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 2 faces of a brand

The 2 faces of a brand

Jun 15, 2016 | Branding, Marketing, Strategy

Marketing and management generally, regularly find themselves actively promoting their branding credentials.

Often they would appear to have no idea beyond the mouthing of clichés why they are bothering.

The costs of building, maintaining and updating a brand is often a major item on the  P&L, and there is much written about the techniques and strategies that deliver a return. However, the core question of ‘Why bother” rarely gets a mention.

Until now.

A brand has two faces:

  1. For the brand owner, a successful brand delivers to its owner a stream of revenue and margin. There is no other reason for the investment necessary for building and maintaining a brand to be made.
  2.  To the customer, a brand offers some level of assurance about the performance, integrity, longevity,  and many other characteristics which to them are important. In other words, the value delivered by the brand, weather that be one defined by the physical performance and characteristics, or the emotional  dimensions of the brand.

“Branding” seems pretty simple, and in principal it is, but the optimisation of the investments made over the long term is the tricky part. This requires expertise and experence pretty hard to find in these days of instant digital gratification.

 

How to make a workshop work for you.

How to make a workshop work for you.

Jun 13, 2016 | Collaboration, Leadership, Marketing, Strategy

Last week I ran a workshop that was designed to wrinkle out the options facing a community organisation. It has been successful for many years, but now faces the challenge of significantly changed competitive and social environments since its formation,  and the loss of a key person whose mission in life had become intimately tied up with the organisations success.

How was that volunteer passion to be replaced?

What did the future hold for this organisation?

How are they going to continue to win?

There was limited time available, certainly no time for chasing rabbits,  so the structure had to be pretty simple and lead to useful outcomes.  In reality is was bog standard ‘workshopping’

  • What is the current situation?
  • Assuming success for the next five years, what would the organisation look like? (I call this hindsight planning)
  • What had been the strategies, both  successful and unsuccessful that had been tried over the 5 years, leading to the success?
  • What resources and capabilities were now evidently required for the ‘success’ to be replicated in real time?

In starting to write up the workshop over the weekend, and necessarily reviewing my own performance as the exercise leader, I thought about the factors that in the past have made for a successful  workshop beyond the necessary structural elements.

Domain knowledge.

Workshops and so called ‘brainstorm’ efforts commonly fail because there is insufficient  domain knowledge and  expertise available that addresses the key questions central to the purpose of the workshop. Success in any activity requires the presence of some sort of plan, with objectives and metrics, combined with a factual assessment of the circumstances that led to the discussion. Without this level of immersion, the workshop will just be a conversation. ‘Think outside the box’ is often the instruction, but if that leads to random thoughts outside the relevant postcode, it will not add any value, and will be enormously distracting. Domain knowledge, and knowledge related to the domain in some relevant manner is essential.

Roadmap.

As the Mad hatter said to Alice ‘If you don’t know where you are going, any road will get you there’  you need a map of some sort that includes your starting point and an end point. Without these, you  will go around in aimless, unconnected circles. No workshop of any kind ever works without some sort of map or guidelines understood by everybody involved.

Inspiration.

Inspiration and ideas come from the friction created by differing and often opposing views presented by intelligent and informed people. Rarely is an idea complete at first blush, rarely can an idea not be improved by some level of refinement, and rarely does informed and creative debate not lead to creative solutions and ideas. It takes people prepared to accept that their idea is merely a contributor to a more complete picture, that it is a point in the road that contributes to a better outcome that leads to true inspiration.

Action plan

As with a workshop roadmap, any plan that evolves out of the workshop needs to have a plan, no different to the one that drove the workshop in its structure. As George Patton said on his drive towards berlin in 1945, ‘without a plan you are just a tourist‘.

Implementation.

An imperfect plan today, well implemented is better than a perfect plan tomorrow. Anther of the wise sayings of my old dad, ‘you get 1/10 for a plan, the other 9/10 are kept for the implementation’.

I have seen many workshops that come up with very useful stuff that is just lost or put aside once the participants get back to what they see as their ‘real jobs’ facing the urgency if the daily grind. It takes a good dose of leadership, and often outside  coaching to make the implementation part of a workshop actually part of the daily business of the enterprise.

