Get out your calculators.
Branding professionals, familiar with dealing with creative and media schedule production, are going to have to get comfortable with calculators, spreadsheets and such green-eyeshade concepts as NPV (net present value), contribution margin and, most important, ROI.
Financial understanding is critical to answering the three questions that resonate in executive suites today: How much is a customer worth? How much am I willing to spend to get that customer? What marketing effort for getting that customer ensures the best ROI?
Answers to those questions (and plenty more) can be found in Marketing ROI: The Path to Campaign, Customer and Corporate Profitability by James D. Lenskold (McGraw-Hill 2003).
This book is not yet another pop-marketing quickie about “immutable” rules or whatever. Rather, Marketing ROI is a solid, well-executed guide that takes readers from understanding basics like ROI to presenting an idealistic vision of a “marketing ROI control panel,” where executives can get both panoramic and drill-down views of customer loyalty trends; campaign, product and customer ROI; competitor performance; and calculation assumptions.
Lenskold asserts early on that ROI is the “ultimate tool” for driving all marketing investments. “ROI analysis becomes a powerful tool not only to determine which programs should be funded, but also to determine to what level each program should be funded,” he says.
In comparison, many other marketing measurements, such as awareness, changes in perception and Web site visits, represent a much weaker justification for investments. In his words: “The short-term financial value of awareness = $0.”
ROI is defined as gross margin minus the marketing investment, with that result divided by the marketing investment. It is critical to understand his definitions of gross margin, marketing investment and other terms, since they differ from classic accounting definitions.
For example, gross margin includes incremental savings from a marketing investment as well as income from referrals. He also introduces a new concept called “Incremental Customer Value (ICV).” ICV—not to be confused with customer lifetime value—is the isolated customer value captured by a specific marketing investment. “The ICV for newly acquired customers must not include future or potential lifetime value that requires additional marketing investments,” he writes.
The first step is to set an ROI threshold. Below this threshold, marketing investments are generally not made. Above the threshold, determined by corporate profitability goals, programs are ranked, with higher-ranking programs funded first.
Next, calculate gross margin and the marketing investment. This is more difficult than it sounds. Referral sales and other indirect benefits have to be calculated. Costs have to calculated and properly allocated. In some cases, such as printing, allocation is easy. But corporate costs such as Web site development or broad market research also have to be allocated among multiple campaigns. Finally, only the incremental return from that one specific campaign or ad must be calculated as accurately as possible.
Analysis can also get complex when analyzing aggregate campaigns. In one example, he discusses comparing the ROI between acquisition campaigns A and B. At first blush, A is the winner, with an ROI of 45% to B's 15%.
But wait. There's also consideration of campaign C that will cross-sell customers acquired by either A or B. C is much more successful among B customers than A customers. As a result, when the aggregate ROI is calculated, the greatest profit potential of 42% results from using B in conjunction with C.
How do you get the numbers for ROI calculations?
In some cases, it can come from CRM systems or simply better tracking of results. But the main source is an activity too often ignored by marketing professionals—testing. Without testing, all marketing becomes faith-based, and millions of dollars can be wasted.
Once ROI calculations are understood, then “Customer Pathing” strategies can be established. Customer Pathing refers to an effort to calculate all the direct and indirect variables than can go into building a brand, ranging from mass-market efforts for building awareness to customer lifetime value to the incremental effect of a single campaign.
Customer Pathing is, in effect, marketing's Holy Grail, because it “identifies the synergies, overlaps, and interferences that occur between independent marketing activities and establishes the total investment limits per customer.” With Customer Pathing, a company could determine the most cost-effective combination of marketing efforts to guide prospects from awareness to long-term profitable customers.
Lenskold is frank about ROI calculation difficulties. For example, “capturing the incremental customer value is by far the greatest challenge associated with marketing ROI investments.” Another major challenge is correctly allocating the expense and/or return from a campaign, especially when product or other managers will always be eager to claim all the returns and throw any expenses over the wall.
Given the complexities, I would have been extremely interested in reading case studies of companies that have incorporated ROI calculations. Two or three examples are scattered in the book, mainly to illustrate a specific point. That's not a criticism, however, since measurement that can fit within the cells of a spreadsheet remains a foreign concept to many marketing managers.
Using the valuable insight provided in this book, marketing decisions can be made on the basis of the contribution to profitability, and results accurately compared to projections. However, the process of implementing an ROI-based organization is difficult and complex. Unfortunately, that means many marketing efforts will continue to be no more sophisticated than “let's throw something creative against the wall and see what sticks!”
If that describes your organization, read this worthwhile and valuable book before you hear the angry footsteps of the CEO behind you, coming to demand what's missing from most marketing today—accountability.
Editor's Note: Watch for details of our upcoming seminar with Jim Lenskold based on his popular four-part Premium article series (co-authored with Hugh Macfarlane), “The Marketing Profitability Path.”
To help you develop ROI metrics that work for your company specifically, contact Roy Young (roy@marketingprofs.com) for information on custom workshops from MarketingProfs.com.
