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Alternative approaches to calculating marketing return on investment offer a more detailed view of consumer response to marketing activities and the impact on sales.
Gone are the days—if they even ever existed—when marketing was solely an exercise in developing creative campaigns. Today, the need to truly understand the impact of marketing on sales is essential, not only for planning purposes, but to drive the business forward.
But how can marketers truly understand the marketing return on investment (MROI) of one promotional activity over the next in terms of sales generated? Since measurement calculations are typically averaged across the entire period analyzed, it is a challenge to get precise strategic insights at specific points in time. To move past this, marketers are exploring alternative approaches to MROI, including more advanced econometric modeling techniques that involve time-varying parameters (TVP).
Marketers have traditionally relied heavily on constant parameters regression (CPR) modeling to understand the impact of marketing investments on sales. Ads were bought on long lead times, the analysis of data was on a six-month cycle or more, and media plans were prepared on an annual basis. However, since ads are now bought and sold in minutes, analysis needs to be done in real time and planning becomes an ongoing activity.
As such, marketers must understand the effectiveness of individual marketing activities at a much more granular level and across multiple channels to provide opportunities for higher MROI. More advanced TVP modeling techniques are gaining traction across industries.
Unlike the CPR technique, the TVP model can capture the finer movements of sales and determine the extent to which each marketing activity contributed to increased sales in a specific time frame. Since this approach reflects the actual response of consumers to marketing activities at a granular level, companies can use the data to make accurate investment decisions that may generate a higher return than would have been possible otherwise. The model also helps to:
Drive marketing spend to higher levels of incremental value per dollar invested.
Make it easier for chief marketing officers to justify MROI.
Ensure the precision of data.
Drive greater transparency in measuring the effectiveness of marketing initiatives in driving sales across media channels.
Provide key information that other departments, such as financing, need for business planning.
To better understand the utility of TVP modeling, we explored the fictitious example of SuperiorBuy, an FMCG (fast moving consumer goods) company with more than 1,500 stores in 50 markets.
We assumed that the marketing department ran a series of marketing campaigns for two years across a number of offline and online media channels. At the end of this time, the CMO wanted to quantify the effectiveness of its marketing activities to plan future activities. We learned the following about TVP modeling in this case:
More granularity. The TVP approach goes a step further than CPR modeling by providing precise estimates of the effectiveness of marketing activities across media channels in driving sales at a local level on a week-by-week basis.
Time sensitivity. The TVP model offers the additional insight associated with quantifying uplifts and dips on a week-by-week basis.
Media driver sensitivity. With a focus on granularity and being adaptive to the movement of local sales, the TVP model gives precise results. Since it analyzes available data and also identifies gaps in that data, it mirrors the real situation.
As chief marketing officers are under increasing pressure to justify MROI, it’s no surprise that decisions around the best techniques to use in analyzing historical sales data are top of mind. When determining the approach that will guide future decisions about marketing activities, there are key questions that must be addressed in any analysis:
Media drivers. Should the marketing organization invest in the same media drivers in the coming year or not?
Media mix. What is the most effective mix of media drivers?
Timing. When should the promotional activities begin in each marketing activity and how long should they stay active?
The TVP approach gives marketers an essential view of the effectiveness of every promotional activity, which translates into invaluable future insights. This way, marketers can invest in the right mix of activities based on how they have historically driven sales.
January 30, 2013
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