The concept of marketing R.O.I. is almost universally misunderstood and therefore the practice of R.O.I. analysis is usually faulty.
 This must change. CEOs have a right (and a pressing need) to know what they are getting for those shareholders' dollars that are spent on marketing. Every P&L expense in the enterprise is measured by its R.O.I., with one exception: marketing. This is true even though marketing is a relatively large expenditure (as much as 30 percent of revenue for some companies).
In part, this is because marketing has not been a true business discipline, until now. A business discipline employs standard process, based on best practice, to create a measured output.
Marketing has been more of an art -- a non-standard, often ad hoc, process, without measurability. Specifically, process-based disciplines are results focused. They measure outputs (what were the results achieved) and balance them against inputs to measure system effectiveness and efficiency. Marketing, as with any non-process activity, has measured inputs instead of outputs. Marketing looks at inputs such as reach and frequency, awareness, CPM and hits on Web sites.
The measure of marketing should not be the expense to create these inputs. It should be the return made for the shareholders via the use of their money for marketing purposes. Fortunately, convergent evidence now indicates that the discipline of R.O.I. is about to be applied to marketing.
For one, marketing R.O.I. tops the agenda at the Marketing Science Institute, which often signals the future agenda for marketing by asking corporations what they would like to spend their academic research dollars on each year. The Association of National Advertisers, similarly, is inundated with inquiries from its members, the top brandowners in the U.S., about "the state of the art" in Marketing R.O.I.
For the Advertising Research Foundation, R.O.I. has become its unofficial motto, and the major aspect of its research agenda is examining the long-term effects of marketing assets. In addition, Jim Stengel, P&G Global Marketing Officer, told analysts at a 1Q 2003 meeting, attended by his CEO and CFO, that every marketing expenditure at P&G is now assessed for its R.O.I.
The reason is simple. Management has no other place to turn to create higher returns. Divisions have been combined. Competitors have been acquired. All waste and inefficiency has been squeezed from the supply chain. Headcount reduction is advanced. The staff groups are eliminated. The span of control has been stretched to the breaking point. Brand managers have become brand(s) managers. Beleaguered assistants support six managers. Low-value activities have been computerized or outsourced.
Now, the corporation must grow at the top-line and bottom-line. Marketing bears the responsibility of driving the top-line through innovation and revenue growth. It has the responsibility to improve gross margin by creating more customer value. And it may be the source of additional savings from that "half" of marketing spending that some have traditionally claimed is wasted.
The process of measuring marketing R.O.I. must begin at the output level with a definition of the goal of marketing in financial measures. It must then work backward to define, in numbers, the equity drivers of those financial measures.
The process of measuring marketing R.O.I. must begin at the output level with a definition of the goal of marketing in financial measures.
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The next backward step is to measure the effectiveness of inputs to those drivers, the expenditures on marketing tactics from product/service innovation to advertising to promotion and trade allowances. Then, by aligning the cost of the inputs (tactics) against the financial outputs, a marketing R.O.I. can be developed.
The ultimate objective of marketing should be to deliver shareholder value. Marketing does not control all the levers, but contributes directly -- primarily through increasing topline revenue growth and gross margin. Therefore, these are the output goals on which marketing should be measured.
Attempts to go any further will fail because there are more independent variables than can be accounted for. For example, attempts have been made to link general brand equity indicators to the brandowner's stock price. While some correlation has been established, there are too many businesses that have strong brands, but poor shareholder value performance, because of external factors such as capital inefficiencies.
Marketing financial performance is actually created via brand equity, the value one attaches to a named bundle of goods or services beyond that same bundle without a specific name attached to it.
Marketing creates value by understanding consumer needs more profoundly and communicating them in a way that elevates the bundle of goods and/or services above mere physical function (such as ketchup for one's burger) up to a superordinate emotional end value (such as kids having fun at mealtime). The power of an illuminating insight enhanced by the technical magic of packaging and product engineers means that the same $500 ton of tomatoes that becomes a $1,000 worth of private label ketchup at consumer prices becomes transformed, in the Heinz brand, into five times that value.
This may seem obvious, but the simple fact is that no-one in the marketing community makes any serious effort to link its marketing expenditures to brand equity with common, integrated sets of measures like R.O.I. Yet, the intellectual framework of brand equity can deliver an analytical framework for R.O.I. based on two measures: total R.O.I. and relative R.O.I.
Total R.O.I. evaluates the efficiency of the total marketing budget: (A) What is the value (in increased net sales revenue and brand gross margin) of bonding consumers more closely to the brand (e.g., creating trial, translating trial into repeat purchase and translating repeat purchase into loyalty). This can be thought of as a continuum of brand involvement; and (B) What is the cost in marketing expenditures to move those consumers up the continuum? "A" divided by "B" is total marketing R.O.I.
Relative R.O.I. is about the comparative R.O.I. performance of different marketing elements. First, relative R.O.I. can answer the question of whether there is a higher return from generating an incremental unit by (a) persuading a new user to buy the unit for the first time or (b) inducing a current user to purchase the brand again, thereby increasing the brand's "share of category requirements" (S.O.R.; often called loyalty) within a household that a product has already penetrated.
Second, relative R.O.I. measures each marketing element to its contribution in moving consumers from limited trial and low S.O.R. to high trial and high S.O.R. For example, a specific ad execution's persuasiveness may improve ownership of a powerful "end benefit." A coupon may induce trial from a valuable, inquisitive new trier. A promotion on a larger size may drive the brand's SOR from 75 percent to 95 percent. Each has an effect, each has a cost. The ratio of effect to cost is what we call marketing R.O.I.
The value of driving consumers up the continuum, divided by the cost of doing so, is marketing R.O.I.
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To summarize, marketing R.O.I. must start within an intellectual framework that defines the purpose of marketing and the value it creates. The analytical framework for marketing R.O.I. must start at the components of marketing's contribution to value creation. These components are brand net sales revenue growth and brand gross margin, driven by brand equity.
Brand equity can be defined and measured as the Net Present Value (NPV) of cash flows (top-line or bottom-line), which result from the cohort of consumers who purchase the brand over time. Marketing drives these consumers "up" a continuum, which is defined behaviorally (from trial to 100 percent share of requirements) and attitudinally (from acceptance of the brand to adoration of the brand).
Driving consumers up the continuum delivers value (revenue and profit). Of course, that carries a cost in dollars expended on marketing. The value of driving consumers up the continuum, divided by the cost of doing so, is marketing R.O.I.
The relative contribution of each marketing element or tactic to this value creation can be calculated with the same tools, and therefore a relative R.O.I. can be developed. By starting on these analytics today, brandowners will be ready for the new, highly granular data about individual consumers and purchases that will be here shortly.
Hunter Hastings is managing partner of EMM Consulting Group, which advises companies on how to implement Enterprise Marketing Management, a multi-faceted system for global brand management combining marketing knowledge, best practice processes and training with collaborative software, marketing tools and infrastructure. He can be reached at HunterHastings@EMMConsulting.net
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