How to Measure and Grow Return on Marketing Investment across Markets and Marketing Actions

Transcription

1 How to Measure and Grow Return on Marketing Investment across Markets and Marketing Actions Professor dr. Koen Pauwels Tuck School of Business at Dartmouth

2 Why measure Return on Marketing Investment? In services and manufacturing industries, marketing should create profitable growth Operations and finance are accountable for return on investments, why not marketing? Return on Marketing Investment badly needed: 80 % of new products fail 50 % of advertising spending has no effect 85 % of sales promotions result in net losses

3 How to Measure ROMI? Structured Executive Opinion Market Experimentation Examining long-term data patterns

4 Limitations of Experimentation Experiments assess short-run impact, but are costly and don t capture competitive reaction Short-term and long-term effects over time? Impact on stages customer buying process (awareness, intention, satisfaction) and firm value process (sales, income, valuation)? Media and marketing budget allocation?

5 Long-term Response Modeling Econometric representation of customer, competitor and environmental drivers Yield performance response elasticity (ROI), in the short-run and the long-run Translate into actionable client advice for media allocation and marketing strategy

6 Long-term modeling challenges How long is long-term? How to model wear-in and wear-out? How to incorporate long-term reactions of retailers, competitors, company action (future decision making)?

7 Vector-Autoregressive Models Flexible model of complex dynamic interactions between a set of endogenous variables Unique perspective on marketing-performance : 1) consumer response to marketing is dynamic 2) competitive response to marketing actions 3) company response: performance feedback

8 Long-term sales response model Conventional sales-price response model: S 1 = a 1 + ρ 1 S 1,t-1 + b 11 p 1 + b 12 p 2 + ε 1 S 2 = a 2 + ρ 2 S 2,t-1 + b 21 p 1 + b 22 p 2 + ε 2 But consumers forward buy and stockpile : S 1 = a 1 +ρ 1 S 1,t-1 +b 11 p 1 +φ 11 p 1,t-1 +φ 12 p 1,t- 2+..

9 Long-term Marketing Model And competitors react with price change: P 2 = a 4 +ρ 4 p 1,t-1 +φ 41 p 1,t-1 +φ 42 p 2,t-2 + +ε 4 And firms decide based on sales feedback: P 1 = a 3 +ρ 3 p 1,t-1 +b 31 S 1,t-1 +b 32 S 2,t-1 + +ε 3

10 Vector Auto-Regression (VAR) i i i i S α1 0 0 b b S φ 11 φ 12 φ 13 φ 14 S i i i i S t b b S t k S α φ φ φ φ = + + i i i i p1, t α p1, t i= 1 φ φ φ φ i i i i p α p φ φ φ φ 1, t , t 1, t i 2, , 2, t i 2, t , t 2, t ε1, t ε + p1, t i ε 3, t p2, t i ε 4, t long-term can be few weeks, months or forever: decided by data: forecast precision vs. complexity Compute long-term ROMI as the net impact of consumer, competitor and company response

11 Price deal yields positive consumer response, but lowers future sales, especially if competitors react Sales Elasticity Consumer Competitive Weeks

12 Discount works, so firm repeats Sales Elasticity Consumer Competitive Company Weeks

13 Worst case: each time you promote line it hurts your bottom

14 Best case: permanent benefits through consumer trial and learning Sales Elasticity Consumer Competitive New product Weeks

15 Profitable Growth Conditions Campaign Marketing Changing Marketing Mature Markets Business-as-Usual FMCG promotions Pharma advertising Escalation Automobiles Price Rebates Changing Markets Permanent Benefit Automobiles Product innovation Evolving Business Medical Services Detailing

16 Journal Advertising Works Right Away, then dies out

17 Direct-to-Consumer ads show Wear-in and Wear-out

18 What is the Best that could Happen? Gross Margin $ Honda launches 1999 Odyssey Oct-97 Feb-98 Jun-98 Oct-98 Feb-99 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Months

19 One-shot innovation increases Honda s Firm Value Forever

20 Long-Term ROI Varies by Segment and Firm 250 Toyota Daimler-Chrysler General Motors Ford 200 ROI in $ Millions Cars Trucks Minivans & SUVs

21 And by Innovation Level

22 In Contrast, Rebates Decrease Firm Value in the long run

23 As They lead to Competitive Escalation

24 Finally, are some Actions Needed to Maintain Sales? Detailing and Sales Jan- 93 Jul- 93 Jan- 94 Jul- 94 Jan- 95 Jul- 95 Jan- 96 Jul- 96 Jan- 97 Jul- 97 Jan- 98 Jul- 98 Jan- 99 Jul- 99 Month

25 How to Grow ROMI? Marketing Campaigns Changing marketing Mature Markets Continue to create better campaigns Allocate $ to other marketing actions Changing Markets Focus and be ready to handle growth Ensure marketing spending keeps up with sales

26 Help Managers Drive Growth Managerial Goal remains the same : Build and Defend Profitable Growth 21 th C Reality : Need to demonstrate ROMI faced with rising costs and channel power Approach: long-term response models yield measurable long-term benefits Translate into actionable managerial insights and need for future monitoring