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Published: 12/17/03
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When Art Meets Science: The Challenge of ROI Marketing

“This customer-focused metric, the share of vacationers’ total expenditure, generated some good business insights that helped Disney to formulate its growth strategies,” according to Zhang. From then on, Disney built Disney hotels and Disney stores. Disney teamed up with airlines to offer travel packages to tourists. People were picked up at the airport by a Disney bus and taken to a Disney hotel where they could listen to Disney radio, watch Disney TV and shop in Disney stores. By building so many of what Zhang calls ‘toll booths,’ Disney was able to increase its share of vacationers’ spending dramatically. The result of these steps, according to Zhang, was that vacationers to Orlando began spending about 75 percent of their money on Disney to get the full Disney experience. “That’s why Disney stock shot through the roof at that time,” Zhang recalls. Zhang also points out that a customer-focused metric can be important in other contexts, such as retailing. In that business, it is quite important for companies to distinguish between “accounting profits” and “marketing profits.”

In a 1999 article in the journal Marketing Science, Zhang and three co-authors described how retailers have long known that some product categories are more important than others in determining the choices that consumers make inside stores. The overall profitability of a store requires careful category-level merchandising decisions to pull the most desirable customers into the store. But the traditional accounting measure of category profits — revenue minus costs equals profit — offers imperfect help in making those decisions because it fails to take into account the effect of the marketing of one category on the profits of other categories in the store.

“A profit measure which takes into account these important cross-effects is the most relevant performance metric for category management,” the researchers wrote in the article, which focused specifically on the effects of a supermarket company’s shelf-space allocations. “We call this new construct marketing profits, as it focuses on consumers and their store choice behavior and is particularly pertinent to the calculus of marketing decision making.” In the article, the authors constructed a formal model of marketing profits, which allows retailers to determine profitability with commonly available data.

Zhang explains the concept of marketing profits this way: Imagine a grocery store that sells meat and produce. To find out how the business is doing, the store’s owner would look at the sales from each category, subtract the cost, and arrive at a figure for the accounting profits. Assume that the owner finds that produce is the most profitable category. It would be natural for her to spend more money to market produce, but in Zhang’s view that may not be the right decision to make. It could be that most customers really come to the store because they want to buy meat and just happen to buy a lot of produce, too. Therefore, devoting a lot of money to marketing produce might not result in more desirable customers coming into the store.

“Our marketing-profit measurement allows retailers to make the marketing decisions that will attract customers who will spend money across product categories,” Zhang says. “To implement this metric, you need a statistical model and you have to change your business processes. If you measure across categories, as we’re suggesting, you have to go beyond relying on brand managers. Brand managers handle one particular brand and don’t care what happens to other brands. What we’re suggesting requires a more comprehensive approach.”

ROI’s Challenges
Wharton marketing professor Peter S. Fader says many companies have yet to grasp the benefits and implications of ROI marketing. “ROI marketing is a legitimate and necessary idea but it’s terribly executed in most marketing practices,” he says. “It’s all talk and, at best, no action, or, what’s even worse, actions that do more harm than good.” It’s not that Fader doesn’t believe in the importance of ROI marketing, since marketing managers need to know what they can get out of a given promotional campaign and other initiatives. But he also suspects that the renewed emphasis on ROI marketing, caused largely by the recent weakness in the economy, has done very little in terms of spurring meaningful changes in company practices.

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