Insights

The Three Components of Return on Marketing Investment

Arguably the single biggest headache for the modern strategic marketer is reliably estimating the return they’re getting on their marketing efforts. Organisations are putting increasingly more focus on cost efficiencies, and the marketing department is often seen as a cost centre, which everyone agrees adds value, but no one can seem to say exactly what value and how much. In tough economic climates it can be tempting to cut back on this expense if its value can’t be proven; the risk is however that once you realise the value it has been adding, the damage will already be done and it will cost you much more than the saving you made to rebuild that lost value.

The trouble is of course that return on marketing investment, or ROMI, is notoriously difficult to measure accurately. To understand why this is, let’s look at the general calculation of Return on Investment (ROI), and how that gets complicated when applied to marketing.

Incrementality and its complicating relationship with ROMI

Most people should be familiar with how to calculate Return on Investment as a financial calculation, but let’s unpack it quickly so we can relate it to marketing activity.

To calculate ROI for a normal asset investment where the asset is disposed of after its useful life could look something like this:

The key point to note in this calculation is that the calculation of ROI relies heavily on the concept of incrementality. Stated differently, we can’t only take into account how much money the asset generated, we also need to know how much it cost us to generate that value.

To complicate matters even further, let’s imagine the asset we’re considering here is a piece of technology that makes a manufacturing process more efficient. We invested in this technology because we believed it would either save us cost or allow us to produce more products in a specific space of time, which would increase our revenues. To truly understand the ROI of investing in this technology, we need to understand how many incremental products we sold because of this investment, as even without this technology we would still have sold a base amount.

This last complication is what makes the calculation of ROMI so tricky: in most businesses, but especially established ones, it is difficult to isolate how much marketing efforts increased demand for your services over and above what already exists without getting your marketing message out there. We call that baseline demand, and it is the key to establishing a reliable measurement of ROMI.

The Omni-channel Complication

The more complex your marketing efforts and your business becomes, the harder baseline demand is to estimate. In the simplest case, you could be running a purely direct approach to your marketing, which could make baseline demand relatively simple to calculate. In this case, you simply ensure that you withhold your direct marketing communication from a statistically significant proportion of customers, and measure the difference in sales (or profits) per person that received the communication vs. not. Scale that up, and you have ROMI!

What happens however when you start to introduce more marketing channels? The minute you introduce above the line channels, a hold-out sample is no longer an option (you could ask certain people to not watch your TV ad, but that will likely not be successful!). You could also try and estimate the proportion of your target market that didn’t notice your advertising through market research, but matching their spending behaviour to this can be difficult, unreliable or simply impossible.

It is worth at this point taking a quick detour into the special case of digital marketing. If you’re reading this and have experience with digital marketing, you might be thinking to yourself, “It’s easy with digital, you just track clicks through the path to purchase and you have your answer!”. This is completely true when looking at digital marketing in isolation, and if your marketing strategy is only digital, your problem is largely solved. There are however two complications to consider:

• Getting a true hold-out sample on digital can be difficult, as people can have multiple profiles and devices, therefore masking true individual behaviour
• If you’re running digital marketing alongside other channels, you have no way of knowing which marketing activity ultimately drove customer behaviour, even if they converted on a digital channel

The Always-On Complication

The establishment of baseline demand gets even more difficult when you have an always-on marketing approach. Many industries have become so competitive that market competitors cannot afford to ever turn off their marketing activity, as other competitors will simply subsume your market share if you stop promoting your brands or services. The problem becomes a little easier to solve when marketing activity is defined around specific campaign periods as we will show shortly, although even in this case additional complications such as seasonality and market activity need to be considered.

Level of Measurement Complication

The final complication in establishing baseline demand has to do with defining the ultimate goal of your campaign or marketing efforts. Depending on your industry, you may market different products at different times, and can therefore establish baseline demand for a product when it is not being promoted (although seasonality and promotional mechanics can obfuscate this). If the intent of your activity is to stimulate demand for your overall product offering and not selected lines, baseline demand is harder to estimate.

What makes marketing even more different

While baseline demand represents arguably the most difficult obstacle to overcome in calculating ROMI, it is unfortunately not the only one. Marketing is a complicated business, and your marketing objectives can be broader than just generating sales. As marketers, we take a long term view towards establishing a brand and generating goodwill with our customers – a loyal and engaged customer will generate much more lifetime value than a transactional one, and it is sometimes worth spending more money now to generate much more value in the future. ROMI can therefore not be reduced to a purely financial return, as the incrementality of the strategic intent of your marketing activity needs to be measured as well.

While baseline demand and strategic intent are important both to marketers executing their strategies as well as their counterparts in finance, sales, etc., the last obstacle is likely much more of a marketing concern than a stakeholder concern. This has to do with the appeal of the marketing creative used to generate demand, and the subjectivity of creative performance.