Required understanding if you are to succeed

Required understanding if you are to succeed

Jun 6, 2016 | Change, Governance, Strategy

Mary Meeker has again produced a report that should be required reading for all who seek to engage with an audience, with the 2016 update of the Kleiner Perkins Caufield Byers Internet trends report.

Disregard the previous statement.

It should not be required reading, it should be required understanding.

The 213 slides are filled with data driven insights, some with scary implications for the laggards, and offering some ideas for what is about to come. Ms. Meeker delivers the 213 slides in 20 minutes, no time to dig the detail, she is delivering a series of trends, and leaving the deck for you to ponder the implications and dig where you wish.

  • At some point, Google will set about increasing the returns on the investments so far in the Android operating system, now it has +80% share of mobile systems. Astonishing numbers as Apple is still making all the money.
  • Digital advertising is exploding, but the share of legacy media is way greater than it should be. Mobile advertising is particularly underweighted. However, the use of ad blockers is also exploding, so the creative challenge is a huge one. While it is not in this report, I have seen others that estimate the amount of digital advertising fraud at over 30%, and I suspect that is on the light side. Add in the fact that many advertisers just translate their TV ads into something digital and you will find billions more being wasted.
  • Hyper-targeting of advertising is a fact of life now, privacy be dammed. Strange thing is that our kids, and grandkids are way less sensitive to this that we digital geriatrics who make many of the decisions.
  • Video is exploding, in all its forms, particularly live streaming, and all on mobile. We always knew we are a visual species, but digital is opening an entirely new door to communication, and we have barely had time as yet to make a rudimentary exploration.
  • There is a whole section on China in the report, and the numbers are astonishing. Uber is extolled as one of the poster boys of the exponential growth enabled by the double sided platforms emerging, so look at slide 181 to see how the growth in China dwarfs the growth in other markets. This is just emblematic of  the digital growth occurring in China and across the Asia Pacific generally, with the exception of Australia, that struggles to deliver upload speeds that would embarrass Nigeria. (In the middle of an election campaign, perhaps this is something that should get an airing? Perhaps not, a bit embarrassing for both sides)
  • The last 20 or so slides concentrate on the implications for business. Read and understand, then take some positive action. The only thing you know for sure is that staying still  is not good enough.

Thanks Mary, and crew!

The key to successful communication

The key to successful communication

May 9, 2016 | Communication, Innovation, Strategy

Actually it is three keys, which taken together make for a potent mix.

It should be easy, but it seems to be hard, judging by all the rubbish I see around.

There is just so much messaging out there that fails to deliver any useful message, despite the money, time and supposed talent thrown at it. Somehow we have lost sight of the simple rules to apply. If you want a message to be seen and acted on, you had better make it clear, and articulate what you now want the receiver to do with the information.

So, three simple rules:

  1. Make it relevant
  2. Make it simple
  3. Make it repeatable.

As I watch the beginnings of what I expect to be a truly appalling tsunami of complicated, irrelevant and forgettable  babblings from politicians on both sides over the next weeks, I cannot help wondering what would happen if one side or the other told the truth. What if they, acknowledged the shortcomings and uncertainties of their economic and social models, and of the resulting ‘policy settings’, acknowledged  that you cannot please all of the people all of the time, and recognised the value of at least some part of the other sides positions.

Little hope of any of that.

Martin Luther King’s great ‘I have a dream’ speech delivered on August 28 1963 on the steps of the Lincoln memorial in Washington would probably not be as well remembered if it was the “I have a 10 point plan” speech.

A 10 point plan to end the racial discrimination prevalent at the time would not have resonated, the way “I have a dream” does. That message has not been heard by the opposition leader who I heard this morning spruiking his ‘Plan to make Australia great” followed later in the day by a long menu of things he will be “fighting for in this election”.

Yawn. Unfortunately the Prime Minister is little better, being unprepared to answer simple questions, even with a caveat that forecasting 10 years is challenging when nobody really knows what will happen tomorrow.

