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(originally published by Booz & Company)


Results-Driven Marketing: A Guide to Growth and Profits

This fifth P lies at the heart of the pressure now being felt by marketing departments to deliver returns on marketing investment. The reality is that, as markets mature and experience commoditization, marketers need to adopt the analytical ways of their more numerate corporate colleagues. They need to embrace sophisticated financial tools and techniques to justify marketing spending — and their own positions.

The simple fact is that measurable outcomes are now expected for marketing programs. A recent study by Booz Allen and the Association of National Advertisers, the leading U.S. marketing trade organization, shows that measurable outcomes are now expected for marketing programs, with 66 percent of executives saying that true ROI analytics are marketing’s greatest need. Yet, most companies are still using surrogate metrics, such as awareness, instead of ROI measurements. Those that don’t change face a bleak future.

As Philip Kotler, distinguished Northwestern University professor and doyen of marketing thinkers, recently observed: CEOs are “growing impatient with marketing. They feel that they get accountability for their investments in finance, production, information technology, even purchasing, but don’t know what their marketing spending is achieving.”

The timing of leaders’ demands is no coincidence. Look around. In many industries, the old medicine isn’t working anymore. Marketing activities constitute a rapidly growing portion of companies’ cost structure. Meanwhile, the returns are increasingly questionable.

Take consumer packaged-goods (CPG) companies. Advertising and media, trade promotion, and consumer promotion spending now account for as much as 25 percent of sales among CPG companies in the United States, up from 15 percent in 1978. Trade spending today is the second-largest item on the profit-and-loss statement for most of these companies, following cost of goods sold.

Yet, as Leslie H. Moeller, Sharat K. Mathur, and Randall Rothenberg show in “The Better Half: The Artful Science of ROI Marketing,” one of the chapters in Results-Driven Marketing, on average, for every dollar spent by major CPG manufacturers to generate incremental volume, marketers gain a short-term return of just 80 cents — that’s a return on investment of negative 20 percent. Retailers, by contrast, see profits from almost three-quarters of all promotional events.

Such statistics confirm prejudices that marketing is a fuzzy discipline — an inexact art rather than a rigorous science.

None of this will come as any surprise to marketers. There is broad agreement that the “black arts” of marketing require a more solid grounding in science. Yet, to date, efforts in this area have not stuck: Marketing as a discipline still lags behind other functions when it comes to rigorous investment-supporting analysis.

In fact, in many industries the return on marketing spending, which has historically been quite low, is going lower. Consider the situation facing U.S. carmakers. The automotive industry has the worldwide capacity to produce around 80 million cars and other light vehicles a year, but it is currently running at only 75 percent capacity. Most of the excess capacity is in the U.S. and Europe, where manufacturing costs are highest and sales are growing more slowly. As the stockpile of new cars increases, carmakers’ ability to “move the metal” increasingly relies on offering buyer incentives.

At America’s Big Three automotive manufacturers, incentives have more than tripled since 1990, reaching nearly $3,800 per vehicle, or 14 percent of the average sales price, according to CNW Marketing Research. Yet Detroit has continued to lose share in the U.S. (by 1.6 percentage points in 2002 alone) to imports whose incentives are half as high. GM’s share of the U.S. market, for example, has slumped from 30 percent in the mid-1990s to 26.7 percent in April 2005.

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