Marketing Effectiveness Analytics Comes of Age

As Marketing Effectiveness Analytics comes of age, it seems to have been promoted from specialized firms to it's own practice area within Marketing Strategy dvisions of Crème de la Crème of the consulting world and from an esoteric existence within Market Research Departments to the Corporate Boardroom- almost a Cinderella story. Marketing Effectiveness Analytics today is the tool of choice while setting benchmarks and hurdle rates for assessing marketing campaign performance, setting new product marketing budgets and pricing strategy shifts.

Studies like Marketing ROI Analysis (a.k.a Marketing-Mix Modeling a.k.a Marketing Effectiveness Analysis), Marketing Spend and Advertising Optimization etc. were not mainstream services within the Marketing practice area of blue-chip firms like McKinsey, Accenture, Booz and Deloitte. Now these firms have dedicated sections to Marketing Effectiveness/Efficiency within their Marketing practice area. It's not as if they have created new and improved version of these analytics that have been practiced by niche firms for the last 20 years or so, they have just added their branding to them and this is causing C-level execs to take notice. So now that Marketing Effectiveness Analytics has established as a mainstay within the "must-haves" of Market Research tools, hopefully there will be more focus on standardizing this tool across industries so that the results can be normalized and used as benchmarks.

One potential outcome of marketing effectiveness becoming a standardized corporate practice is that GAAP could be amended to treat Marketing as a Capital expense (maybe a bit of a stretch but not impossible). This will have far-reaching effects on marketing budget management- for instance if marketing expenses could be capitalized and amortized over time instead of in the same revenue period, Corporate stakeholders would be less likely to slash marketing budgets every time costs need to be trimmed. Return hurdles set by Marketing Effectiveness analyses would ensure that marketing spending is efficient and productive thereby providing a check to a tendency to overspend and amortize over longer periods. Just a thought.

Media, A Wharton Professor and Marketing Research - II

And a little book called Moneyball
Following up from my last post, I gave my second blog a little time to think itself through. For some reason, I kept thinking about this book while I was listening to Professor Fader's ideas. That set me off on another line of thought. What is marketing research all about? The professor kept talking about the value of conventional wisdom and using information more effectively. Perhaps a few innovators in baseball have hit upon the answer. So, without much further ado, let me introduce the reader to the book using the omnipresent Wikipedia (http://en.wikipedia.org/wiki/index.html?curid=438445). Here you can find a pretty succinct summary of the book. The core of the book to me, however, is the essence of innovative marketing research.
Every industry has its own conventional wisdom. Take, for instance, the motion picture industry. Traditional wisdom says that movies should be released on Fridays so that they can benefit from the weekend crowd. While this might have held true in times when the average movie-goer went to work 5 days a week and looked for some Friday night entertainment, but will this theory change if we had flexible working hours? Is the pre-release on Wednesdays and Thursdays an attempt to get an early edge? Is it the reflection of an extended weekend? Do these rules apply equally in the summer? I don't have a definitive answer, but I just know that the new trend certainly isn't conventional wisdom.
Baseball, too, suffers from its multitude of opinions. What Billy Beane and his crew did was to challenge opinions using statistically-backed stats. For example, they found that a college player's chance of making it in the big leagues is way greater than a high school player's odds. This flies in the face of traditional baseball thinking - but is validated by research! This allowed a middle of the pack team like the A's (when it came to budget) to run with organizations like the cash-rich Yankees or the Red Sox who in the past have simply shelled out exorbitant cash for the best established players.
I am sure marketing researchers at this point are smiling to themselves. Haven't we all faced some brand manager who seems to believe that her brand is premium despite all evidence to the contrary? Or that TV advertising still generates 15% incremental sales for a mature CPG product?
To me, the professor's theories, the book and the current state of marketing research all point in the same direction. Research is useless if it is only used to validate conventional wisdom. True value in research is driven by finding previously undiscovered nuggets - and not by doing the tried and tested.

