How to calculate a Return on Marketing Investment

How to calculate a Return on Marketing Investment

Jun 20, 2016 | Governance, Management, Marketing, Strategy

 

Marketers being belted around the ears to produce a marketing budget before  June 30 is disturbingly common.

It is a clear sign that the marketing group is acting as a co-ordinator of ad hoc activities, rather than being a disciplined, repeatable, and continuously improving process of revenue generation over the longer term.

Nevertheless, it is happening everywhere as you read this, as June 30, and a new financial year is looming.

A common approach to alleviate the belting is last year + 1.5%.

Not much use if last year was a bummer, especially if you are not sure why.

The other way is  that the ‘boss’ starts at the bottom right hand corner of the P&L and works backwards

Revenue  = X, Market share = Y, Therefore marketing budget = z.

Alternatively, some arbitrary percentage can be applied to projected sales as a marketing budget.

What a load of crap!!

The reality for a marketing budget is that to be productive, marketing needs to be way ahead of the tactical implementation that generates immediate revenue.

Marketing needs to be considering and implementing the strategies to generate revenue tomorrow and the next day, determining where that revenue is going to come from, which products, customers, geographies, and channels, and giving customers reasons to be committing their scarce dollars to whatever it is  that  you are selling.

Constructing a budget without all that strategic information clear and agreed is like taking off on a journey without deciding the destination: any road will get you there, and most of the time and money spent will be wasted.

As an alternative, start to see marketing as an investment.

That discipline of seeing marketing expenditure as an investment requires a longer term view. It also requires an acknowledgement that not everything works as expected, a capacity to learn from experience, and driving the processes is a cultural recognition that the organisation requires a return in its investments in marketing activity.

Calculating a return on marketing investment is not easy, and has rarely been attempted until recently, as the numbers were simply so rubbery (a technical accounting term for crappy and just plain unreliable). However, that is changing rapidly, so the best time to start developing a regime and capability of measuring and optimising the return on marketing investment is now, the beginning of the year, while in ‘budget mode’

It is a six step process driven by the four stages of strategy development:

  1. Have in place a ‘planning rhythm’ strategic cascadethat starts with the long term strategic and cultural challenges and progressively becomes more detailed and tactical.
  2. Recognise the connection between marketing and the long term financial returns from the enterprise.
  3. Collect data on a routine basis that delivers the insights necessary to measure both efficiency and productivity of the investments, and the cause and effect chains that link an activity to an outcome.
  4. Develop the analytical means to generate the insights.
  5. Make the enterprise sufficiently agile to adjust in the light of the insights generated.
  6. Report marketing ROI as the operational people report the ROI on the investments made in equipment, so that the activities have the credibility and weight in the boardroom that the expenditure deserves.

 

Calculating the return on investment is essentially a simple equation.

Cost divided by value derived.

The challenge has always been to attach a value to the various outcomes of marketing expenditure, including the organisational costs and overheads. That task is becoming progressively easier with the digital and data analysis tools now available, and there is no longer any excuse not to at least start the process, and with time and effort improve it so that it is a reliable indicator and tool to determine the value of future investments.

As with any calculation, the result is determined by the input assumptions, parameters and values, so there is considerable opportunity for judgement and change.

Following are a few of the obvious ones;

  • Time frame over which the return will be measured. Budgets are annual, while marketing investments tend to be cumulative over a long period, sometimes decades.
  • The means by which you judge the revenue to be a result of marketing activity. The demarcation between marketing and sales is often an entertaining debate, which I tend to finish by removing all direct sales costs, particularly price discounting activity which is generally brand destructive, and counting everything else,  but allocating a weighting.
  • The components of the cost equation, such as product development costs, customer service, and logistics that are included, and their weighting, which is also a challenging debate. Standard accounting packages are poor at collecting and consolidating this information, it usually takes a tailored process to gather and record the data in an easily reportable format.

