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E. Craig Stacey, Ph.D. Measuring the Return on Marketing Investment The Center for Measurable Marketing at NYU Stern

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E. Craig Stacey, Ph.D.

Measuring the Return on Marketing Investment

The Center for Measurable Marketing at NYU Stern

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

- John Wanamaker

Corporate marketing is the last bastion of unaccountable spending in corporate America.”

- Eric Schmidt

2008 – 2010 Research Priorities

1. Accountability and ROI of Marketing Expenditures 2. Understanding Consumer/Customer Behavior 3. New Approaches to Generating Customer Insights 4. Innovation 5. Marketing Strategy 6. New Media

1. The Need for Marketing Accountability

The Center for Measurable Marketing at NYU Stern

www.msi.org

2010 – 2012 Research Priorities

“Marketing Management and Practice in an Evolving Landscape” 1. Delivering Value through Enhanced Media and Channels 2. Managing Brands in a Transformed Marketplace 3. Allocating Resources to Marketing Activities 4. Leveraging Research Tools and New Sources of Data

1. The Need for Marketing Accountability

The Center for Measurable Marketing at NYU Stern

www.msi.org

The Center for Measurable Marketing

• Measure marketing performance and integrate into business process

• Develop metrics and methods for existing and emerging communication channels

• Measure and manage brand equity

1. The Need for Marketing Accountability

The Center for Measurable Marketing at NYU Stern

Research Priorities

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

“Metrics for Making Marketing Matter” 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Lehmann (2004)

Marketing Metrics Hierarchy 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern

Marketing Capabilities

Marketing Activities (Inputs)

Individual (Customer) level attitudes and behaviors

(Aggregate) Product-market outcomes

Financial results (Performance)

Expectations of future performance (Valuation)

Outputs

Donald R. Lehmann and Dominique M. Hanssens, Marketing Metrics, Wiley International Encyclopedia of Marketing, 2010.

Framework for Marketing Performance Measurement 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do • Advertising • Price • Promotions • Distribution

What customers think & feel

Awareness Consideration Liking

What customers do

Brand purchases

Direct Effect Feedback Effect

Advertising Campaign Testing 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do • Advertising • Price • Promotions • Distribution

What customers think & feel

Awareness Consideration Liking

What customers do

Brand purchases

Direct Effect Feedback Effect

Brand Health Tracking 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do • Advertising • Price • Promotions • Distribution

What customers think & feel

Awareness Consideration Liking

What customers do

Brand purchases

Direct Effect Feedback Effect

Marketing Mix Modeling 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do • Advertising • Price • Promotions • Distribution

What customers think & feel

Awareness Consideration Liking

What customers do

Brand purchases

Direct Effect Feedback Effect

Mindset Metrics & Marketing Mix Modeling 2. A Framework for Marketing Accountability

The Center for Measurable Marketing at NYU Stern Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do • Advertising • Price • Promotions • Distribution

What customers think & feel

Awareness Consideration Liking

What customers do

Brand purchases

Direct Effect Feedback Effect

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

Marketing Mix Models…

• … are representations of marketing systems that are useful for understanding the behavior of markets and for predicting the impact of marketing actions.

• … describe the relationship between performance measures, such as sales or market share, and controllable variables, such as price and distribution.

• ... are designed to aid managers in planning and forecasting.

3. Marketing Mix Modeling and Marketing Planning

The Center for Measurable Marketing at NYU Stern

Maximize Return on Marketing 3. Marketing Mix Modeling and Marketing Planning

The Center for Measurable Marketing at NYU Stern

Marketing ROI

Marketing Expenditure

Marketing Support

Incremental Contribution

Incremental Volume

Costs Margins

Model

Dimensions of Marketing Planning 3. Marketing Mix Modeling and Marketing Planning

The Center for Measurable Marketing at NYU Stern

Product

Time

Geography

Types of Marketing Planning 3. Marketing Mix Modeling and Marketing Planning

The Center for Measurable Marketing at NYU Stern

Product

Time

Geography

BRAND PLANNING ASSORTMENT

PLANNING

PORTFOLIO MANAGEMENT

Marketing Mix Planning 3. Marketing Mix Modeling and Marketing Planning

The Center for Measurable Marketing at NYU Stern

TRADEMARK

BRAND

PACK/SIZE

ACCOUNT DMA MARKET

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

Model Design

• Model objectives • Selection of variables • Relations among variables • Data sources • Functional form

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Objectives Specified in Model

• Sales • Market Share • Traffic, Average check size, … • Awareness, purchase intent, …

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Selection of Variables

Examples of dependent variables: sales, market share, brand choice, awareness, attitudes, trial rates ... Examples of explanatory variables: marketing mix activities, macroeconomic factors ...