Wading Through A Deluge of Recession Pricing Advice

Over the past year or so a lot of advice has come out from business thought leaders about recessionary pricing strategies. Below are three articles from what are considered to be well-regarded sources:
INSEAD: When to push the panic button?
Harvard Business School: Marketing Your Way Through a Recession
McKinsey: Pricing in an inflationary downturn
Although there's a lot of valuable advice in these perspectives, it is surprising that some of these studies propose a one-size-fits-all approach to recessionary pricing.
Sorry to burst the bubble, but the consumer decision process is not that simple. For instance the INSEAD article proposes that consumers are not more price sensitive during a recession, the extra sensitiveness shown during recessionary times is attributed to income smoothing and advices firms to focus on share of customer wallet rather than share of market. Good advice, but while it is great to focus on share of wallet, share of market ultimately determines the financial performance corporate stakeholders will be evaluated on. Share of wallet as a metric is focused on retention(up-selling and cross-selling). While retention is critical, acquisition is important too in driving growth. Market-share is a more wholesome metric that takes into account performance of both retention and acquisition activities, especially if the firm is in a growing category, where acquisition could be a greater determinant of performance than retention. On the other hand for mature industries, retention would certainly be more important. This highlights the perils of subscribing to generic strategies.
Another frequent advice I have come across is to not take a perceived increase in price sensitiveness during economic downturns as a signal to aggressive pricing strategies that may lead to unprofitable price wars. That is all good, but game theory suggests that in multi-competitor industries, you will always have a player that will try to increase their payoff by defecting and using aggressive pricing strategies to garner market shares. In this case should you take the higher road and trust in your customer loyalty or protect your market-share?
The Harvard article scores on a few points, for instance Advice #6 is to "Adjust Pricing Tactics"- some good nuggets of wisdom here, but #3 "Maintain Marketing Spending" is no all that realistic. Margin pressures inevitably result in budget cuts.
The McKinsey article actually has some pretty good advice on how research steps that can help fine tune pricing strategy, without actually trying to generalize findings. I especially liked these:
Monitor customer-level profitability
Update price sensitivity research
Monitor your industry’s microeconomics
Consumers reaction to pricing in recessions is not generic across all of their purchases. For instance, if a Brand is in a category with relatively low product differentiation, price discounting could forever forfeit brand premium, while Brands in categories with higher product differentiation can actually leverage pricing without damaging longer term equity. Also for service-based industries, brands can drive longer-term market-share by lowering price and locking in customers over a longer-period. Ultimately the key thing to remember is that when it comes to pricing strategy- one size certainly doesn't fit all.

Riding out the Recession with Lean Business Strategies

Businesses in the present economy are under pressure as the pace of revenue growth slows down to a crawl, compressing profit margins as revenues barely exceed fixed costs. Of course you can still drive growth through share gains and lower costs by targeting jobs for elimination, but when industry growth is nonexistent, your competitors will protect market-share fighting tooth and nail. Also there’s only so many jobs that can be eliminated without cutting into the core of the organization. Here are some measures that can be taken to tighten the organizational belt and drive austerity within the organization- some old ideas and some new.

Internal Impact: Reinforce your core and increase operational agility

Drive Operational Efficiency:
Leverage matrix relationships and pool resources across functional groups. Also evaluate the opportunity of creating smaller multifunctional “SWAT” teams that can rapidly deployed to tackle complex one-time assignments across the organization. Protect cash reserves to compensate for credit paucity during recessions- don’t over-leverage. Acquisitions may seem very attractive during recessions as valuations are low, but acquisitions add a lot of burden on the company in the integration process during a time when corporate energy needs to be conserved- bite only as much as you can chew!

Focus on competitive advantage:
Every firm at some point started with some competitive advantage that enabled them to enter a market effectively and when times get tough, it becomes critical to leverage this inherent expertise. This also offers the surest opportunity for growth- by simply taking your competitive advantage to newer markets, rather than trying to get into markets where you have peripheral or no expertise. Bring the game to where you have an advantage.

Streamline your Product Portfolio:
Innovation is critical to growth, but depending upon the industry, only about 30% of all innovations have the ability to drive incremental growth (without cannibalizing core business). New product trials to identify successful innovations consume precious resources that are critical to corporate health during tough economic times. Plants are masters at evolving through tough environmental conditions and provide us a valuable lesson in growth- you can only grow if you survive. In bad weather, plants conserve resources and do not produce flowers, fruits or seeds. These are critical for it’s proliferation, but consume precious energy in producing, which is better used in staying alive. Take a realistic look at your innovation portfolio, rank them by short-term probability of success and take the top 25% or fewer to trial.

Enhance existing product features:
Leverage customer data and market research to understand what product features are the most valuable to customers and enhance core portfolio. Remember when resources are scarce then innovation needs to be efficient.

