Advertising will always have an artistic element. However, new entrants to the industry and many existing players are disrupting the traditional advertising model, primarily through mobile phone and digital applications, supported by big data and predictive analytics. These new market entrants are using advertising science to directly engage the consumer. The new advertising disrupters have large research and development budgets and leverage R&D tax credits to support the technology-based charge.
Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:
Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years. As of this writing, it is anticipated that the R&D Tax Credit will be extended, perhaps with additional tax incentives for startups.
The advertising industry has long relied on data to make decisions and measure the effectiveness of campaigns. As more data collection methods have become available, many firms have begun focusing on 'Big Data.' Big Data is defined as large data sets that are too large and complex to be analyzed by conventional means.
Many advertisers, both large and small, have departments dedicated to Big Data analysis, often headed by a Director of Analytics. These professionals apply advanced quantitative concepts to their data, including multivariate analysis and sophisticated algorithms. These individuals tend to be highly educated in technical fields such as mathematics and software engineering.
Business intelligence is thus now being supported to a much more sophisticated degree by scientific discovery, thanks to a new class of staff who are the scientists of the business world. When a firm engages in Big Data analysis, it brings an unprecedented scientific rigor to its decision making. The basic principles of the scientific method, which include hypothesizing and experimentation, are fundamental to the R&D tax credit.
A 2013 Infogroup Targeting Solutions survey of more than 400 marketing professionals found that 88% of marketers surveyed had plans to invest in big data solutions within the next five years, with 54% having already done so. The survey also found that the most significant barrier preventing companies from utilizing big data was budget limitations. However, companies can use the R&D Credit to ease the financial costs of investing in data related activities, as R&D related wages, contract research expenses, supplies, and software costs can qualify for the credit.
For years, firms have developed models to try to reflect human behavior. Added computing power and data processing capabilities continue to support modeling of increasing complexity, allowing analysts to consider more variables and choices in their analyses and to construct models with subcomponents that provide greater precision within one's results.
Predictive analytics can help advertisers estimate key data items, including which websites a consumer is likely to frequent, which group is likely to be responsive to a particular advertisement, the estimated lifetime value of a customer, and customer retention rates. These models and analyses can factor in the decision making process for advertisers by helping them determine which ads to show to a particular consumer, which special offers to offer to that consumer, and the frequency of those offers and advertisements.
Numerous studies have been performed to show the effectiveness of using predictive analytics in advertising, A recent AberdeenGroup study estimated that organizations that use predictive analytics are nearly twice as likely to identify high-value customers and make the appropriate offers to that segment as organizations that don't. As the effectiveness and efficiency of predictive analytics becomes more evident, companies and industries are increasingly turning their focus towards these data collection and analysis methods to better understand consumer behavior. It is estimated that the predictive analytics market will reach $6.5 billion by 2019, with the retail, insurance, financial services, pharmaceutical, and telecom industries seen as the key drivers for growth in the upcoming years.
Predictive analytics has become widespread on the internet, as companies are monitoring consumer behavior online in hopes of better understanding shopping habits and the ways consumers use the internet to shop. Notable examples of online predictive analytics include:
It is estimated that global ad spending will increase by approximately 20% from 2014 to 2018, with a significant amount of that growth coming from projected increases in digital and mobile ads. Tech-giants Google and Facebook see this as a potential opportunity, as both are building internal advertising agencies.8 Facebook's internal agency, called The Creative Shop, employs 70 staff and has a presence in 14 countries.9 The company has also announced plans to develop a mobile-ad network that can be used in conjunction with the large amount of data it collects from users. Approximately 50% of Facebook revenues are from mobile advertising, and it is believed that this move will give the company more bargaining power in its future revenue-sharing deals with publishers.10 Google's The Zoo employs approximately 100 staff and works with brands to effectively utilize data collected from Google's search engine and YouTube to effectively target consumers.
SOURCE: Financial Times; Available at http://www.ft.com/cms/s/0/440c1f46-bfdc-11e3-9513-00144feabdc0.html#axzz2zdfjGETg
Other notable companies that have recently announced plans to enter in or expand operations in the field include Twitter (which recently acquired MoPub, the world's largest mobile ad server for $350M), AdRoll (a retargeting advertising platform company which recently received $70M in venture capital funding to expand into mobile advertising), and CPXi (a digital ad company which received $30M in funding). These companies, among others, have positioned themselves to take a bite out of the future industry growth.
Research and development is not a term that in the past was often associated with the advertising industry. Technological advances in recent years have changed the way the industry works, with big data and predictive analytics leading the way. Companies that engage in these activities are well positioned to take advantage of substantial research and development tax credits.
Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.
Raymond Kumar is a CPA and Tax Manager with R&D Tax Savers.
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