NOVEMBER 16, 2004

By Christopher Kenton

The Bang for Your Marketing Buck

Measuring the return on investment isn't just counting beans. It's the key to understanding what works with your customers and why

Effective marketing programs should always be built on a sound business strategy. Yet a fundamental component has been missing from the historical marketing mix -- measuring the financial return on investment. As anyone in marketing today can attest, there's growing pressure to quantify the value of every marketing initiative. Hard-driving businesses are demanding ever-greater accountability: If I give you a $1, I expect a $1.50 in return. This is a big adjustment for marketing, a field that has traditionally been the domain of creative minds more than bean-counters.

I've heard many marketers treat the ascendance of financial concepts into marketing language like just another trend, and they dutifully learn to make conversational use of terms like return on investment (ROI) and lifetime value. While the celebrity of these ideas may be a popular response to the excesses and failures of the recent boom and recession, the real pressure for accountability is being driven by something far deeper: advancing technology and increasing market complexity.

APPLIED MATH. There have been many attempts to quantify marketing ROI, starting at least 75 years ago, when direct marketers first tracked responses to advertising. But most marketing return analysis veered away from financial measures for marketing ROI and concentrated instead on softer qualitative measures such as awareness, attitudes, and recall. Many businesses routinely neglected any marketing measurements at all.

Today, technology that analyzes customer behavior is sophisticated enough to connect customer actions and revenue to specific marketing programs. And by technology, I don't just mean systems and software such as customer relationship management (CRM), but also the science of tracking and analyzing data to extract real knowledge. If you doubt the increasing sophistication of marketing science, just Google "Market Basket Analysis" to learn about some intensive academic research into marketing mathematics.

As technology advances our ability to track behavior, businesses will increasingly migrate toward marketing activities that can be measured. The most dramatic example can already be seen in advertising, where online investments have moved away from buying ad impressions (CPM) to price/performance buys such as cost-per-click (CPC) and -- even more relevant -- cost-per-action and cost-per-event. But the trend isn't confined to advertising. It permeates every modern marketing initiative from search-engine positioning to basic Web-site development.

FOLLOWING THE LEADS. Technology is also continuing to revolutionize the media channels used to communicate with customers. The choices available for businesses to reach their audience are complex, confusing, and subject to constant change. To build an effective marketing mix in such a challenging environment requires not just campaign performance data, but also the business sense needed to clarify key decisions.

You may know, for example, how many leads were generated by your last e-mail campaign. But do you know how many leads will turn into sales? Do you know the lifetime value of those sales? Do you know how the value of those sales compares to potential sales from other channels?

Such complexity explains why many of today's most successful marketing programs are incorporating a more intensive business mindset. In the right hands, a focus on ROI doesn't just make the marketing function a bean-counting performance-driver -- it makes you accountable for knowing and serving your customers well.

STRATEGIC QUESTIONS. While it may seem that marketing is being turned on its head, the truth is that the fundamentals really haven't changed. Successful marketing is still determined by how well you know your customers.

If you track your campaign budgets well, you may know what it costs to reach a customer. But you also need to find ways to discover which customers really drive revenue. Look beyond campaign stats and pursue strategic business-level questions such as:

THINK LONG-TERM. By defining the relevant metrics and making them an integral part of the marketing process, you can better measure, refine, and optimize your marketing mix -- and avoid being thrown off balance by the next change in the media landscape.

On a strategic level, such metrics are the basis for understanding customer value as well as true acquisition and retention costs. On the tactical level, these metrics help define specific program objectives and expected financial benefits. On both levels, better metrics lead to more informed decisions.

In the quest for marketing metrics, there's a temptation to abandon softer measures that have been developed to track customer loyalty, market perception, and brand awareness in favor of hard-edged numbers that show quarterly performance. This is just one more example of the growing tendency among businesses to lose focus on long-term brand development by emphasizing measurable, short-term initiatives.

DON'T FORGET THE SPARK. This is why it is so important to develop long-term brand-development objectives as a backdrop for short-term marketing campaigns -- especially as the focus moves toward hard data in analyzing the revenue and profit driven by each campaign. You have to hold your marketing efforts together with a consistent brand experience that extends across all customer touch points. A marketing approach that centers on touch points, in fact, can provide an effective bridge between long-term strategies and short-term tactics, by providing a constant view of your company's fingerprint on the market.

There's no reason to sacrifice brand for marketing metrics. Straight analysis won't yield all the answers -- a sound brand-building strategy still needs a creative spark to bring it to life.

If you think you have a good handle on the marketing metrics that tie your company's marketing budget to the bottom line, check out this marketing ROI calculator for a challenge.