Unravelling ROI

Everyone could be a great marketer, if it was easy to measure the ROI of marketing

investments.

Greatness is not for everyone because, even when thorough analysis has been done, a

large part still depends on judgement, experience, vision and creativity. It is difficult

to isolate the factors and influences, there is no formula for success.

On top of that, the marketing game is rapidly and surely changing to increased

fragmentation on the consumer side and increased choice of media to involve

consumers on the media side, making it even harder to assess the effect of each

component.

Despite this complexity, marketers are increasingly being asked to provide the ROI of

their activities. The time that millions of dollars were invested behind a TVC, just

because the MD said so are over – for most companies.

However, ROI of marketing spend is not just an issue of the marketer, to measure the

ROI of marketing the whole company must be behind it.

1. Role and importance of marketing in the company: What is it that marketing

is set out to do? And to what extend is the marketer is in the driver’s seat of his

own results?

Firstly, the discussion about ROI is diffused. Most professionals will agree that

securing payback and improving the ROI of the company’s investments and assets is

a primarily a marketing job. It’s the marketers job to create higher revenues and

thereby increase the profits. However, when they speak of ROI measurement, it is

mostly related to measuring the return of investments of advertising and promotions, a

much more tactical definition.

Measuring ROI and defining the appropriate metrics, starts with clarifying the role

and importance of marketing to the company.

There are two reasons why marketers could say: ”Don’t ask me for ROI, I have no

control over it”. Firstly, the way global, regional and local allocation of roles and

responsibilities are allocated. Locally marketers may feel they’re merely executional,

while globally marketers may be in the drivers’ seat. Secondly, and more

fundamentally: is the organization truly market driven with marketing driving

business strategy or is the role of marketing seen as keepers of the A&P budget? Is

marketing building the stage for success (positioning, product development and

strategy) or is marketing seen as “making sure the sales people can sell”. Is marketing

seen as an investment or a cost. Paradoxically, in the second scenario, the marketer

may be under more pressure to prove the ROI of his efforts, while he has actually less

control.

Clearly, measuring the contribution of marketing on the company’s ROI requires

different metrics as measuring the ROI of the A&P investment.

2. Align the rest of the company: systems and processes should support ROI

measurement

Does your finance management reflect reality, or do you adapt reality to fit the

finance management system and views? In many companies, it is the second scenario.

In one concrete case, the companies’ finance system used ATL cost codes and BTL

costs codes separately. The marketing department however, was already working

“through the line”. Finance also implicitly assumed that BTL, meant sales driving,

ATL brand building. Budgets would be allocated accordingly among sales, trade

marketing and marketing. Marketing was working with today’s knowledge that

brands can very well be built BTL, and certainly everything done BTL should

contribute to brand equity and be aligned with the ATL activities. However, if it

would have been up to Finance, marketing would have just been able to work with the

ATL budget.

With this type of misunderstanding, it will be impossible to measure ROI effectively

or use the results effectively. So, you must get the support system and processes to

mirror practice and priorities, not vice versa

Budget management can further support by providing project based costing, rather

than account code costing. Largely automated, real-time and project based finance

systems are still exception rather than norm. On-line project based costing systems

can provide easily available, real time information to managers and executives. Most

importantly these systems can provide an overview of cross departmental

investments. Many case examples can be found on: www.consumergoods.com. Only

when all the costs are accounted for by project – ideally including internal costs such

as time spent - an ROI analysis comes close to reality.

3. Set the Metrics and learn

Based on a clear definition of what it is marketing is set out to do and an integrated

support system, now metrics should be agreed upon to measure marketings’ ROI. Not

only measuring what are the most cost efficient ways to achieve a maximum of short

term sales, but also leading to a situation where marketing knows which direction to

go to create more value for the company.

Mr. Reichheld advocates: Measure the Net promoter Score, based on by asking

consumers the simple question of; “How likely are you to recommend this product to

a good friend?” In the now classic book “the Ultimate question” Mr. Reichheld

makes a compelling case for measuring just this, in stead of the usual battery of

measurements.

Metrics of marketing in the more tactical definition have to do with executional

excellence and are therefore not less important, just of different nature.

How to measure the effectiveness of the design of a car showroom, how to isolate the

effectiveness of promotion girl in a coffeeshop among other promotional tools, how to

measure the difference between putting an ad in the news paper or having an on-line

application.

Each item can be linked directly to incremental sales or value – if you’re able to test it

in isolation. It requires great effort, but especially the chocolate and the cigarettes

companies have come a long way. The next important question is how the company

can develop benchmarks as to learn each time they execute, each time they spend

money.

This is really a matter of creating benchmarks that are related only to executional

excellence – not directly linked to sales - and discipline. The discipline to always

measure what you do, in standardised terms and to log that so that it remains

accessible. The book: “Measuring Marketing: 103 Key Metrics Every Marketer

Needs”, by John Davis, provides a practical overview of key metrics.

Stifling?

Does all this ROI measurement lead to slow and stifled companies? Yes, if done in

the wrong spirit. If it is done as a control measure from top-management to bottom, it

will lead to junior managers following the rules and the quantitative measures. If it is

done in the spirit of empowerment “these measures are the boundaries and minimum

requirements, within that you can decide and learn”, it will lead to faster, lower level

decision making, having a learning organization and improved motivation through-out

all levels of the company.