How to Approach Marketing ROI
Measuring return on investment (ROI) in marketing is an important and complicated issue. As with any other investment, businesses want to know they are getting value and increasing their bottom line. However, there are some fundamental differences between marketing and financial investments.
Marketing ROI isn’t straightforward. Different companies have different needs. Some sell expensive durable goods that are bought infrequently. Others sell packaged goods that can fly off the shelves. Still others sell business services with high acquisition costs and need to build long term relationships; the initial sale isn’t worth much. In fact new customers often have negative initial economic value.
So it is not surprising that evaluating ROI is confusing. Approaches can vary from an assistant with an excel sheet to sophisiticated software and high priced consultants.
The most important thing to remember about Marketing ROI is that there is no perfect formula. You have to choose the method that best fits your needs. A good place to start is to clarify what you want to achieve.
Company Strategy
How a business approaches ROI will depend a great deal on company strategy. Harvard professor Michael Porter lists three types of strategies:
Cost Leadership: Companies with a cost leadership strategy tend to be more focused on direct response advertising, so the ROI picture is somewhat clearer. Direct Response is fairly easy to measure.
Focus: Companies that focus on a particular market segment usually have limited marketing budgets. They are either regionally focused or cater to a particular type of customer. The marketing ROI equation is somewhat simplified for companies with a focused strategy. They don’t have that much going on.
Differentiation: Companies with differentiation strategies are the most marketing intensive. Their success depends on consumers believing that they offer something better than their competitors do.
Brands that seek to differentiate themselves need to build passion and desire for their brand. This strategy can be immensely profitable because consumers are willing to pay a premium for brands that they love and trust. Strong brands also tend to have lower acquisition costs.
For companies with a differentiation strategy, marketing ROI doesn’t just involve sales, but the perception of their brand that leads to sales. They track not only brand awareness, but also “brand attributes” – what people think about their brand. For instance, McDonald’s tracks attributes such as perception of value, quality, taste, “good for kids”, etc.
Marketing ROI for a differentiation strategy is complicated further if it involves a durable good with a long product cycle (i.e. cars, home appliances, etc.). Consumers who desire their product might be years away from a purchase decision.
Four Basic Approaches to Marketing ROI
Timelines: Making a timeline of marketing actions can be very useful. You can see what you did, when you did it and track response, such as sales, inquiries to the call center, etc. By comparing marketing inputs and outputs you can get a sense of what drives sales. If you can identify a correlation, the math is pretty straightforward and you can get a good idea of what drives your ROI.
While the approach has the virtue of simplicity, it also has its problems. For instance, a timeline only shows when the action happened, not how intense or how long it was. Furthermore, if there is a lot of activity, the timeline becomes unreadable and loses the virtue of clarity.
Grids: Because of the limitations of timelines, many marketers use grids. They are very easy to make in excel and you can overlay activities of different durations.
Moreover, additional information can be inserted into the grid. For instance, you can show that you bought 200 GRP’s of TV per week for 5 weeks and also ten monthly magazine insertions and 1 million banner impressions per week for six weeks. Grids retain much of the simplicity of timelines and contain much more information and flexibility.
However, grids too have their drawbacks. How should intensity be measured? For TV, is GRP the right metric to use, or should it be coverage at a discreet frequency or share of spend in the category? For internet, should banner shows be in the grid? Clicks? Registrations?
Grids also can also get cluttered and confusing. For some very active brands, they become enormous and unwieldy.
Tracking and Two-Variable Modeling: Another approach is to track all activity using a variety of metrics. With tracking, you lose the visual simplicity of grids, but you can include as much data as you want.
You don’t have to guess beforehand what you think will be most relevant. After tracking for six months or so, you should have enough data to build two-variable econometric models. (For more on models, see Less Numbers – More Math).
Two variable models require some mathematical sophistication, but can be done in excel. No expensive software is required. There are some subjective decisions to be made about which model to fit, but common sense goes a long way. Usually the simplest model is best.
Once you find a good model, you can derive the equation and significantly increase efficiency through better planning. However, two variable modeling can be very labor intensive. You need to try a number of variants before you find one that fits well enough to be useful.