Reporting requires metrics that build a picture of the processes to which the activities all contribute.  Every business will be different, but a few of the metrics that have served well for my clients are:

  • Sales of new products across timeframes, 1,2 & 3 years, with some calculation of the losses from cannibalisation, although it is absolutely wrong to use this as an argument to not take an action. Better you cannibalise your sales than a competitor eat them for you.
  • Value and number of prospects at each stage of the sales pipeline
  • Velocity through the sales pipeline
  • Conversion measures at each point in the sales pipeline
  • Share of wallet, for individual customers, and various groups of customers
  • Customer longevity and churn
  • Market share
  • Geographic measures
  • Gross margin and GM ratios
  • Sensitivity to competitive price promotion
  • Customer satisfaction scores
  • Net promoter scores
  • Various social media measures (not likes)

It is also a mistake to measure everything, you will just drown in reports and minutiae. Report on the items that can be demonstrated to move the performance needle, where there is a demonstrable cause and effect chain in place that is connected to strategy as well as revenue.

Finally, make ROMI a core performance measure of the enterprise, everyone in an organisation has some influence on the outcomes that can be connected to marketing success. Expose those connections at every level and make people responsible and accountable.

Need some help with all this, find someone with the experience and wisdom to deliver.

 

 

 

 

The most misused management quote ever

The most misused management quote ever

May 30, 2016 | Leadership, Management

Benjamin Franklin said many worthwhile things, and a few bits on nonsense. However, amongst the best known, and perhaps most quoted is:

“If you want something done, give it to a busy person”

Absolute bollocks!!

Acting on that advice is in my view a failure of leadership.

You are in effect saying that it is OK to load up somebody who is already at or near capacity while other ‘resources’ remain idle, or at less than capacity.

People are not machines,  but like machines, everyone has a different capacity. Exceed that capacity and you just get inefficiency, poor quality and even breakdown.

We do not do it to our equipment, at least not deliberately, so why on earth would it be OK to do it to our people, and perhaps even worse, our best, most dedicated and productive people?

This little rant was instigated by a business owner I met and with whom I was exchanging views on management and leadership. Needless to say, he will in all probability (now) never be a client.

How to get lucky!

How to get lucky!

May 2, 2016 | Customers, Innovation, Management

‘Getting lucky’ has some pretty specific connotations in Australian vernacular,  but has much wider implications in business.

My old dad used to say “the harder I work, the luckier I get”. He would usually be saying it as he reached for his last bob while playing a round of golf, or chasing the bream off the beach in the morning.

‘Lucky’ has many faces.

Dad also had things to say about the nature of luck in business, things that have stuck with me over the years and informed the way I advise those I work with.

Luck comes with hard work……

Luck does come with hard work, but working hard to dig a hole will just get you a deeper hole, and sometimes that is not the answer. You have to be able to be selective at what you work at, and swap horses when you need to.

Luck come to the prepared mind.

This old saying is also true, and recognises that preparing your mind to recognise and act on the so called ‘luck’ when it happens is hard work. This work usually happens over a long period, and is usually the result of some level of collaboration. Alexander Fleming  ‘discovered’ penicillin in 1928, his lucky observation informed by previous work by others over a long period. It was not until 10 years after later that is was turned into a product by Howard Florey, driven by the demands of war, and funding from the Rockefeller foundation.

Luck comes from learning.

Thomas EdisonIt seems to me that ‘luck’ also favours  those who treat ‘bad luck’ not as a setback, or indication that they should cease and desist, but as an opportunity to learn and build something better that sometimes, magically overnight after 20 years, comes together in a new way. Thomas Edison’s famous words telling us that the discovery of the light bulb was the result of 9,900 failed experiments says it all.

 

Luck come from seeing what others miss. 

See what others missThen, there is also those who see opportunities as they emerge by, and have the sight to recognise them, and balls to act on them. Steve Jobs was a master at this. He saw a whole new world in combining the existing functionality of the telephone and MP3 player with the then unused touch screen technology that had emerged from NYU labs and demonstrated publicly for the first time in 2006.

 

‘Luck’ rarely just arrives, although it does happen. As a kid I knew a bloke who bought a single Opera House lottery ticket (when 200k was a lot of money) for himself on special occasions, and then won it. That seems like luck to me, but luck is usually a function of several of the above working together.

4 essential  marketing success factors.

4 essential  marketing success factors.

Apr 6, 2016 | Change, Management, Marketing, Small business

I originally studied to be an accountant, it seemed logical at the time.

My dad was sort of an accountant, taking over the family small business after he returned from the rumble in New Guinea in the ‘forties’. He was the only son, taking over the family business was the done thing, like it or not.   He was a practical, objective bloke, and ran the business by the numbers.