What if one of the protagonists in our political system actually articulated the dreams, the things we can all relate to, then backed it up with the truth. The truth, with all its  power to engage, build a following, and be held accountable.  In the 1990 film  “Crazy People”  Dudley Moore as an over-stressed advertising man proposed that greatest of evils, truth in advertising, and became wildly popular while kicking the accepted wisdom of obscuration, selective delivery of any facts, wild and unrealistic claims, and outright bullshit, squarely in the teeth.

Perhaps a bit of that medicine should be dolled out this morning as this 44th Parliament is wound up.

 

 

Where will the retail gorillas make profits tomorrow?

Where will the retail gorillas make profits tomorrow?

Apr 20, 2016 | Customers, Marketing, Operations, retail, Strategy

Coles and Woolies are locked in a battle for share of the customers wallets and throats that becomes more complicated every day.

The competitive landscape has changed. The old model of them against each other and independent wholesaler supplied groups, has been spiced up by Aldi, Cosco, and the tide of competitive business models evolving both in store formats such as the convenience small stores around commuter points, farmers markets, and digitally enabled sales.

Those sales I call ‘Beyond Checkout’ cover everything from online ordering with home delivery to the evolution of old fashioned drive thorough pickup.

In my view the battle is a losing one for the gorillas without significant change to their operational culture. Their current business models are based on mass merchandising, not easily made compatible with the personalised service delivery and the  lower volume specialised products now being sought. You need go no further than the disappearance of Thomas Dux for evidence.

Having said that, I see 5 general areas for operational innovation of both the gorillas that would deliver ongoing profits, and sensitise them to the changes happening beyond the walls of their stores.

  1. In store technology deployment.

Deploying some level of the data driven category management control to store level would greatly enhance assortment optimisation, out of stock reduction, and margin maximisation. The assumption of course is that there is staff in the stores with the nous to leverage the information  they are being given.

There is also the juicy thought that stores will be able to connect to consumers in close proximity to stores via their mobile devices geo location capability and make them offers based on their purchase patterns. Then there is the option of instore kiosks harnessing the value of instore video and personalised advertising and promotion, again catalysed by your mobile device.

  1. Leveraging existing asset

Reduction of maintenance and running costs with innovations like rooftop solar power, preventative maintenance programs, improved store security, and stores as the logistic base for home delivery. Home delivery will become more and more important to time constrained consumers, so developing a compelling offer should be high on their agendas. To date the penetration has been poor because the logistics, particularly for fresh and frozen product is really challenging.

  1. Employee productivity improvements.

With better staff training, particularly in produce, customer sensitive opening and closing times, cash register  speeds (the Aldi insistence on prominent bar codes by observation speeds up throughput significantly), much can be achieved. Self-serve checkouts currently rolling out with store renovation programs have clearly been a success with consumers, and offer significant productivity improvements.

  1. Value chain optimisation

The use of collaborative technology  that goes back into supplier production planning and collaborative volume management from the production line to the checkout has been around for years. However, there remains huge opportunities to extract benefits from inventory management for all in the value chain. The barrier is cultural, as the gorillas want all the benefit to come their way, removing the incentive for suppliers to take risks and innovate, except when under the whip.  Collaboration through the value chain can deliver great benefits when done well.

  1. The customer experience,

What is retail about, if not customer experience?

It is here that retailers can differentiate themselves in all sorts of ways.  What they cannot do is demand from head office that customers like them, and prefer their stores over the others. Store choice is a personal thing for consumers, made up of many elements, but creating a store environment where the employees are pleased and proud to be of service is a great start.

Long way to go there.

What the senior management can do is provide the infrastructure that enables that level of personalisation and service to be delivered in stores, and the leadership to create and encourage the customer centric culture that front line employees then deliver.

And a final thought: Is that the light at the end, or a headlight?

E-tailing is a huge threat to the gorillas, and while it involves capital to develop and deploy the technology, it is essentially an individual engagement and transaction. Online gets all the publicity, but still only accounts for around 6% (depending on whose numbers, and which categories you look at) of sales. The gorillas should see E-tailing as their next opportunity area, to be embraced rather than feared.

Remember what happened to the Blockbuster video business? They had the game by the throat, Netflix was just an irritation in the corner, so they ignored them.

Bamm! Blockbuster is gone.

While it is still pretty hard to stream a family roast dinner, the lesson of Blockbuster should not go unheeded by Coles and Woolies.