External Impact
Maximize Customer Value Proposition
Understand what customer need your product serves and try to maximize the product’s ability to serve that need. This goal determines the focus of internal impacts 2, 3 and 4 above. For instance if functional benefits are the primary need your product serves then minimize packaging and other peripheral costs and increase the functional offering. If quality not quantity is the key benefit your customer derives out of your product, then quantity not quality is what needs to be adjusted to protect margins.

Retention rather than acquisition focus
In most industries, acquisition costs are very high and there is a net negative cash flow of replacing an existing customer with a new customer when factoring these acquisition costs. If there is a moderate to high degree of customer turnover, your marketing dollars are better spent on retention rather than acquisition.

Protect core market
Your core market segment and is what drives your main cash flow and your core customers are the most loyal. It is easy to take this for granted as corporate leaders focus on making their mark on newer areas of growth, but when faced with economically challenging times, the castle needs to be protected from competitive incursions. This is also your most familiar grounds from which to weather out economic storms.

Satisfy broader range of existing customer needs
This is probably the lowest hanging fruit and also the most important in all of your external opportunities available. During economic hardships every single of your customers are trying to stretch their dollars and if there are innovation opportunities available to fulfill multiple customer needs with fewer products, these should be capitalized.

"Wal-Mart-esq" Marketing Strategy at Hyundai Motors?

I just saw the Hyundai ad that offers to buy back your new Hyundai if within a year of purchase you lose your job- talk about making best out of the situation! They were already pushing the best value for your money line- but this is quite a bold move that for the time-being stands head and shoulders above the rest of the "economic downturn? we are here to rescue" pitches. If it doesn't burn a hole in their pockets, this should bode well for their brand equity. On the flip-side, Hyundai taking back my new car will ease the pressure of making payments, but now I will not only be jobless but also car-less.

Honda, Toyota: this is your opportunity to outdo those smarty-pants at Hyundai Marketing- make a counter-offer of also throwing in a free loaner for those job interviews (you can thank me in cash for this free tip).

Media, A Wharton Professor and Marketing Research - I

A couple of weeks ago I had the opportunity to actually attend a lecture by a Wharton professor - Peter Fader - at the Marketing Modelers meeting down at the ARF in NYC. The topic of conversation was "The Paradoxes of Interactive Media". Peter Fader is a professor at the Wharton school of business and is actually on the board of A-list journals such as Marketing Science and Journal of Marketing Research. He has built his reputation on his research on trial and repeat in the CPG industry, while also doing some mean research in the field of electronic commerce. Most notable was his testimony during the Napster trial. Based on that testimony it was clear that the man is a rebel and revels in lateral thinking. The talk just confirmed it.

Even though I - or most other people in the room - didn't agree with everything he said, but his approach prompted me and everyone in the room to question our beliefs and conventional thinking. In today's blog I am presenting one of the points made in the session.

Professor Fader iterated that cross-group differences across different demographics like ethnicity are often meaningless. Now this may be true from a total category point of view (he used the example of DVD purchaes by hispanic vs. non-hispanic consumers). But if you get down to the brand or attribute level, this actually leads to way different consumer behavior - and since marketing is brand-driven rather than category driven, I would have to say that distinct differences do exist and can be leveraged by marketers to drive sales differently among different demographic groups. However, his essential theory that people are the same (or distributed similarly/ normally, if you want to be statistical) everywhere is pretty solid. However, as soon as you start breaking down a category by its attributes (brand, size, flavor, feel etc.) ethnic differences come into play. I would love to hear other points of view on this. I will deal with a couple of other interesting points made by professor Fader in my next posting....

P&G Giving Up on Facebook Marketing?

I was just reading an article by Jack Neff of AdAge covering P&G "Digital Guru" Ted McConnell. Ted believes that Social Networks like Facebook may never be able to show the ROI on Ad dollars marketers spend on their websites. The article quotes Ted as saying about consumer-generated Media "Who said this is media? Media is something you can buy and sell. Media contains inventory. Media contains blank spaces. Consumers weren't trying to generate media. They were trying to talk to somebody. So it just seems a bit arrogant. ... We hijack their own conversations, their own thoughts and feelings, and try to monetize it." I am not sure if someone rewrote the English language dictionary but last time I checked Media is defined as "means of mass communication" and with a Reach of 12% of global internet users according to Alexa, Facebook certainly fits that bill. Now is it a good medium for advertising, that's a whole another thing. Ted also raises concerns about the type of targeting afforded by Facebook, but that's a fallout of the Information Age. There was a lot of hue and cry about using Credit Bureau data for marketing, a few regulations later that is still an industry. Ted makes a good point about reach fragmentation though- there's just way too much people do online to effectively reach them with any decent amount of banner ads. On the other hand as technology advances the ability of online advertisers to track a target through their internet trail and persevering until a conversion is obtained isn't that difficult. Already re-targeters are identifying unique users and repeatedly hitting them with ads- check this article.