Marketing creative is the vehicle we use to communicate our brand persona and what our customers and potential customers should associate with our brand. If the creative doesn’t align with your brand’s intent, whether visually or tonally, you miss the opportunity to build ongoing engagement with customers. While creative appeal can be subjective, it is the customer’s opinion that matters most and an analysis of customer perceptions of creative appeal forms an integral part of an integrated view of ROMI.

Our answer: A three-pronged approach to measuring ROMI

Given the complications discussed above, we have developed a three-pronged approach to measuring ROMI. This approach allows an integrated view of all the components of marketing return, and provides a diagnostic view that allows us to continuously improve on marketing efforts by understanding what drives the performance of each component.

Component 1: Financial Return on Investment

Financial return on investment aims to measure how much incremental revenue (or, if possible, profit) was generated by your marketing efforts. To do this, we must establish two things: the level of measurement we’re interested in, and how to estimate baseline demand.

The level of measurement is an indication of what our marketing objectives are. Broadly speaking, we can measure at a product level or at an organisational level. To make this practical, think of a marketing campaign that a financial services institution might launch. A single product focussed campaign could promote the take-up of personal loans, in which case the level of measurement would consider how many personal loans were granted over the campaign period. The campaign could however focus on all unsecured lending products to establish the bank’s overall positioning in granting credit, in which case the level of measurement would take into account all unsecured lending products, including things like overdrafts and revolving facilities. Finally, the bank might run a campaign that positions itself as an integrated financial services provider, in which case the level of measurement might want to look at bank-wide sales over the campaign period.

Once the level of measurement has been established, baseline demand needs to be determined for the campaign period. Blacksheep Consulting uses a variety of statistical techniques to determine a baseline that take into account seasonality, past performance and previous marketing activity. In its simplest form the baseline calculation looks at a moving average over an appropriate time period (volatility in your industry will dictate what that time period is), but additional complications are factored into the calculation to ensure the baseline isn’t overstated because of other internal or external factors.

Financial return on investment is then calculated as the difference between actual revenue over the campaign period and the estimated baseline demand over the same period. It should be noted that an accurate calculation of baseline demand that is completely cleaned of external factors can be a mammoth task, however, if the baseline is calculated in a consistent manner, it can still be useful to generate relative financial return on investment that allows comparison between campaigns.

Component 2: Strategic Intent

The second component of measuring ROMI is concerned with the strategic intent of your marketing efforts. Consider again our example of a financial services institution. Suppose the bank has identified that while it has very high brand awareness, it struggles to convert customers to have their brand in their consideration set when signing up for new products. They also want to be known for offering more than just lending and transactional services, and want to improve perceptions of them being an innovative organisation.

Given these clear objectives of what the campaign needs to achieve, we can now establish a baseline for customer perceptions on each of these. To do this, we can follow two approaches:

• Before launching the campaign, collect data on customer perceptions that align to the strategic objectives. For example, we could measure how likely customers are to consider the bank, how aware they are of the bank’s other financial services and how they rate them on innovation. Once the campaign has launched and concluded, we can measure customer perceptions on these strategic objectives again, and determine any uplift in how customer perceptions have changed.
• If it isn’t possible to measure customer perceptions before and after the campaign, we could also do a single measurement of customer perceptions once the campaign has concluded. We would add another question that asks whether people recall seeing the specific campaign in question, and the difference between those who recall it vs. those who don’t would constitute the incremental uplift in strategic intent.

Component 3: Creative resonance

Finally, understanding creative performance forms the final component of an integrated ROMI measurement. There are many models available to measure to what extent marketing creative resonated with consumers. At Blacksheep Consulting, we try to understand to what extent a piece of creative generated positive emotions, whether the message was clear and well understood, and whether the creative promoted your overall brand identity. Additional diagnostics can be added to this to provide insights into what drives creative resonance with consumers.

It is important to note that creative has different objectives depending on the channel it is published on. Measurement of creative resonance needs to take into account the marketing channel, and whether the creative was fit for purpose on the channel.

The single score dilemma

Return on Investment models often try to reduce the calculation to a single score. While this can be useful to simplify the communication of whether marketing has delivered a return, we find it often masks valuable diagnostics that can be gleaned if the three components of ROMI are looked at separately. For example, a campaign might deliver financially but not improve strategic objectives; in this case the campaign messaging needs to be reviewed to determine why the campaign’s strategic intent wasn’t met. While ROMI is useful to ensure the value of marketing is well understood, it becomes much more powerful when used as a diagnostic tool to continuously improve marketing efforts.

Conclusion

While measuring the impact of the marketing department can be a daunting task, the Blacksheep Consulting model of financial return, strategic intent and creative resonance provides an evidence based framework that allows for deep diagnostic of any marketing efforts.

Interested to measure the impact of your organisation’s marketing? Contact us to learn more.