Marketing effectiveness

In the last thirty years, the range of marketing options and opportunities for marketers has expanded dramatically. Once there was only a limited choice between TV and print. Now there are a whole range of media from direct mail to the Internet supported by new technologies such as CRM and new ways of measuring markets. Increasingly board rooms are asking marketing managers to justify or prove the effectiveness of the marketing budget.

For many companies, marketing is a major annual expenditure. For instance for drinks companies like Diageo or Pernod-Ricard, marketing and promotional budgets run at more than 15% of total revenue. For these companies that means marketing expenditure of more than $500m per year across the globe.

If this type of expenditure went on salaries or production plants there would be a strong impetus in the business to try to calculate project return on investment before the money is committed. For marketing however, this isn't so easy. We intuitively know that marketing works, but in practice we don't know how well a piece of marketing will work until it is tried live in the market. It is also often not clear what makes one piece of marketing work better than a different piece of marketing, or what the ideal marketing portfolio (the choice of media and execution is).

To show how difficult this is, if you look at the advertising and promotion spend versus revenue and profit for Diageo and Pernod-Ricard from 2005 you find the following

Diageo (£) Pernod (Euro)
Revenue 3609m 3490m
Profit 863m 787m
A&P spend 559m 742m

This indicates that Diageo is making more sales and more profit with substantially less marketing spend that Pernod. Indeed for each pound of marketing spend Diageo generated 6.45 pounds of sales and 1.54 pounds of profit. This compares to 4.70 of sales and 1.06 profit for each pound of Pernod spend. So how is it that Diageo is 45% more effective with its marketing than Pernod?**

To understand marketing effectiveness we have to become a lot better at measuring marketing. Most market measurements or market metrics measure values. These values might be awareness or brand strength, but how do these values relate back to actual purchasing and decision making by consumers and how do you optimise the amount you spend on marketing to get the best return?

To start to make these types of measurement you need to carry out stimulus-response type measurements. These can be techniques such as conjoint analysis prior to market launch, or test and control or fractional factorial design experiments after market launch.

For much of this type of work we need to know far better how marketing works. Traditional models such as Awareness-Interest-Desire-Action don't work well enough, or fails to capture enough of the reality of decision-making. Our pattern-cascade model fits far better with the idea of stimulus-response and leads into research and measurement techniques that look at how and what decisions are made and the patterns that consumers link to their purchases which we explore using techniques like our sensory-emotion process.

** There are other effects going on here so it isn't quite this straightforward - for instance Diageo has higher other costs than Pernod.

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