A new horizon for marketing accountability
Editor’s note: Raymond Pettit is vice president of product development and intelligence at Longwoods International, a Toronto-based research company.
The traditional view of marketing as an art form with a mysterious language to describe its success is rapidly disappearing. In its place, a new model is evolving that combines the science of marketing with performance measures from the world of finance. Marketing expenditures have become investments, and the tools of the trade - advertising and communications - are now being tracked for their ability to provide a satisfactory return to the organization and its shareholders.
The time has come for a careful reexamination of the status quo in advertising and marketing. We need to refuse to accept advertising waste; we need to fix broken or incomplete measurement models; and, we need to demonstrate more clearly the impact of marketing dollars on the bottom line. This challenge calls for bold, thoughtful and innovative action.
Marketing investment management (MIM) is an approach that fuses technology, a keen understanding of how marketing works, and the tools and disciplines of measurement science to deliver breakthrough results. This article will present the principles, processes and science of MIM, and suggest how to overcome inertia, plan for success and realize the potential of this powerful approach to maximizing marketing results.
The beauty of marketing science is that a broad, rich and powerful set of analytical techniques and methods already exist to support precision business and marketing decision-making. Highly valuable and essential information is being collected every day and stored in various operational and business information systems (including CRM, ERP, HRM, SFA and others), yet is lying unconnected, unused or misused across the enterprise. To make matters worse, the marketing data that exists is often chopped into separate, distinct pieces of information linked to specific templates that have been defined and developed independently. In most cases, the available body of marketing knowledge provides an incomplete picture and insufficient analytic guidance to help marketers ensure maximized returns on advertising and communications investments.
Sadly, the power of technology to support and enable sophisticated marketing measurement has not been very well exploited. In fact, most software vendors and business intelligence tool vendors are still focused on single domain solutions that, while delivering marketing guidance in a limited or specific area, perpetuate a fragmented approach. As a result, in spite of vast sums invested in acquiring and implementing software-based enterprise marketing information systems, most businesses still face critical hurdles in their efforts to optimize marketing returns on advertising and communications investments (see Figure 1).
There is no doubt that technology is changing the way we go to market. But early customer relationship management concepts created a confused perception that strategic marketing - like sales, accounting, and customer contacts - could be automated for efficiency. The truth is that even the largest users of marketing automation technology still struggle to make sense of the information their companies pay so dearly to acquire.
As a result, the real power of a CRM, sales or marketing effort is dissipated and unknown because of the complexity of understanding how communications strategies and tactics affect customers and ultimately, the corporate bottom line. When that is achieved, true progress will be made in improving the effectiveness of marketing efforts, as well as determining the value and profitability of campaigns and customer segments.
“You can’t manage what you can’t measure.”
This time-tested adage from management guru Peter Drucker applies more than ever to the need for implementing full accountability for marketing expenditures. Leading companies know this all too well and are positioning themselves to capitalize on the power of integrating scientific marketing measurement with process management technology (see Figure 2). They are seeking to create competitive advantage through reduced advertising and marketing waste, by improving the precision and value of their measurements vis-à-vis which strategies and tactics consistently deliver more of the right customers more profitably.
Precision marketing, ultimately, is about improving business results. Success depends on a solid balance of process control, information technology, marketing science, results measurement and competitive business leadership.
Marketing investment management
Marketing investment management (MIM) is the science of managing advertising and communications strategies and tactics for optimal business impact. MIM increases overall business profitability and incremental return on investment (ROI).
Recent innovations in information technology and in directed excursions beyond traditional marketing measurement have defined the tools and techniques necessary to evolve beyond the status quo. MIM is a best practice fusion of technology, marketing, ROI measurement and systems (see Figure 3) that makes continual marketing process improvement a reality.
To embrace MIM, businesses need to focus exploration, analysis, measurement and reporting technologies on the full range of data available regarding the impact of communications on customer actions. This includes not only the transactional or financial data generally stored in data warehouse and operational data stores but also attitudinal, behavioral, syndicated and secondary data. Thus, an integrated approach to effective customer understanding requires both a technology infrastructure and measurement and analytic components that work together.
Due to the presence of data warehouses and other large data repositories across the business landscape, businesses are accumulating an increasing amount of information about customers including: account information, transaction history, service requests, satisfaction surveys and channel purchase preference. Companies believe that by exploiting this mass of data, significant opportunities to increase revenues and enhance customer satisfaction can be realized. Further, companies that can effectively analyze this data know they should be able to develop important insights into the matching of marketing strategies to customer behavior.
However, just because data can be gathered and stored does not mean companies know what to do with it all. There is a significant management and strategic planning dimension to measurement and customer intelligence that is lacking in most organizations. Many people are doing important things with customer data - but in a quasi-vacuum.
What is missing, in most cases, is a holistic and incremental perspective showing which strategies and tactics work best for the most profitable customer segments. To achieve this, companies must align the breadth of customer and campaign measurements spread throughout the organization and transform disconnected marketing data into richer and broader intelligence that is actionable and results in more effective, efficient and profitable sales and marketing activities. In short, companies need the holistic marketing ROI perspective and continual marketing process improvement made possible through the successful implementation of marketing investment management.
The three legs of MIM
If MIM were a stool, it would have three legs: process controls, financial metrics and technology support (Figure 4). And like any three-legged stool, if one leg, or element, of the MIM discipline is missing or weak, it is of little benefit.