Unfortunately, if there is too much market activity, it will be hard to find a two-variable model that explains more than 50% of the variation in the data. A model that offers more doubt than certainty is of questionable value.
Multivariate Modeling: Some of the world’s premier marketers use multivariate modeling. While prohibitively expensive for most companies, you can include a variety of marketing and economic factors and get much better models than you can using only two-variables.
However, multivariate models are extremely complex. PhD level mathematicians need to be contracted. Moreover, designing a good model is as much art as it is science. Those that build the model have to understand the business and the business people who use the model need some understanding of how it works.
For a successful multivariate effort, the rare combination of high level quantitative skills and street level business acumen is essential. That’s difficult to achieve.
Furthermore, even the best models will fail at some point. As markets evolve, success factors change. The world is a messy place.
Beware of Easy Answers
Often, the story is more complicated than it seems at first. Years ago, I had a magazine consulting client who was experiencing a fall in copy sales. Because there were no new launches in their category and they had no change in their marketing strategy they assumed that their product needed to be reworked.
It turned out that, although they hadn’t altered their marketing intensity, competitive activity had doubled. Comparatively, my client’s marketing activity had dropped in half. By raising their marketing budget to meet the competition, they were able to reverse the slide and maintain the integrity of their product.
It’s because of the complexities described above that ROI is probably the most difficult and contentious issue in the marketing arena today. There are many ways to get it wrong and very few ways to get it right.
Some Common Sense ROI Rules to Follow
Keep it as simple as you can: One core principle of econometrics is to always use the simplest model that explains the data adequately. If you’re getting reasonably good insight with a simple process, there is no point in trying to be more sophisticated.
Define your goals: No ROI process can explain everything. While a perfume brand might want to focus on consumer perception a retail business will focus more on direct sales. You can’t optimize your marketing strategy for everything. Managing a business is about making choices.
Check your work: Once you believe that you have identified a factor that drives your marketing performance, try to get the same result using a different method. When evaluating marketing ROI, it’s easy to get false positives.
Avoid bias: If at all possible, people who are implementing campaigns shouldn’t be responsible for evaluating them. Suppliers, for the most part, shouldn’t even bother with ROI. Unless there is a very integrated relationship with the client the analysis will be ignored at best. At worst, it can be selectively used against you.
Eventually your model will fail: Even the best models are based on past experience and any bearing on future performance is tentative. A failed model shouldn’t necessarily be seen as a bad thing. It is a signal that the basis of competition has changed, and that is very important for a marketer to know.
I hope this has been helpful. I would love to hear your comments.
– Greg
As usual, a great post! But it all of this is a aimed at people using Outbound Marketing techniques such as direct mail. I have been writing a series of posts over at http://www.inbound-marketing-automation.ca/blog/ about how “Outbound Marketing is Dead” because it just doesn’t seem to work much anymore. We’re using Inbound Marketing in its place, and when you go down that road, you have to automate a bunch of stuff to cope with the increased volumes of leads, prospects and data. But the good news about it all, is that Inbound Marketing Automation calculates the Return on Marketing Investment (either ROMI, or plain ROI, too), in real time, as your campaigns unfold. No more guess work, no more complex calculations, just instant, ongoing and accurate data. For more on how it all works, check out our white paper, 7 Ways to Boost Profits using Sales and Marketing Automation. http://www.inbound-marketing-automation.ca/blog/2009/08/04/seven-ways-to-boost-profits-using-sama/
Eric,
Most people aren’t familiar with the term “Inbound Marketing” so I can assure you that conventional marketing is alive and well. (For those who aren’t, Inbound Marketing is a growing area where marketers use various techniques to get consumers to participate rather than broadcasting a message to them.)
In any case, I don’t think that the techniques are only for “outbound” strategies. For instance, you might want to track you corporate blog audience and your social activity while also tracking new businesses inquires and retention rates. At the same time you might want to make keep track of when corporate conferences were held.
You could then see if you could derive a relationship between online activity and offline results while at the same time do an outlier analysis to try to evaluate the efficacy of your conferences.
