In the second part of their article on measuring return on marketing investment, Karim Rammal, Amin Rammal and Mansoor Ali address the issue of acquiring the right mindset.
The sole purpose of marketing is to get more people to buy more of your product, more often, for more money. If your marketing is not delivering consumers to the cash register with their wallets in their hands to buy your product, don’t do it.” Sergio Zyman, Former Chief Marketing Officer, Coca-Cola, author of The End of Marketing as we Know it.
Every business has a strong focus on improving sales and profits. Businesses are also interested in measuring success to improve their ‘recipe’ of doing business – eventually leading to more happiness for the shareholders. Marketing communication is at the core of this ‘recipe’, especially for those who are selling directly to consumers. At some point in history, the challenges of measuring the actual sales driven by specific advertising and brand marketing expenditures, shifted measurement criteria – such as awareness, perception – and purchase intention came to the forefront.
“Marketing placed such strong emphasis on creative and entertainment value, which would score high on awareness and perceptions, that it lost touch with its primary purpose of generating profits. The removal of a direct connection between marketing initiatives and profits led to a corporate mentality that marketing was more of an expense than an investment.” (Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability, by James D. Lenskold.)
The story of measuring marketing investments in
Our brand managers are regularly linking their own, or especially their agency’s, key-performance-indicators (KPIs) to soft attributes like consumer perceptions, awareness, purchase intent and so on and so forth. Today’s marketing director, who was a brand manager some years ago, followed the same soft KPIs in his time, and our local brand management industry has evolved in this manner, which is similar to the global evolution.
During the last decade, brand teams in developed nations have managed to cultivate an ecosystem around measuring marketing investments through focus on return on marketing investment (ROMI). In
Today, building a ‘ROMI mindset’ is a huge opportunity available to all marketing teams as we enter the new age of competition – facilitated by the digital information market. This age will demand more transparency in the management systems, which will lead to more accountability for every decision and action. If we break it down to bits and bytes, then every marketing action ranging from delivering a speech at an industry event to a satellite TV spot on a primetime news show costs money. Do we expense this money? Or do we capitalise it as an investment into brand development (similar to R&D investment)? These answers will take some time to settle down, but in order to embrace the wave of transparency which is building up in these digital times, we believe there is a need to adapt to the ROMI mindset.
The ROMI mindset as we understand it, is the ‘will’ to comprehend and quantify each marketing action into sales value. It might take an organisation five to 10 years to accurately quantify the returns of various combinations and permutations of marketing investments. However, the ‘will’ to reach there should exist today.
Having this will is what we understand as having a ‘ROMI mindset’. This mindset is likely to give way to a company culture which can sustain the virtuous cycle of innovation; a cycle of innovation that can lead to intelligence that can be used in strategic and tactical development of marketing initiatives.
“Marketers rely on all forms of intelligence: customer needs, market conditions, competitive activities, and campaign performance history to improve marketing effectiveness. ROMI projections can serve as intelligence into the profit potential. It provides insight into the value that an initiative, strategy, or investment can deliver.” (Marketing ROI)
If we delve deeper into ROMI we understand that clearly the return is dependent on the objective of the investment which dictates the time horizon over which it will be measured and attributed in terms of sales. A product launch or relaunch will tend to have a much longer time horizon than a promotion to drive down inventory. The longer time horizon increases the chances of extraneous factors impacting the margin of error in calculating the return and hence requires an appropriate methodology to control for it. Similarly, major marketing investments also complicate the allocation of cost that would be assigned to the investment.
At a very rudimentary level, ROMI = ((Incremental Sales Volume x Contribution Margin)/Investment). Each one of the three components is a function of several variables and requires its own assumptions and methodologies. In this article, we will discuss the first component which is incremental sales. There are several methodologies that can be employed from basic to more complex statistical techniques. We will highlight a couple to illustrate this point.
A simple model often used in direct marketing and online measurement is the ‘treated and control’ methodology. It requires keeping a control cell which acts as a baseline. The treated cell or cells are developed with various stimuli such as different offers, creative messaging or communication channels. The sales rates from the treated cells are then compared to the control and any statistically significant difference is considered to be incremental. While easy to set up and calculate, this methodology has its limitations, such as it only allows a limited number of variables to be tested at a time.
A more complex technique is based on experimental design which uses statistical modelling based on combinations of variables. Therefore, hundreds or even more variables can be tested at a time. This technique is also used in clinical trials to look at the interaction of chemicals and their effects on subjects. Computing power and applications such as Statistical Analysis Software (SAS) enables statistical techniques such as logistic regression to compute large data sets with many variables. However, even with mathematical modelling, business judgment is critical to implement such techniques and assess the output.
Marketers who can embrace the key principles of ROMI have much to gain as it makes the entire marketing process very simple – it comes down to how much more money you end up with (your return) compared to what you invested. Measuring ROMI does have its challenges as confirmed by the high percentage of marketing executives reporting difficulties in the Accenture Survey Report mentioned by James D. Lenskold in his book Marketing ROI. The major challenges that face companies working toward more accurate and useful ROMI measurements are:
- Generating reliable future value projections
- Getting access to data
- Standardising measurements, values and practices
- Establishing cost effective measurement processes
- Establishing valid control groups
- Matching results back to the appropriate marketing initiative in multi-channel marketing environments
- Allocating expense
- Understanding the residual value (or impact of ad-stock)
- Organisational barriers:
Rewards and recognition
Lack of financial skills
Truth in results
Budget allocation power
Reliance on media agencies
Fear of change
The current age of marketing is bringing companies closer to the individual customer and each relationship must be managed to maximise customer profitability. The process of settling marketing budgets based on previous year budgets can be considered inefficient and outdated.
“The need now is for every department, and organisations as a whole to work smarter and marketing must step up to the plate and motivate change.” (Marketing ROI)
Karim Rammal is President, Unicorn Consulting Inc.
NB: In writing this article, the authors have sought the permission of Mr. James D. Lenskold to quote from his book – Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability.