It’s a question as old as business itself: How can a company be sure it’s spending the right amount of money on the right kind of marketing so that it can sell more products or services to increase profitability and, ultimately, enhance shareholder value?
|“ROI marketing helps executives better understand how to spend their dollars to attain the highest return on their marketing investments.”|
Most marketing executives have always felt that they had little choice but to throw money at the wall and hope that at least some of it would stick. That kind of thinking, however, is changing, according to experts at the University of Pennsylvania’s Wharton School and the management consulting firm Booz Allen Hamilton. These days, chief marketing officers and the people who work for them are under increased pressure to make marketing more of a quantifiable science than an ephemeral art. Numbers-driven CEOs and CFOs demand to know how efficiently their companies’ marketing dollars are being put to use.
In response, a management concept known as ROI marketing is evolving to help executives better understand how they can spend their dollars to attain the highest possible return on their marketing investments. Interviews with Wharton faculty and Booz Allen Hamilton consultants for this white paper explore how companies in a variety of industries are practicing and rising to the challenge of ROI marketing.
“Some companies use metrics well, especially for things like advertising, reducing prices, or issuing coupons,” says Jagmohan Raju of Wharton’s marketing department. “When they drop the price or put out a coupon, they know how many extra sales they get. But what’s not clear is whether extra sales represent the right metric to look at in the first place. Should a company be looking at increased sales or should they be looking at the profit impact of the price change or the coupon? They should ask how many new customers they got from that marketing campaign and what their lifetime value is. I don’t think companies do that.”
“Even packaged-goods companies need to know more than they do,” says Wharton marketing professor David Reibstein. “Companies can say, ‘We can spend this amount of money on an ad campaign and we know what sales it will generate.’ But will people buy now or later? Will they stock their shelves now and not buy anything for six months? And how is the competition going to respond to the campaign?”
Moreover, while marketers may declare that customer satisfaction is up, the question CEOs really want answered, says Reibstein, is this: “What does an extra point of customer satisfaction do for my shareholders?”
It’s a Tool, It’s a Philosophy
In past decades, companies relied in large measure on anecdotal evidence and rudimentary metrics (e.g., a 20 percent discount coupon that generates a 30 percent lift in sales) to develop marketing strategies and tactics, implement them, and assess their effectiveness. By contrast, ROI marketing involves the use of new, sophisticated metrics and computer models to analyze and quantify marketing spending and return on investment. But ROI marketing is much more than a measurement system; it’s a marketing management philosophy that requires changes in organizational design and business processes to optimize marketing activities.