– Greg
Greg;
Good point! Thanks. I guess I’m something of an Inbound bigot. I see what you’re saying and understand that it would (a) work, and (b) be useful information to gather. But it does seem to be complex and require a fair amount of work versus using an Inbound Automation suite to achieve both more leads and instant ROMI calcs.
Eric.
Eric,
I think everybody advocates for their own passion, but I think that it’s important to remember that marketing services is a $400 billion market in the US, so that leaves room for a lot of things that different people are advocating:-))
As I said in the article, you should use the simplest model that gives you the understanding you need. However, as any business gets more successful it gets more complex so it’s good to familiar with at least one degree of complexity higher than you actually require.
– Greg
Marketing as an investment is a dubious proposition to me. Marketing is an expense. I recommend to new businesses that they only invest in measurable response marketing/sales. Also, they need to be able to determine a “cost of widget sold” figure as the bottom line. Sometimes it is difficult to predict, but some attempt has to be made, if only using educated guesses. That figure ought to be somewhere between 5%-10% for most businesses.
Tom,
I see where you’re coming from, but in that case it would be an optional expense and nobody should expect a return. I don’t think that reflects reality. Advertisers certainly do expect a return or they wouldn’t do it. Increasingly, they seek to optimize that return.
I think the situation is analogous to financial derivatives. 30 years ago, who would invest in a spread? In volatility?
– Greg
Greg:
Excellent post. You quite rightly emphasize the complexities involved in ROI measurement of marketing activities. That is quite often overlooked these days in the mad rush to show ROI of social media, for instance. Placing the ongoing ROI discussion into context is critical, in my view…
I agree with Greg that ROI should be determined for marketing activities and could be a mix of profit / economic value of customers over their estimated lifecycle and other attributes such as brand value and recognition.
There also has to be factoring in of the changing nature of business itself to being service oriented from a product orientation. Putting a value to customer relationships should also include word of mouth /referrals from customers.
Stephen,
Thanks. Your views are much appreciated. I added a link to your Social Media ROI post. I hope that’s okay.
– Greg
Thanks, Uday.
I agree 100%, although tracking word of mouth is notoriously difficult.
– Greg
This was a great article, and one of the most important aspects is the inclusion of ‘Common Sense’ for ROIs. As a consultant who specializes in multivariate modelling to help brands and business grow, it becomes increasingly important to be sure that an ROI is in line with goals, and I’m very glad to see this point on your list!
Additionally it’s also important to look at the effectivenes of a campaign. If the ROI increases while the effectiveness declines, you are simply having less effective TV (or other marketing activity) for less spend, which may not be sustainable and lead a brand in the wrong direction.
Katie,
Thanks. I think it’s important to track multiple KPI’s. For instance, you can track multiple target groups in TV, not just the buying target. Often you will find that as one KPI becomes irrelevant another success factor can emerge.
– Greg
Hi Greg,
I enjoyed your post and wanted to tell you about a couple of my measurement techniques and successes.
I use marketing measurement and ROI monitoring to help ensure spend is an investment, not just an expense. The results feed back into the marketing plan, contributing to continual improvement and ROI growth.
I typically base evaluation on fairly traditional, tactical measures undertaken across the marketing mix. I draw these together to form the “Big Picture” with the real value delivered through KPI BENCHMARKING.
I benchmark by timeline (2009 better perform better than 2008!) and, most importantly, against competitors. Qualitative PR evaluation in particular has enabled me to leverage competitive activity and actually benefit from someone else’s investment; exceptionally valuable for SMEs.
Lindsey,
Sounds like your process makes a lot of sense. Good for you!
– Greg
Greg.
Absolutely true.
However as a risk management consultant (and this is also true for the multitrillion $ consulting, financial and other services industries), I get referrals from existing clients which is the best way to get new business. So in the econcomic value analysis or revenue / profit potential of my existing clients, if I dont capture the potential value of these clients as a referral source to get new business, I think I am not capturing their value correctly which in turn will skew the marketing ROI analyses.
Uday,
I fully agree word-of-mouth is important, just difficult to track on a large scale.
– Greg
Greg. You are absolutley correct.
Do you think measures like Net Promoter Score allow such measurement of customer likely to promote your business?
