ROI on marketing spend impossible to measure?

Measuring the number of new sales generated via advertising is often difficult to calculate. This form of measurement tool is often very difficult to quantify. Is it, in fact, possible to measure the Return on Investment from one’s marketing spend.

This introductory blurb raises the point that it is difficult to calculate sales from advertising. I am surprised that this is even tabled as a topic for discussion. In the marketing world I inhabit, everything is measurable with ROI as the focus. But this is clearly not the case for everyone. I am often amazed by the way in which some marketers throw around money. If you spent a rand wouldn’t you like to know what it achieved? Now think about 1 million rand or 10 million rand. It’s my belief that if you don’t take that question seriously you deserve to be shot. No wonder so few marketing managers make it to the C Table.

There are some areas in marketing that account for high spend where it is especially difficult to measure the outcomes e.g. sponsorship and PR. So they invented a metric called EAV (Equivalent Advertising Value). For example, if you sponsor the LED advertising boards at a soccer game for 10 minutes, they calculate what that time would have cost had you been paying the normal, rate card rate. BUT, how much is really seen and does simply brandishing a logo have any impact on sales or even brand equity? It does rather seem to confuse cost with value and completely ignore that fact that most media owners are highly flexible when it comes to negotiating media costs these days anyway.

And what about PR. In my experience your name only needs to crop up once in an article for the PR guys to claim the entire article at its EAV. To be fair to the PR guys, when PR is done well the reader or viewer doesn’t even realise that it was placed by the company so I do appreciate how difficult it sometimes is for them to justify their existence.

So, what about traditional above the line advertising. Does that generate sales? Within two years SA will spend R18 billion on ATL so, one would hope so. But how few marketers have taken the time to prove the case. Some even go so far as to say that that it is not the job of advertising to generate sales, hiding behind that good old cliché of ‘it’s our job to build brand equity’.

What generally happens is that if sales, in general, are going up … marketing will claim the victory for advertising. But any number of variables can account for increased sales (e.g. a couple of years ago Cadbury gained significant MS at the expense of Nestle because Nestle introduced a new SAP system that impacted on its forecasting, production and distribution). Maybe I should just interrupt myself to make it clear where I stand on advertising … or more accurately, branding. Do consumers have relationships with brands? Of course they do. Do consumers choose brands they like in preference to brands they don’t? Of course they do. Do consumers trust their preferred brands more than brands they don’t like? Of course they do. Does this help one brand to sell more than another? Of course it does.

It’s the job of marketing via channels like advertising and increasingly social media to tell their brand stories, to promote their USP, to communicate their positioning. And YES, if done well, this helps to stimulate sales. But can you quantify by how much. The answer is usually NO.

So, back to the topic in hand …. Let’s briefly chat about what we mean by ROI and even more importantly marketing.

ROI = Return on Investment. If I spend R500 and generate R800 in sales I have shown a profit of R300. Divide R300 by R500 and you have a 60 percent ROI. Actually technically that is called a GMROI (Gross Margin Return on Investment). The fact is that the R300 was income not profit. To get a better sense of return you really need to ask yourself if you want to measure ROI using GP (Gross Profit), NP (Net Profit), PBT (Profit Before Tax) or even PBTD (Profit Before Tax and Depreciation)

It does, of course, get even more complicated when you start to factor in other aspects like ‘embedded value’ and ‘discounted cash flow’.

Embedded value is related to the concept of LTV (Life Time Value). I can undertake a marketing activity today and acquire a new customer who sticks around for two or three or even five years. Now what is the ROI? Over what period, when you are calculating ROI, do you claim the future value?

If that is not complex enough, we now need to think about DCF. I spend R1 today at today’s value. This year the money the customer spends is worth roughly the same R1. But next year, the R1 the customer spends, if we have 10 percent inflation, is worth only 90 cents. And in year two that could be 81 cents.

No wonder marketers shy away from issues like this.

Why might this be important? It seems to me that if activity A delivers a better ROI than activity B, I would be foolish not to invest more in activity A.

So, back to the topic at hand … how do we measure sales and other outcomes from marketing activities?

You start from the premise that marketing has to be measurable and not just an after-thought or some sort of granny flat (i.e. got added on at the bottom of the garden).

If you are a B2B marketer it should be a walk in the park. Why, because you can see all your customers and how they are transacting.

If you are a retailer who sells on credit, it should also be a walk in the park because you can also see all your customers and how they are transacting.

If you are a retailer who doesn’t sell on credit (like Clicks or Woolworths) you create a program to enable you to see your customers and how they are transacting.

If you are a cinema chain you create a Club to enable you to see your customers and how they are transacting.

If you are a casino you stop people playing with money to enable you to see your customers and how they are transacting.

If you are an airline like SAA during the time that most tickets were sold via travel agents you invent Voyager to enable you to see your customers and how they are transacting. It’s questionable if you need it so badly now that many bookings are made on line.

Before any-one thinks that I am suggesting that every company or brand needs to have a loyalty program let me make it clear that I am not. Heck, I am in the business and I am not sure what loyalty is. But what I am advocating is that if it’s at all humanly possible you need to get to know who your customers are and what they are doing and I don’t mean that in a general sense but on a one by one basis.

That, of course, is the real reason to run a program of any kind. To get customers to identify themselves.

So, what can we summarise in terms of the topic at hand?

•In the ‘old world’ of marketing it was indeed hard to measure the ROI from marketing
•In the ‘new world’ of marketing it’s mandatory
•To quote Stephen Covey ‘Start with the end point in mind’ … don’t put the cart before the horse
•Always ask the question … how will I measure the outcomes from my marketing activities ?
•Be willing to do the hard yards
•Understand & optimise the power of datainformation

Claude Hopkins in his book ‘Scientific Advertising’ said: ‘the purpose of advertising is not to entertain’. Frederick Taylor many years ago said, ‘If you can’t measure it, you can’t manage it.’ Now there’s a couple of thoughts for all those guys spending millions on advertising without effectively measuring the impact!

Article written by Keith Wiser