It seems with hindsight that I had absorbed the pain and frustrations of his small business as a kid until the market changed radically in the sixties, and the business tanked, and Dad found himself in a job he hated for the next 25 years to keep food on the table.

Now I am that unusual marketer, one that not only understands the numbers, but who has a feeling for them, and advocates loudly that the numbers are the foundation of a business. You simply must know, understand and leverage them in order to be successful.

Wrapping up  the marketing and financial management skills into one bag, there are a four elements that I regard as essential to success.

Logic and extrapolation are driven by assumptions. Accountants are black and white,  debit or credit of the ledger. It is really easy to be seduced by the numbers spat out by a spreadsheet, but they are only as good as the assumptions about all sorts of things that make them worth the paper they are on. The greater the degree of interrogation of the assumptions driving the line of logic being employed, the better. I used to annoy the daylights out of my marketing teams by insisting that when delivering a business case, they came at the projections from at least 2 entirely different perspectives as a means to test the assumptions they were using.

Weight reason greater than passion. Often I have said that there is nothing so contagious as a dose of passion, and I stick to it, passion is great, irreplaceable, but not t the expense of reason. Passion should be build on a foundation of reason.

Greatly value the intuition of experience. Some things are just not quantitative. Have you ever felt that something was ‘just right’ without being able to articulate why? When I get that feeling in a domain where I have deep experience, usually I go with it, and the intuition usually pays off.

Accept that you are  not always right. In business we are trying to be alchemist, to tell the future and allocate resources accordingly. Not easy, and no matter certain you are of the assumptions, your intuition, and the rosy picture pained  by the numbers, shit can and does happen, and you just get it wrong. Accept it, cut your losses, learn form the experience and move on.

Experience is hard won, and in some cases can be turned into the wisdom to be passed on in the effort to better serve our customers.

Design for context.

Design for context.

Mar 21, 2016 | Customers, Management

Good design is considering up front what could possibly go wrong, and designing it out.

A while ago I did some work with a business that had suffered for years with excessive  invoice errors. To their credit, they had done a lot to eliminate the variations in their processes, and systemise them, which had made a difference, but not enough.

It was pointed out (by a forkie) that their very attractive shipper design, done by a design agency at considerable expense to be consistent with their brand, was really difficult for the forkies to read in the warehouse, three rows up.

They got rid of  the pretty graphics, replacing them with a clear, big product descriptor  and bingo, errors almost eliminated.

Lesson is  that design has many functions, and good design takes into consideration the circumstances that the product finds itself in, out there in the real world, not always the same world as that shown on the screen of a design software package.

On a more personal note, over the 40 years wandering around business, I have found that there is as strong well of common sense and actionable improvements available to us in places that those in the air-conditioning and suits often do not consider.

Go talk to those people.

8 reasons the opportunity for consumer goods SME’s has never been greater.

8 reasons the opportunity for consumer goods SME’s has never been greater.

Mar 14, 2016 | Change, Management, retail, Strategy

Think about it.

  • Many domestic competitors are gone, sent to the wall by combinations of the high $A, the power of the retail duopoly to call the tune with prices and terms, house brand expansion, and poor management.
  • Coles and Woolies have lost some of their grip as Aldi makes inroads, and some of the independents like Ritchies continue to compete effectively in local markets, and access to food service, ingredient and alternative retail becomes easier.
  • Consumer brand loyalty has been disrupted by the disappearance of some of the favoured brands, offering opportunities to forge new brand loyalties
  • Marketing expenditure can now be highly directed, and its effectiveness measured and continuous improvement be applied.
  • The costs of the tools like the analytics required to do effective category management, a data intensive exercise are  getting cheaper and cheaper, and the skills needed to make sense of the data more available.
  • SME’s are recognising that collaborative actions are not verboten, but are in fact very sensible and cost effective. Making it easier, digital technology has removed one of the greatest barriers to effective collaboration, the inability to communicate.
  • SME management has also recognised that collaboration is strategically and operationally sensible to build comeptitive scale to enable long term prosperity, so there are potential partners around.
  • Export is easier, as trade barriers are dropping, and product niches are often global

None of this of course is of any value unless you have the cash flow, determination, and management capability to make the changes necessary. However, those that have survived the last 10 years are a robust bunch, now the pressure is off a bit, don’t make the mistake of taking a breather, get in there!