election years have historically brought an associated bump in ad growth year over year.

Note that according to eMarketer, 2021 was a record year, and the advertising industry is highly unlikely to see this again. That large increase was because 2020 saw a contraction for the first time on record, due to the pandemic. Also, the shift of ad spending to streaming and social media platforms caused digital ad spending to exceed forecasts. In upcoming years, forecasters anticipate growth that aligns more with historical norms.

Advertising agencies’ revenue depends heavily on client investment in marketing budgets, which typically equal about 10% to 15% of sales, according to Bloomberg. In Olympic and presidential-election years, companies usually increase their marketing budgets to take advantage of the added exposure, which is why we anticipate increased advertising growth in 2024. However, advertising firms cannot assume this outcome.

The most successful firms will be those furthest along in their digital evolution. These firms lean into digital tools to make their employees more efficient and deliver value to their clients.

According to the Association of National Advertisers, these tools include AI-powered marketing, first-party data management and continued investments in streaming and connected TV (CTV).

Firms are utilizing a variety of AI tools to analyze large sets of data to identify patterns, trends and insights quickly and efficiently, allowing them to automate their marketing efforts and to personalize them in a meaningful way for the user. Some of these tools include programmatic ad-buying, which automates the buying and placement of digital ads, and predictive analytics, which provides forecasts that can better prepare firms for market changes.

First-party data is increasingly important heading into 2024, as privacy regulations continue to be enhanced and third-party web cookies continue their decline. Utilizing this data allows advertising firms to target their audience more accurately, driving more value for their customers.

We have previously discussed streaming and CTV. These markets are not going away anytime soon. As consumers continue to embrace streaming platforms and major players roll out ad-support tiers, CTV will be a powerful way for advertising firms to provide value.

The stabilization of the economy over the last several months is also a factor. With the odds of a recession lower than they were a year ago, and the continued decrease in interest rates and inflation, companies are feeling a sense of optimism.

According to Dentsu’s CMO Navigator report, CMOs are more optimistic about the direction of the economy over the next six to 12 months, with 46% saying they think there is a recession, down from the 67% who said this in the spring. The improved outlook lends itself to opportunities. These CMOs expect marketing budget increases, which bodes well for them in 2024.

What’s next?

While there is optimism about 2024, there are threats that can impede anticipated ad growth. According to GroupM, the top five global sellers of ads are not even advertising firms. Rather, they are technology companies. Each has increased its ad revenue by 25% on a compounded basis from 2016 to 2022, beating the nearly 10% pace of the total advertising market. This growth has come as advertisers sought out digital tools, specifically those leveraging AI, that can more specifically target individual customers.

In 2024, it is clear that advertising firms are at a critical juncture. Those investing in technology, embracing AI tools and leveraging first-party data are poised to separate themselves from the competition.