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3 Reasons You’ll Never Measure Marketing ROI Correctly (and That’s Perfectly Ok)
Today, our business is everywhere — on mobile, across social media and messaging apps, and even exposed to new mediums like connected devices and virtual reality (VR). Marketing remains the same mix of math and magic we know and love, but the ways marketing is executed day-to-day has changed profoundly. Our work has gotten a lot more complicated, and this growing multi-channel complexity makes it harder than ever to cleanly attribute results and marketing return on investment (MROI).
When a lot of marketers first look at their MROI, the natural reaction is to start by comparing the change in gross profit (sales growth multiplied by gross margin), customer lifetime value (LTV), or another revenue metric, versus the marketing investment that led it.
As an illustrative example, if a campaign with a $1 million budget had a $5 million increase in sales that can be attributed to it, and the business has a gross margin of 30%, then the simple MROI formula on that marketing investment could be:
For a “campaign ROI” of 50%. Or, if you kept overall spend the same, but optimized your creative and media investments to increase net sales by 2%, you could look at MROI this way (assuming your business has $100 million in annual sales, gross margin of 30%, and your marketing budget for the year is $10 million):
Here, you capture a simple resource optimization MROI of 6% across your marketing budget.
As we all really know however, it’s rarely that simple. In particular, there are three important factors that need to be carefully understood as a business moves from measuring simple MROI to a more comprehensive MROI.
#1 – Attribution Reality (and Causality)
The first MROI hurdle for most brands is clean, clear multi-touch attribution. One particularly acute challenge is the brand and business itself, and the interplay between brand marketing impact (from investments that build and shape long-term market perception) and direct response impact (from investments that generate short-term sales). Direct response campaigns like new product launches, holiday campaigns, and discount promotions may cycle up and down over the course of the year, but they happen against a backdrop of longer-term brand and market share continuity which impacts customer perception and buying behavior. Brands are built up — and sometimes, eroded — over time, and every campaign effectively stands on the shoulders of the work that’s come before it (that said, it’s also important to remember that long-term effects are not simply an accumulation of short-term effects). Similarly, there are few things more complex and hard to understand than human decision-making, but it’s important to recognize most purchasing decisions start with the brand, not the channel or offer.
Then, there’s the causality problem. With different initiatives happening across different channels at the same time, how do you measure a multi-touch customer journey that represents the sum of so many diverse, often difficult-to-measure interactions?
Measurable multi-touch attribution vs. purchasing reality and brand influence.
There are many different methodologies for assigning channel and interaction value via multi-touch attribution. A few common industry models are:
Prefer first – The first ad or customer interaction receives the majority of the attribution credit and each touch further down the path to purchase receives credit in a weighted or rules-based, linearly decaying fashion.
Prefer last – The last ad or customer interaction receives the majority of the attribution credit and each touch earlier in the customer journey receives credit in a weighted or rules-based, linearly decaying fashion.
Equal-weight – Every ad or customer journey action receives equal attribution credit.
U-shaped (barbel) – Here, attribution is segmented by first touch, middle touches, and last touch. First touch might receive 40% attribution, last touch 40% attribution, and the remaining 20% of attribution credit is divided among the middle touches.
Nonetheless, almost any method of attribution will likely oversimplify the story, which is why marketing organizations should approach their media mix like a long-term investment portfolio, similar to the mutual funds many of us invest our 401Ks and retirement accounts in. The analogy is there are a lot of different individual stocks you could invest in (think: different channels, campaigns, and creative directions in marketing), so rather than trying to “pick individual winners,” you should spread your bets across a diversified portfolio, using a sound, well-reasoned investment thesis that tracks its returns across different time horizons. Over time, your winners make up for your poor-performers, and your overall investment delivers a positive annual return.
This isn’t a perfect analogy — after all, ‘indexing’ in a creative profession is a fast path to mediocrity — but it’s clear sustainable MROI comes from actively managing and optimizing a portfolio of campaigns and content beneath a brand system of key messaging anchors. For some businesses, the internal rate of return (IRR) of investing in better long-term marketing capabilities may even prove to be multiples higher than other alternative areas of business investment or capex.
#2 – Time
Another challenge is time itself, and the time interval of the ROI analysis. Addressing the time value of money as an input into calculating marketing ROI is outside the scope of this essay, but I do want to briefly talk about the time window your ROI analysis is framed in. In marketing, there is a fundamental difference between being efficient (obtaining high MROI) and being effective (driving maximum profit and long-term shareholder value), and actions that achieve the first need to be balanced against investments that support the second.
In “The Long and Short of It: Balancing Short and Long-Term Marketing Strategies,” one of the most thorough analyses to date on marketing effectiveness over time (done by the IPA across more than 700 brands in over 80 categories), the findings are fairly clear: direct-response marketing investment that focuses on short-term sales growth can — and should — be measured inside a one year timeframe, or even within an individual quarter or season. But brand investment — investment that produces the most growth in long-term market share and profit gains — must be measured on a 2-3+ year timeframe.
Measuring the MROI of a brand campaign after, say, three months, is entirely the wrong lens to apply. The same can also be said for a true platform strategy.
#3 – The Right Denominator (for Marketing Investment)
Another reason why a ‘portfolio’ measurement philosophy is particularly helpful for MROI is it looks across all budget categories to account for (1) distribution and working media investment, (2) content production and creative development investment, and (3) people, talent, and other overhead investments. Comprehensive MROI understanding starts when all budget areas are understood as a composite whole across all geographies, brands, channels, etc.
Of course, holistic budget understanding is easier said than done. Although marketing is effectively a business function for manufacturing and distributing communications, most companies lack the analytical rigor to understand the size, speed, and economics of their communications supply chain. One global CPG company worked diligently for eighteen months to complete a first phase of process diagnostics and technology improvements so management could start benchmarking its marketing supply chain. This initial phase then provided the business case and blueprint to broaden the effort to other brands and markets, ultimately generating millions in incremental MROI through creative and team productivity improvements.
Because marketing ROI is ultimately determined both by the brand and customer behavior, it can’t be encapsulated or fully understood solely through the lens of marketing. Quite the opposite, marketing ROI manifests itself across company financial statements, sales figures, and customer satisfaction reporting. Marketing should still be budget and P&L-accountable, revenue-driven, and a disciplined user of data and analytics, but when it comes to playing an important role in its customers’ lives, it’s far more important to get the overall relationship right than count every word in the conversation.
For more on how to approach marketing ROI, download our new playbook “Three New Strategies To Unlock More ROI From Your Marketing”.