For example, even the most perfectly implemented marketing management processes backed by state-of-the-art software would do little to improve the overall profitability of a company’s advertising and communications without the financial metrics to compare the relative performance of different strategies. Likewise, if the right processes are not in place, software and metrics would add no value. Finally, without the holistic view enabled by MIM software to help users audit, understand and apply the insights hidden in the volumes of marketing data flowing through their organization, individual processes and their financial metrics would be next to impossible to correlate and apply to improving marketing ROI.
Marketing investment management is first and foremost a disciplined approach to managing marketing budgets with a focus on bottom-line performance. While a truly successful implementation of MIM relies on a solid knowledge base of data on customers, transactions, competitors, suppliers, employees, distribution, sales and communications, at its core, marketing investment management is about one simple truth: If an organization wishes to continually improve the ability of its marketing programs to generate profitable revenue, its advertising and communications resources must be managed like an investment portfolio, with measures of success and failure calculated in terms of risk and return.
MIM is most successful when a detailed knowledge of the financial implications of each incremental investment made in identifying, understanding, contacting, converting and cultivating customers is at hand. In essence, MIM provides the hard data needed to analyze a campaign’s strategic and tactical execution, including the many technical and statistical techniques creative teams need to better understand and target customers.
While the importance of the role that branding plays in positioning a company and its products in the minds of prospects and customers has not diminished, the communications created for this purpose can no longer avoid the inclusion of one or more tracking elements necessary for gauging its contribution to marketing returns. When the corporate branding team incorporates MIM principles into its marketing planning and creative development process, measures of awareness, preference, mind share and recall readily translate into specific incremental changes in corporate profitability.
Marketing process controls
A process-based marketing framework is built upon a complete understanding of the marketing, advertising and communications processes and how they all fit together. It includes the forms of customer and marketing intelligence that are necessary to drive the creative development, testing and application of communications and campaigns, as well as the ability to measure branding, satisfaction and loyalty effects. In addition, it aligns them in a universal process that matches the specific marketing and financial needs to the objectives of the organization.
Financial metrics for marketing
A credible and accepted set of financial measures by which to gauge marketing performance is critical to the successful implementation of MIM. Though there are many options for comparing the performance of one element versus another including the cost per sale, the expense/revenue ratio, the break-even point, and more, the most useful indicator of the performance of a marketing investment is return on investment.
ROI is commonly used to assess and guide many different forms of corporate and personal investments. It provides a deeper understanding of the value that an initiative, strategy or investment can deliver. Increasingly, best-practice companies use ROI to compare and prioritize marketing options, make informed marketing and communications decisions and effectively spread customer, business and marketing insights throughout their organizations.
MIM technology support
The third leg of the MIM stool is the technology that supports and enables the profitable management of marketing investments. This requires a system of software applications working in concert to provide strategic, operational and analytic teams with the tools they need to apply what has been learned in the past to maximize returns from present and future marketing investments. It is vital that the technology platform be built from an intimate understanding of the marketing and advertising process and incorporate the best-practice financial analysis techniques available. It is also of equal importance that the solution integrates easily with internal and external sources of marketing performance data and that it not be yet another island of enterprise expertise.
MIM emerges from the balanced fusion of the above three elements: intelligent marketing processes, holistic financial analysis and marketing-savvy technology solutions.
The successful measurement of MIM
To successfully measure and apply marketing knowledge to improving returns from present and future campaigns, every element of the marketing mix must be measured, tracked and rated for its ability to deliver incremental profits - in real time wherever possible. This includes all available advertising and communications resources including communications through: mass media marketing (TV, radio, print, outdoor, PR and Internet); database marketing (direct mail, e-mail, telemarketing, fax and wireless); face-to-face marketing (direct selling, seminars, trade shows and in retail environments).
To satisfy this requirement and successfully establish and optimize the full power of MIM, we need to understand and apply financial analysis principles such as measures of ROI to all marketing investments.
ROI (literally return/investment) means that if one invests money or resources, they should earn a return greater than the investment. The actual ROI metric is a ratio or percentage, where gross profits less the investment is divided by the investment ((ROI=r*gm%)-i/I, where r=revenue, gm=gross margin [adjusted for the cost of goods sold and selling costs], and i=investment). Since most investments impact results over time, ROI also represents a forecast that determines the incremental value of one investment over another. This makes it of great value as a management tool that can be used to allocate limited resources to the places where they will produce the greatest benefit to the business.
A quality ROI calculation forms a road map that will help identify whether investments are on track, and provide some guidance as to what to do if they are not. Marketing ROI is meant to function as a discipline that creates accountability within the marketing organization. Properly and expertly developed, ROI establishes a fundamental, well-defined and accepted path to MIM.
While a detailed discussion of marketing ROI is beyond the scope of this article, excellent books are beginning to appear.1 It is important to know the five essential measures that are required for ROI calculations. These are presented in Figure 5.
Determining ROI (and other important measures, such as incremental customer value and profit optimization) requires aggregating a lot of data, modeling that information and then running calculations. Technology has advanced in the form of campaign management, business intelligence, executive (dashboard) reporting, and marketing sales force automation to make this a somewhat less onerous task. In fact, the race is on to provide enabling technology and software automation that captures marketing data at an increasingly detailed level. In addition, and this is a big step, software systems must assist the marketer in managing the entire process through planning, implementation and results. Indeed, the seeds of MIM have been planted, and the emergence of powerful solutions is at hand.
Notes
1 An excellent and thorough treatment is found in: Lenskold, J. D. (2003). Marketing ROI: The Path to Campaign, Customer, and Corporate Profitability. NY: AMA/McGraw-Hill.