Up to $35 billion of co-op funds go unused every year. Wesley Young of the LSA takes a look at trends in the use of co-op funds, challenges and threats arising from digital media and opportunities to make co-op work for you.

According to a recently released white paper by the Local Search Association (LSA) on co-op advertising programs, titled, “Breaking through the Co-op Clutter,” estimates of unused or unclaimed co-op dollars range from $14 billion to $35 billion. Even on the low end of that range, that’s a lot of cash.

Estimates of the total co-op dollar amount available varies between $36 billion to $70 billion, which would place unclaimed value at between 39 and 50 percent.

What’s also revealing is how co-op dollars are being used. According to Brandmuscle’s State of Local Marketing report, 64 percent of all co-op spend is in traditional advertising such as newspapers, radio and direct mail. Yet while about the same number of businesses use digital advertising (68 percent) as traditional advertising (69 percent), digital advertising only accounts for 16 percent of co-op spend.

Source: Brandmuscle’s State of Local Marketing Report

A survey by Manta and LSA reported a similar gap. Sixty percent of businesses that used co-op applied it to print ads, while only 47 percent said they used print advertising. On the other hand, only 37 percent of businesses used co-op for digital advertising, even though 83 percent use digital.

This traditional/digital gap is likely a product of a system that lagged behind in making changes to media adoption and helps explain why so much money is left unused. David Sigler, director of training and co-op for Gatehouse Media stated, “When I started, fewer than 25 percent of manufacturers would support digital.” Yet over the last three years, 90 percent of the brands in LSA’s co-op database have implemented digital programs and reimbursement for advertising products such as paid search.

This evolution in the co-op space is having an impact beyond more media options for local affiliates. The large amount of money at stake and the drive for innovation that comes with digital technology has brought new eyes and new players to the marketplace. Talking about recent trends in the use of LSA’s Co-op Service Bureau, Neg Norton, president of LSA, observed, “We are seeing more clients that are taking a fresh look at co-op for both new opportunities and to guard against threats and competition created by brand driven demands.”

On the flip side, the late adoption of co-op reimbursement for digital ads meant that some digital pure play agencies and services never embraced co-op. Thus, there may be a whole generation of industry professionals and business owners who don’t really know what co-op is or understand how it works.

Below I take a look at the basics of co-op, threats existing co-op providers and users must be aware of and new opportunities that all users can benefit from.

What is co-op?

Co-op refers to programs by companies, typically large national brands, which bring exposure to the brand through advertising efforts by local or regional dealers who sell the branded product or service. These programs will typically contribute funds, reimburse costs or provide some other compensation for local advertising that includes the brand, subject to certain rules.

[pullquote]Co-op advertising refers to an agreement between a manufacturer and a retailer to share advertising costs in order to create brand name awareness with local consumers.[/pullquote]

For example, a local tire dealer might take out a half-page Yellow Pages ad and highlight in that ad that it carries Goodyear and Pirelli tires. The local tire dealer may receive as compensation from the brands a credit on its supply of tires from the manufacturer or a direct reimbursement of some or all of the ad cost if the ad is approved to meet certain criteria such as total size of the ad, size and location of the Goodyear logo in the ad, color specifications and the business category heading the ad appears in.

The co-op dollars are intended to benefit local dealers or businesses that advertise, but the value is certainly relevant for entities that help and support those businesses in marketing and advertising. Thus, co-op is relevant to agencies, publishers and media companies who work with local businesses in providing marketing services, designing marketing strategies, creating campaigns and buying advertising media.

The dual threat from the shift to digital

Even with traditional advertising, meeting brand requirements to qualify for receipt of co-op dollars was always a barrier. Common reasons agencies and/or businesses didn’t pursue co-op funds include not knowing what is available; inability to comply with complicated processes to apply for funds, get approved, and get paid; not having enough time to jump through all the hoops; and finding co-op advertising too rigid to fit local needs.

Evolving co-op to accommodate the shift to digital marketing has for many simply aggravated the struggles with co-op further. New forms of media such as search, display, social, mobile and email have created more rules surrounding fulfillment, proof of delivery and performance that must be understood and navigated to qualify for reimbursement.

Further, the expected real-time nature of online media today requires current and fresh content that again places more demand for creative than previously required for comparatively static traditional media.

For the new user, this complexity of the co-op process can present a daunting learning curve. To the existing co-op user, additional complexity exhausts resources and takes more time.

However, a new and rather unanticipated threat is arising that existing users must account and plan for. “Digital media is not just changing the co-op product. It’s also changing the way brands are asserting control over performance and ROI of their co-op payouts. Agencies that have relied on traditional reimbursements need to beware of these changes,” states Neg Norton. He identifies this new threat as follows:

• New players. A whole new class of technology companies and service providers has emerged to service brands, lured by the large accounts and dollars at stake.
• Pressure on channel partners to keep up. Brands themselves use and embrace digital marketing for their corporate brand marketing, but until recently, they have not always placed the same pressure on their channel partners, even though they rely heavily or even entirely on channel partners for sales. That is changing. For example, Ford now requires at least 50 percent of co-op funds to be spent on digital.
• Concerns about ROI. Local businesses aren’t the only ones who struggle with attributing ROI to less tangible digital media marketing. Brands find it more difficult to track as well and are creating some co-op program requirements to drive ROI behavior.
• Favor to specialized platforms. The new players are using technology and data to better meet brand demands, track co-op spend and measure ROI. And brands are responding by creating rules that favor trusted providers or platforms. For example, they are paying higher rates of reimbursement for use of specific platforms, similar to the way healthcare insurers favor network providers.

