Accountability and Return-On-Investment:
The Importance of Knowing "Which Half?"
By Rick Watrall
Once viewed more as art than science, marketers are
increasingly interested in measuring performance. Like
it or not, there is a new wave of accountability in
the world of marketing, and if you're not prepared,
you could get swept under it.
Companies are becoming increasingly concerned with ensuring
that all activities are profitable. As a result, each
dollar invested in marketing is being challenged to
demonstrate bottom line performance. New forms of marketing,
escalating ad costs and tools that purport to measure
marketing effectiveness have all contributed to the
pressure traditional media is facing to "prove
its worth."
John Wanamaker's old adage, "Half of the money
I spend on advertising is wasted; the trouble is, I
don't know which half," has been used to describe
the quest for marketing accountability.
However, this statement represents a starting point,
as the questions facing today's businesses are much
more complex. For example, marketers have begun to seek
answers to the ultimate question: "Just what is
the return on investment (ROI) of my activities?"
The problem is that most companies have difficulty in
measuring ROI for their marketing programs -- activities
that have a dynamic effect over time, such as advertising
and public relations, are particularly problematic.
Challenges in Measuring Marketing's Effectiveness
According to one major study, 68 percent of marketing
executives say they have difficulty measuring the ROI
of their marketing programs. The complexity surrounding
an accurate reading of the effects of numerous and interrelated
marketing activities is often cited as the primary reason
for these difficulties.
Traditional strategies for measuring marketing include
tracking studies, using test markets and in some cases,
more esoteric techniques such as split-cable tests as
seen in the packaged-goods industry. These techniques
are not always feasible for every product or service
category and do not provide complete results.
Strategies for measuring marketing have developed over
the last few years due to continuous improvements in
technology and emerging methodologies for providing
marketing accountability. World-class marketers have
been embracing these advanced analytics as a central
piece of their marketing planning and measurement processes.
These techniques enable cutting edge companies to precisely
measure the incremental profit driven by each marketing
initiative. Profits can then be compared to costs associated
with each activity in order to calculate each vehicle's
ROI.
Marketing Mix Models
Several powerful methodologies have emerged to help
marketers tackle the task of identifying their ROI.
One such tool is a multivariate statistical based tool
called Marketing Mix Models that measures marketing's
impact by analyzing changes in marketing activities
and linking them to fluctuations in key performance
metrics such as sales, profit, number of accounts or
leads.
The technique measures each marketing variable while
simultaneously quantifying the impact of external or
non-marketing factors such as the economy, competitive
events and even the weather.
The premise here is that a brand's success can be influenced
by many factors. In order to accurately measure the
effect of any one marketing element, all major drivers
need to be considered in the analysis. Tools such as
the Marketing Mix Models excel at understanding the
intricate dynamics of many variables operating concurrently,
the very environment most marketers face.
Through the application of statistical and other mathematical
algorithms to data relating to the brand's marketing
and sales processes, the marketer can see a full picture
of what is driving the business. Moreover, when done
correctly, the methodology allows accurate quantification
of both the immediate and long-term effect of each driver
and can tease apart the complex interactions among marketing
vehicles that sometimes exist.
Getting the Most Bang for Your Marketing Buck
When coupled with each activity's spending, these models
can be used to determine the ROI of each marketing driver.
Armed with this knowledge, the savvy marketer can then
make re-allocations of the marketing spend to optimize
the impact of the overall marketing plan.
When used correctly, these models can help get a greater
return from a company's marketing budget by re-allocating
from less to more efficient product lines, channels,
times of the year, markets, etc.
Marketing Accountability's Future
We are starting to see more and more companies use
these models as a central piece of their research and
planning process. In some cases, companies reevaluate
their marketing strategies based on insight they gained
from these analyses.
The adoption rate to date has been hindered for a number
of reasons. Generally, there is a low level of awareness
of these tools and the value they provide. Also, there
are very few firms that can successfully perform the
very difficult analytics that are required -- particularly
in more complex industries like financial services,
B2B and automotive.
Still, more and more companies are using these techniques
to provide, for the first time, a true accountability
of their marketing efforts. To date, brands in a variety
of industries including consumer-packaged goods, retail,
internet, telecommunications, financial services, quick-serve
restaurants, e-commerce, automotive and pharmaceuticals
have used them to measure the effects of their marketing
activity.
Some marketing professionals are initially hesitant
about the potential for their "baby to be called
ugly." More often than not, however, the findings
from these analyses support greater (not lower) levels
of overall marketing spend. For the most part, these
techniques have legitimized the use of marketing by
proving its value, something that up to this time has
been difficult to show.
Going forward, more and more companies will embrace
analytics. Their value in unlocking the true impact
of marketing is too powerful to ignore. For the marketer
seeking the Holy Grail, these techniques will put them
on the road to understanding just which half is working.
Rick Watrall is a partner with the Hudson River Group,
the premier supplier of customized advanced analytics
and marketing models operating in the United States,
Europe, Canada and Asia. He has helped pioneer the use
of Marketing Mix Models and was the first to apply them
commercially in a number of industries including automotive,
retail, telecommunications, quick-serve restaurants,
Internet, financial services, entertainment and e-commerce.
Discuss this topic with other IABC members at: www.iabc.com/memberspeak.
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