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Variables

A Simple Model 4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Y (Sales Level)

} b (slope of the salesline) }

1

X (Advertising)

a (sales level when advertising = 0)

Response Function 4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Current Sales

Response Function

Min

Max

Current Effort

Sales Response

Effort Level

Data Sources

• Dependent and Independent Variables

• Internal vs. Syndicated

• Levels of Aggregation

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Multiplicative Models

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

ihi

H

hii

hxs εα βΠ=

=1

)exp(

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Q = eB0 XB1

(0 < B1 < 1)

0

2

4

6

8

10

12

0 20 40 60 80 100 120

Series1

Multiplicative model

• Only highest order interaction • Constant elasticity model • Log-log model

Most widely used sales response function

• Cobb-Douglas Production Function (1928)

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

Q = eB0 X1B1 X2

B2 ….. XjBj

4. MMM: Econometric Time-Series Analysis

The Center for Measurable Marketing at NYU Stern

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

0 1 2 3 4 5

Series1

lnQ = B0 + B1lnX1 (Linear in logs)

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

How Modeling Works 5. Model Estimation

The Center for Measurable Marketing at NYU Stern

Fit a model…

sale

s

to minimize the errors…

sale

s

-5

0

5

10

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

error

0

10

20

30

40

50

60

70

80

90

100

Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

Advertising

Promotion

Seasonality

Distribution

Price

Base

Sales

Calculate contributions…

…over the year

0

20

40

60

80

100

120

Jan

Feb

Mar

Apr

May Jun Jul

Aug

Sept

Oct

Nov

Dec

Sales Model

Base20%

Price17%

Distribution21%

Seasonality15%

Promotion12%

Advertising15%

Example Model 5. Model Estimation

The Center for Measurable Marketing at NYU Stern

Sales Volume Fitted Model

R2 – 0.92 MAPE – 4.4%

Sal

es V

olum

e

Example Model Decomposition 5. Model Estimation

The Center for Measurable Marketing at NYU Stern

Measuring the Return on Marketing Investment

Outline

The Need for Marketing Accountability 1

A Framework for Marketing Productivity 2

Marketing Mix Modeling and Marketing Planning 3

MMM: Econometric Time-Series Analysis 4

Model Estimation 5

MMM for Today’s Media Landscape 6

Traditional mix modeling does not work for integrated online measurement

• Treating online marketing (especially digital media) as just another direct driver of sales leads to misattribution of sales to drivers and ultimately bad mix decisions

• Even the best of today’s commonly used approaches have failed to keep up with today’s challenges

• The following picture simply no longer holds true:

6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

PRINT x COUPONS TRADE Online SALES X TV x

A far more complex marketplace exists in which online activity acts as an outcome of offline marketing, as well as a driver of sales.

A new approach is needed to manage complexity of the new media paradigm 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

Earned Media

Coupon

Paid Media

Owned Media

Trade

SALES

Organic Search

Earned Media

Coupon

Paid Media

Owned Media

Trade

SALES

Organic Search

How Marketing Influences Sales 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

As well as feedback effects

Direct Impact Sales

In-Store

TV

Print

Online Display

Radio

It’s amazing what soup can do

How Marketing Influences Sales 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

Marketing drives customers both directly and indirectly

Direct Impact Sales

In-Store

TV

Print

Online Display

Radio

It’s amazing what soup can do

Drivers to Sales Immediate, Persistent, and Indirect 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

Knowing what consumers say matters

Level of conversation activity (and sentiment) is typically monitored 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

7/4/

2010

7/18

/201

0

8/1/

2010

8/15

/201

0

8/29

/201

0

9/12

/201

0

9/26

/201

0

10/1

0/20

10

10/2

4/20

10

11/7

/201

0

11/2

1/20

10

12/5

/201

0

12/1

9/20

10

1/2/

2011

1/16

/201

1

1/30

/201

1

2/13

/201

1

2/27

/201

1

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/201

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3/27

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2011

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2011

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/201

1

7/3/

2011

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/201

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7/31

/201

1

Negative Neutral Postitive

Black Friday Store Promo Online Coupon Deal

PR Event

Context of conversations matters: Went to store/made a purchase 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

• Went to store\Made a purchase

Context of conversations matters: Store/brand advertisements 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

• Store\Brand Advertisements

Context of conversations matters: I love store/brand 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

• I love store\brand

Drivers of offline store traffic 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

• I love store\brand

So what can businesses do? 6. MMM for Today’s Media Landscape

The Center for Measurable Marketing at NYU Stern

• I love store\brand

• Track the content, not just volume and valence of social interaction, and relate to marketing and sales

• Move beyond observer role by targeting paid marketing to

stimulate specific social interactions • Encourage virtuous circle of social interactions leading to

purchase, which further induces social interactions about purchase (e.g. Kohls Facebook)

The Center for Measurable Marketing NYU Stern School of Business 40 West Fourth Street, Suite 915 New York, NY 10012 [email protected] MeasurableMktg

References • Lehmann, Donald R. and David J. Reibstein (2006),

Marketing Metrics and Financial Performance. • Lehmann, Donald (2004), “Metrics for Making

Marketing Matter,” Journal of Marketing.