The consequence of this threat to traditional resellers of local media is that they now have new competitors for the ad dollars of some of their largest and best advertising accounts — those who resell big brand products. It is important for these resellers to develop programs that not only provide value to local merchants but also demonstrate to brands that they are high-quality, compliant vendors that have expertise in media, such as search and display, and are partners the brands can trust.

Opportunities for a co-op revolution

The weight of these challenges and competition to claim co-op dollars may seem so overwhelming that many are left feeling it’s simply not worth it. But let me remind you, there’s up to $70 billion at stake and $35 billion that’s being left unused.

Brandmuscle reports that 49 percent of local affiliates rely on co-op dollars to fund half or more of their entire marketing spend. Another 28 percent use co-op dollars to fund one quarter to one half of their marketing spend. In other words, local affiliates rely heavily on co-op dollars to pay for advertising. At a time when many local advertisers aren’t marketing more because of budget constrictions, co-op offers a direct solution.

The amount of money being left on the table and the number of local affiliates that don’t maximize or even utilize co-op at all means there is plenty of room to take advantage of opportunities. Here are a few of those opportunities:

1. Growth in search and display advertising

Growth in co-op use is in digital media, particularly in search, display advertising and email, as observed from reimbursements through the LSA Co-op Service Bureau. There is growth in mobile and social as well, albeit at a slower pace. As mentioned above, 90 percent of brand co-op programs expanded to cover digital media over the last three years, as tracked on LSA’s database.

With co-op reimbursements finally covering media types that most businesses use, co-op is more attractive and has greater utility to local businesses. As local businesses catch up and adapt to make use of co-op, they’ll have more money to spend on search and display advertising, which will lead to more sales and greater returns from marketing.

2. New and more business for agencies

Agencies that can leverage co-op to subsidize the cost of their services and media purchases will be attractive business partners to local businesses looking for help. Co-op can help beat the competition by lowering net cost while adding services.

Agencies can also demonstrate how rolling those savings into additional marketing will boost the local business’s bottom line. A report by IHS Global commissioned by the ANA and the Ad Coalition found that every $1 spent in advertising generates $8.78 in direct sales. The savvy marketing rep will convert the savings or reimbursement to a local dealer from co-op into buying more advertising.

3. Technology and service providers are making it easier

As with everything else, technology platforms in co-op aim to simplify and make the co-op experience more user-friendly. For example, LSA acquired Ad Builder and its co-op platform, Recas, earlier this year (now LSA Recas) to supplement its full-service offerings with a more self-serve automated platform. The other part of that acquisition was Creative Outlet, a service  to address the challenges of multi-format creative needs.

Comprehensive service providers such as LSA’s Co-op Service Bureau offer a complete suite of services to support every stage of navigating co-op programs (Disclosure: I work for LSA). Examples of services that marketers and agencies can receive support for include the following:

• identifying brand co-op opportunities;
• creating sales lists targeting businesses that could benefit from co-op;
• meeting qualification requirements for reimbursement;
• designing creatives and submitting them for brand-use approval;
• administering compliance with brand co-op programs;
• applying for and providing supporting documents for claims;
• tracking and collecting co-op benefits and payments; and
• creating and supporting pilot campaigns for co-op.

4. Evolution to simpler and scalable processes

The permutations of variables are incredibly complex when you consider a single marketer’s task of managing multiple clients, multiple brands, multiple forms of media and a process that has 10+ steps to administer. LSA has been working with brands to streamline the process to three or four steps to expedite putting those co-op dollars to use.

Larger media companies are also working with companies like LSA to design entire campaigns involving multimedia and cross-media that consolidate co-op approval and funding that is attractive for all parties in their efficiencies and scale.

Closing thoughts

Change is not easy. If you ever need an illustration for that anecdote, try $35 billion of unused co-op money. Many are already too busy learning about the latest, greatest marketing tech, managing existing portfolios, calling potential new customers and designing new content.

Yet it’s worth investing a little time in exploring what kind of change it would really take and what the payoff would be to add a co-op component to your campaigns. Brandeis Hall with the Radio Advertising Bureau observes, “Sellers underestimate the amount of money available and overestimate the amount of work it requires.”

You can start by taking a look at the 10 Best Practices for Improved Co-op Sales in LSA’s white paper and analyze how much change is necessary to bring in more co-op revenue. Check out various co-op platforms to see whether a little extra help might bring in big returns. Or consider whether to outsource the work to a full-service provider that can get you kick-started or administer a profitable co-op program for you. The opportunities are there… and the money is waiting.