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Three Lessons for More Effective ROI

by Jim Lenskold

Originally published in CMO Magazine.

Have you heard the rumblings in the industry that ROI analysis of marketing may be dying or fading away? Surely you didn’t believe them. Assessing ROI has been at the top of the marketing executive’s agenda for a good four or five years, yet it is still not common practice and remains quite foreign to many marketing organizations. It would be convenient—a relief, even—to let this slip away and stay in the comfort zone of soft metrics. But let’s be realistic—ROI is here to stay.

There’s one fundamental principle that keeps ROI at the top of the agenda: Companies must make more money than they spend. Executives need to have greater confidence that marketing can deliver on this promise. It does not mean that every marketing dollar will be measured in terms of incremental profits. Nor does it mean that long-term profits must be sacrificed for short-term profits. It just means that the additional discipline in understanding how marketing initiatives ultimately drive profitable customer behaviors is key.

So what do you need to do to improve ROI and measurement capabilities? Instead of seeing a mountain of challenges that might slow you down, take a look at what is required to move to an attainable plateau. I’m going to share a few lessons that may help you determine how to get started in your pursuit of that next level of success.

Lesson 1: Prepare for a journey

There is no single solution or quick fix for implementing marketing ROI. Marketing ROI is a framework that bridges marketing strategy with measurements and financial outcomes. It does require time, resources and CMO commitment to shift the capabilities and the culture of the organization. The good news is that small steps forward can have significant impact. And providing marketers with new information and tools that help improve their performance, as well as their credibility, will have a lasting effect.

A good starting point is to bring additional insight into the planning of new campaigns or marketing initiatives. You use rough assumptions to estimate the incremental profit contribution of your marketing to help understand how shifts in your strategy or tactics results will impact those profit estimates. Depending on your current practices, this may involve converting sales volumes or revenue projections to profit projections, determining how targeting and segmentation changes customer value, linking demand generation activities to sales results or identifying synergies between tactics aimed at the same customer segment. The goal is to use your best estimates to quantify how marketing investments influence different customer segments and lead to incremental sales, taking into account profitability at either a transaction or customer level.
At this stage, using assumptions allows you to learn how changes in marketing spend, strategies and impact drive profitability. You’ve made progress in establishing the marketing ROI framework while (temporarily) avoiding measurement challenges and complexity. In fact, it is this new framework that will help guide what and how you measure marketing effectiveness.

Lesson 2: Focus on strategic insight

It seems as if marketing ROI is perceived as the pass/fail measure of marketing performance that may eliminate campaigns that cannot prove their value contribution. Instead, you want to approach ROI as an analysis to understand how strategies and tactics can be improved to increase profitability. That means setting up your measurements to maximize the learning for future marketing with less emphasis on justifying past expenses.

Part of your success at this stage will be improving the accuracy of your assumptions with good data mining. Your ability to leverage an ROI framework increases significantly with analysis that uncovers such valuable insight as the customer value, buying patterns, retention patterns and transaction profitability that result from different types of marketing initiatives.

Lesson 3: Measure smarter

One of the CMO’s greatest challenges for improving marketing measurements is finding the balance between the urgency to push new marketing initiatives out to market and the need to test and learn on a small scale before committing a major portion of your budget to an initiative that may have little or no impact. The rush to market is generally favored and may potentially hold back your opportunity to effectively assess marketing’s contribution.

If marketing is going to be held accountable for delivering bottom-line results, there must be a commitment to measurements. The vast majority of marketers indicate their measurement and analysis budgets are underfunded. But additional funding will only help if marketers learn to measure smarter.

First, the CMO must prioritize the testing and measurements of integrated strategies over independent tactical executions. Collectively, are marketing initiatives influencing prospective customers all the way through the buyers’ funnel, where in the funnel do they fail to progress, and what are the strengths and weaknesses in the core strategy? Then the assessment can dig into the tactical effectiveness to guide investments toward the most profitable returns.

Just as important is concentrating your research and analysis efforts on the high-value and high-potential target segments. You need to know how you are improving your competitive positioning, preference and performance among the few customers who generate the bulk of your profits. I’ve not only seen research that places equal weight on responses from low value customers, I’ve seen plenty of cases where most of the responses are from the portion of the audience that will most likely never buy from the company. So what if they have seen your ad or marketing campaign, you need to motivate profitable customers to buy from you so be smart about your measurements.

The bottom line is, your only hope of ever establishing a stronger marketing ROI discipline in your organization is to take action. Get started with an improved planning process, some new analysis or testing, a pilot project or a shift in your approach to measurements. Set a goal to reach a certain plateau that will improve on your current level of insight and capabilities. After all, you don’t want to fall behind and let your competition start reaping a greater share of profits at your expense.

 

Copyright © 2006, CXO Media Inc., reprinted by permission from CMOmagazine.com.