Return on Product Innovation: Measuring your Innovation Pipeline

Innovation is a critical growth driver for most industries, but more so for industries that are mature. Growth industries are less reliant on an ongoing pipeline of innovations because the full potential of the existing portfolio hasn’t been maximized yet, penetration can be further increased and new markets can be expanded into, where success with existing products can be replicated. Products and brands in mature industries on the other hand are characterized by a lack of differentiation outside of price- barriers to entry are low, which increases the number of market players, pushing marginal profits down. In such an environment, innovation provides a strong differentiating factor, allowing a brand to lower dependency on price as a competitive lever.
So if you are responsible for the strategic planning for your firm and not in an early stage industry, you need to be thinking about your innovation pipeline and it’s not enough to say you have a department for innovation- in most industries only 1 in 10 innovations succeed. So you not only need to have a team in place that has a network reach both inside and outside the organization that allows ideas to funnel up, but you need to also have the right metrics in place to evaluate the performance of your innovation strategy vis-à-vis your industry. A study by McKinsey (McKinsey Global Survey Results: Assessing innovation metrics, October 2008) suggests that a large percentage of executives even at companies that actively pursue innovation don’t formally assess innovations at all.
One way to evaluate innovations is using Return on Product Innovation (ROPI) measured through in-market tests (in-market tests are also risky because your competitors can copy it and bring to market faster than you, stealing your thunder). For ‘breakthrough’ innovations that you are planning to take straight to the market without first testing, ROPI can be estimated as ‘one-year out ROPI’, ‘two-year out ROPI’ and so on. At the end of year 1, forecasts can be used to estimate breakeven time for ROPI to turn positive and marketing ROI can be used to evaluate opportunity to optimize marketing strategy to improve ROPI.

ROPI={[Dollar Sales-Cannibalized Sales]/ [Fixed Cost + (Variable Cost*Units Sold)]-1}*100

Fixed costs can include development or other one-time costs related to production, variable costs are usually ongoing production, marketing and distribution costs. You need to deduct cannibalized sales, because these are sales you would have gotten even without the innovation. This equation can be modified for any custom inputs particular to your industry or the nature of innovation. For instance, if estimating ROPI for an in-market test then using the full fixed cost for development is not fair and should be factored down based on the ratio of size of market tested vs. the total market-size.

Predictive Targeting In Digital Media Marketing

I was just reading an article on MarketingProfs.com that was talking of leveraging a technique called "CARVER" (reminds me of Thanksgiving!) used by the military to "identify and prioritize" targets ("How to Target Your Prospects With Military Precision" http://www.marketingprofs.com/8/target-prospects-with-military-precision-meachum.asp?sp=1). This won't be the first time ideas from the military have been leveraged in business 'warfare'. In fact Precitive Trageting is exactly the area where another concept from military surveillance has been used- Receiver Operating Characteristic Curves or 'ROC' Curves. ROC Curves are used to evaluate how well predictive models are able to identify targets that are most likely to respond to specific media tactics. The concept is based on the effectiveness of Radars to identify targets by sifting signal from noise. ROC curves are used to evaluate econometric models that identify prospects that are most likely to respond to media tactics. Wikipedia has a good explanation of this approach: http://en.wikipedia.org/wiki/Receiver_operating_characteristic_curve. Although the CARVER concept is interesting, the optimization of the weights for each factor seems a bit subjective inc comparison to the scientific precision provided by an econometric model. This link provides a fairly decent expanation of the method: http://www.ni2cie.org/targetanalysis.php.htm
Compared to the subjective approach utilized here, an econometric model not only helps identify most opportunistic targets, but also quantifies specific relationship between probability of response to marketing and amount invested in each media tactic available. Of course to do this successfully you do need a training sample based on historical programs, so if the CARVER approach doesn't need any historical data, there may be something there.