How to Measure and Grow

Return on Marketing
Investment

Professor dr. Koen Pauwels

Tuck School of Business at Dartmouth
Can you answer these
questions
• What is affecting your current and
future performance, and by how
much?
• When does your marketing action
affect performance, and how long
does it lasts?
• Which marketing action gets you the
highest return on investment and
where?
• To increase baseline performance,
 Example 1:

Market ing Pre-duck Post-duck

Success !
Brand 2% (1999) 80 % (2001)
awareness 85 % (2006)

Company $ 555 M $ 712 M (2000)

Revenue (1999) $ 919 M (2001)
Financial success:
RODuckI ?

• Observable duck lift (full

attribution)
 Awareness increase: 3900 %
 Revenue increase: 28 - 66%
• Very expensive: $450M (2000-
2006)
• Need to continue spending at high
level
•
Example 2: manager’s
question:
•“I am running a print advertising
campaign in several trade publications.
This ad is solely to increase our brand
awareness. We are in the financial
services industry and our services do
not warrant a call to action type ad.
However, our CEO wants to quantify our
ROI on this campaign. Do you have any
suggestions how I can justify or validate
this advertising program. Is there a way
to determine the ROI?”
 Why measure Return on
Marketing Investment ?
• Marketing is held accountable to create
profitable growth and reduce waste in
spending
• Operations and finance are accountable
for return on investments, why not
marketing?
• Return on Marketing Investment badly
needed:
 80 % of new products fail
Need to answer questions
as :
• How do retailers and competitors,
not just customers react to your
marketing action?
• How does retailer and competitor
response change your marketing
ROI?
• How do customers move through
online & offline purchase funnel
(aware  consider  buy  love)
and how does your marketing help
 Persistence Marketing
Models

• 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
 Persistence modeling
works
• Data tells us how long the long-term
is:
 Immediate, adjustment,
permanent effect
•

• Allows for wear-in and wear-out: ads

may take some time to work and
then fade out
•
 Example: Discount immediately
increases consumer response, but
lowers sales in next weeks,
especially if competitors react
5

4
Immediateeffect
3

1
No Permanent effect
Consumer
0
Competitive
y E
s
ticS
le
a

-1

-2

-3
Adjustmenteffect
-4
1 2 3 4 5 6 7 8 9 10 11 12 13
Weeks
 Discount ‘works’, so
company repeats it but gets
lower returns
5

1
Consum
0 Compe
y E
s
ticS
le
a

Compa
-1

-2

-3

-4
1 2 3 4 5 6 7 8 9 10 11 12 13
 Worst case: each time you
promote it hurts your
bottom line
Retailer Revenue response

CHEESE
0
1 3 5 7 9 11 13 15 17 19 21 23 25
-20000

-40000

Adjustment Permanent effect

-60000
($)

effects
-80000

-100000

-120000
Immediate effect
-140000
Weeks
 Best case: permanent benefits
through consumer trial and
learning
5

1
Consum
0 Compe
y E
s
ticS
le
a

New pr
-1

-2

-3

-4
1 2 3 4 5 6 7 8 9 10 11 12 13
 Profitable Growth
Conditions

Mature Markets Changing Markets

Campaign Short-term Gain Permanent Benefit
Marketing FMCG promotions Automobiles Product
Pharma advertising innovation
Changing Escalation Evolving Business
Marketing Automobiles Price Pharma Detailing
Rebates Social Network Site
 Example Short-Term Gain:
Medical Journal Advertising
Works Right Away, then dies
out
10
9
8
JAD Elasticity

7
6
5
4
3
2
1
0
1 3 5 7 9 11 13 15 17 19 21 23
Months
 Direct-to-Consumer ads
show Wear-in and Wear-
0.18
out
0.16
0.14
DTC Elasticity

0.12
0.1
0.08
0.06
0.04
0.02
0
1 3 5 7 9 11 13 15 17 19 21 23
Months
 What is the Best that
could Happen? Permanent
Benefit
5000

4500

4000

3500
Gross Margin $

3000

2500

Honda launches
2000
1999 Odyssey
1500

1000

500
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
 One-shot innovation
increases Honda’s Firm
$50
Value Forever
$45

$40
Firm Value ROI in Millions

$35

$30

$25

$20

$15

$10

$5

$0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Weeks
Long-Term ROI Varies by
Segment and Firm
Toyota Daimler-Chrysler General Motors Ford
250

200
ROI in $ Millions

150

100

50

Cars Trucks Minivans & SUVs

 And by Innovation Level
Top Line Bottom Line
12

10

8
ROI Elasticity

0
1 2 3 4 5
-2

-4
Innovation Level
 In Contrast, Rebates
Decrease Firm Value in the
long run
$140
$120
Firm Value ROI in Millions

$100
$80
$60
$40
$20
$0
-$20
-$40
-$60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Weeks
 As They lead to Competitive
Escalation
Chevy Dodge

$2,500

$2,000
Average rebate

$1,500

$1,000

$500

$0
1/3/99 5/3/99 9/3/99 1/3/00 5/3/00 9/3/00 1/3/01 5/3/01
 Evolving Business:
Detailing needed to
9000.00
maintain Sales
8000.00
Detailing and Sales

7000.00

6000.00

5000.00

4000.00

3000.00

2000.00

1000.00

0.00
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul-
93 93 94 94 95 95 96 96 97 97 98 98 99 99
Month
Site subscribers go up with
higher but also go down with
SE activity
Need to know which
scenario
• Economic boom and category growth
 Evolving business scenario
attractive: positive performance-
spend cycle
•

• Economic recession and category

decline
 Evolving business scenario
unattractive Short-term Gains very
attractive
 How to Grow ROMI ?

Mature Markets Changing Markets

Marketing Continue to Focus and be ready

Campaigns create better to handle growth
campaigns

Changing Allocate $ to Ensure marketing

marketing other marketing spending keeps up
actions with sales
Are we heading in right
direction?
• Does your boss / board want a bird’s
eye view of performance and its
direction?
• Do you want all decision makers to
speak the same data and metric
driven language
• Do you want to compare
performance across regions,
companies, industries?
•
Integrate insights in
dashboard
• “Concise collection of interconnected
key performance metrics and
underlying performance drivers
that reflects both short and long-
term interests to be viewed in
common throughout the
organization”
• Consists of a number of page views,
mechanisms to navigate between
them and easy-to-use what-if
Dashboard page view
example
Marketing dashboard
benefits
• Visualizes ROI model insights for
different decision makers and
stakeholders
• Allows performance tracking at
different levels, versus internal
targets and versus peers in other
regions and/or companies
• Shows in real-time the expected
effects of changing marketing
budget and allocation
 The time is now :

• 21th C Reality : Need to demonstrate

ROMI faced with economic
uncertainty, rising costs and
shifting customer preferences
• Approach: long-term response
models yield measurable long-term
benefits
• Translate into actionable managerial
insights and need for future
monitoring