Marketers must learn to evaluate ROI effectiveness Tony Davis & Adam Driussi
There’s talk in marketing circles about the financial accountability of what we do. Conferences are focused on it, press articles feature it, and boardrooms are demanding it. For too long, marketers have been analysing the results of their campaign spend in qualitative, non-financial terms
In learning to speak the language of finance, marketers have a journey ahead to link the marketing mix with quantitative effectiveness measures to demonstrate both an improvement in short-term profits and the creation of long-term shareholder value.
We need some answers.
The London Business School recently held the International Marketing Metrics conference where Professor Tim Ambler challenged marketers to decide whether they were “Wimps or Warriors”. In short, will marketers continue to allow their boardroom influence to shrink, due to a lack of financial accountability?
The conference was awash with challenges to marketers to learn the language of finance and to deliver results measurable in cash terms.
Return on investment (ROI) is just as topical in Australia. The recent publication of the Australian Marketing Institute’s paper ‘What Value Marketing?’ offers a framework for more consistent measurement. It acknowledges that boards are interested in creating shareholder value and that a link needs to be found to marketers’ short-term, all too often qualitative, measures.
Marketers have been preoccupied with backward-looking metrics, rarely converting our thinking into ways of managing margins, improving future cash flows and delivering shareholder returns. Even when we do stray beyond the awareness measures of our brand spend into measuring the cost per acquisition for our DM, it is rare that we get into the guts of true ROI.
In the Biblical parable about ROI, a nobleman challenges his servants to make something of the talents—the money—that he invested with them. After some time, the results were presented: He who had received five talents came and brought another five talents, saying “Lord, behold, I have gained beside them five talents more”.
Note here that the servant did not come back with the results of the latest wave in brand tracking, showing a small uplift in awareness; he came back with a commendable return on investment measured in cash terms. The nobleman’s response: “Well done good and faithful servant…I will make thee ruler over many things”.
Optimising returns
In order to really understand ROI, our thinking must expand beyond measuring the effect of spend—money already spent—into a more forensic understanding of the drivers of results to create optimal returns in the future.
What will customers do in the short term without further marketing investment? Which customer behaviours drive revenue? Where should we make marketing investments to drive those specific behaviours? These questions can be answered only by taking a more analytical approach to measuring ROI.
Perhaps the process for this approach is as follows:
Establish baseline sales
Understand what level of sales would be made without further activity: the foundation beyond which we can measure performance improvements. We need to understand the behaviour of customers prior to our marketing spend to better target that spend in areas that make the most difference and ensure the results are trulyincremental.
Isolate value-contributing behaviours
By identifying the customer behaviours that drive revenue, we can consider which behaviours we might wish to stimulate from which customers. This will always be based on previously observed behaviour—not just age and income—and constructing models to predict similar behaviour in the future.
Plan and execute the marketing activity
With an understanding of revenue drivers, we can vary the elements of the marketing mix to test how we can influence customer behaviour. We can also calculate the impact of such behaviour on margins and cash flows. As a result, our planning and forecasting will become more robust once we are able to empirically determine the drivers of customer behaviour. For example, we can measure the impact of incremental spend on creating incremental sales. This leads to a measure of our ‘ability to influence’ customers with our marketing, bringing an improvement in immediate results and a better understanding of future behaviour.
Measure the results
Putting it all together, we will quickly isolate difference between the components of the mix which drive customer transactions and those which drive long-term brand loyalty. We must analyse the influence of strategies such as advertising investment, price discounting and product tailoring, both on generating response and on delivering profit.
The Challenge
Getting smarter about the way we work is not a simple challenge, but by taking a more forensic approach, marketers will be able to develop plans which deliver a balance of volume and value—indeed they will be in the driver’s seat to identify the optimal objectives and business targets.
But many marketers may prefer the relatively easy life of Tim Ambler’s wimp…churning out promotions to deliver volume targets alone.
It is the warriors that will get stuck into their data and learn how incremental marketing spend delivers incremental sales and how much thisincreases shareholder value.
Such a challenge requires venturing into the often complex world of customer data—beyond the simplistic overlays and into a forensic investigation. Also it will require a greater familiarity with the world of the CFO and perspective of the board, perhaps even learning a new language—finance?
Face the future of marketing measurement and accountability. After all the other option is pretty unpalatable. As in the case of the nobleman’s response to the servant who delivered no tangible returns: “Cast ye the unprofitable servant into outer darkness: where there shall be weeping and gnashing of teeth”.
Tony Davis and Adam Driussi are directors of Quantium, a customer analytics agency using actuarial techniques in managing and measuring marketing performance, including advanced pricing strategies.