Would love to get your thoughts on that.
Uday,
I’m sorry to say I’m not familiar with Net Promoter Score. I took a quick look and it looks like it’s not exactly a bad idea, but not very impressive either.
If you were researching this often enough to get enough of a sample for a decent trend why would you only ask them one question? If your customers hated you, would it tell you why?
Many brand tracking studies actually do include the “would you recommend to a friend” question so I don’t get what’s new here.
– Greg
Excellent post. Marketing ROI is something that small business owners seem to struggle with during signs of a growth phase. Particularly because they’ve had to be very creative with their budgeting during start-up, then when they experience a level of growth they become overwhelmed with the question of effectively managing a larger marketing budget. It’s always difficult to spend your hard-earned money on something that’s tough to measure like marketing. But your post definitely helps put the process into perspective! Thanks, our clients will love this.
Jay,
Thanks and I appreciate the link on your site.
– Greg
Greg,
Good post. Quite often marketers try to eat the marketing ROI elephant all in one bite and that is difficult. It is much easier to do it one bite at a time.
Guy,
Thanks. Although I don’t recommend eating elephants, whole or in parts:-))
– Greg
Greg, I couldn’t agree more with several of the points that you made regarding marketintg ROI. It needs to be done, but the devil is certainly in the implementation. I have yet to work for a firm that does a really good job in this area, and I have worked for some large companies, but also some small start-ups.
Due to the complexity in truly trying to capture the ROI of your marketing, you will see many companies shy away from any rigorous analysis. The investment in time, money and people will scare many away, especially smaller businesses with much smaller budgets. You mentioned that people using the more complex models need to gain an understanding of them, so they can better appreciate the results. Unfortunately, with this level of understanding required, I am seeing people avoid these types of tools, simply because they want to avoid the learning curve, or more importantly, they don’t want to undertake the burden of explaining to an exec how the numbers were derived, if asked. Therefore, there are people relegating their ROI analysis to simple directional or trend information. Quite often you will hear things such as ‘making the needle move’. Positive feedback makes the needle go up, and negative goes down.
It is unfortunate to see this, but as you clearly articulated, the marketing ROI analysis has its many challenges. I enjoyed reading your post.
Ryck,
Great points! Thanks.
Have a nice weekend.
– Greg
I think this is a fundamentally flawed statement, and one that clients often make.
If people used the term ‘expense’ as defined to be:
something expended to secure a benefit or bring about a result
Then I might be inclined to agree. But most people use the term ‘expense’ defined as:
a financial burden or outlay
I see marketing as an investment because this really sums up its function much more succinctly:
the outlay of money usually for income or profit
While the definitions of the terms overlap, the connotation certainly matters. Marketing is definitely an expenditure that depending on who you invest with can return varying results. There is no question that marketing dollars do increase income and profit for companies that invest wisely in it. This goes straight to the heart of Greg’s post about ways to measure that ROI.
Treating marketing as a pure expense that has no possibility to increase revenue is a mistake, and exactly the kind of adversarial relationship that businesses have with marketing that can be difficult to overcome. I for one do not want to internalize or condone that message.
Greg,
Spreadsheet warriors can distort marketing & sales objectives! Is this the problem or the solution when measuring marketing ROI?
Corporate communications, marketing communications, outbound marketing, inbound marketing, etc. (in my humble experience) are currently handicapped by decades of being positioned as an art (a.k.a. ‘creative’) and not science (a.k.a. a ‘value driven’ discipline).
While B2B, B2C and C2B communications all produce a different ROI – markets also dictate different ROI from marketing. A campaign advertising soda will clearly require a different ROI from one promoting a nuclear power plant!
I agree that “businesses want to know they are getting value” – all business activity has an ROI. Engineering, manufacturing, administration, customer service, etc. all contribute an ROI. Even the management process of measuring ROI has an ROI. What makes one company different from another is ‘if and how’ the management team chooses to use ROI information. But ROI analysis can never be a good substitute for experience and judgment.
Reading the last four paragraphs has an ROI – but how many of us think to measure it?
Your comments are always appreciated.
Warren,
Thanks for your input.
– Greg