Before the answer is revealed let´s have a quick look at the insights from Gurdeep Puri - The Effectiveness Partnership, and some thoughts based on other research and basis of the LIVE 365 Framework.
According to Mr Puri "85% of CEOs say that 'getting closer to consumers' is their top priority but only 10% of board level discussions are about Marketing. There is in other words a lack of alignment between Corporate Strategy and Marketing:
7% of companies always set KPIs clearly for each initiative.
10% of businesses have core strategic metrics that remain consistent to enable longer term reporting.
39% of companies believe they are fairly or very effective at measuring ROI. "
These are pretty disturbing naked truths, consider also the findings of Les Binets and Peter Fields in "The Long and the Short of It" ref short term focus. Marketing needs to step it up and Mr Puri advises on how:
"Think commercial, speak commercial and demonstrate commercial. For marketing to succeed it needs to demonstrate Effectiveness to the CFO. Here´s how to align Corporate Strategy and Marketing:
Define how Marketing will help deliver on revenue and profit goals.
Then create actions to achieve this.
Measure effect on attitudes and behaviors, influence across customer journey and impact on financial goals.
Value of investment in Marketing: Finally analyze, calculate Payback and ROMI. "
How to calculate the value of Marketing actions:
"Payback is the ultimate KPI for marketing. The ultimate measure of Effectiveness.
Payback is the Net Profit generated due to a marketing action.
To find Payback you need to
1. Estimate value sales through Econometrics, Area testing or Extrapolation to find the Incremental Sales(IS) due to marketing action
> IS= Actual sales – Base sales(sales if the marketing action had not happened)
2. Calculate the Incremental Profit(IPC) due to marketing action
> IPC= Incremental revenue – Incremental costs
> Incremental Revenue = Estimated value sales – intermediary cash margin (Retailer mark up)
> Incremental costs = Variable cost pr unit (aka cost of production * Incremental units
3. Payback (Net Profit) = Incremental Profit Contribution – Cost of Marketing action. (Do not incl agency fee, only production and media costs.)
Example:
1. We found that 3.000.000 extra units sold due to our marketing action (campaign, communication etc)
Average retail price is $2 > Incremental sales value is $6.000.000
2. Retailer margin is 10% (10% of $6.000.000 is $600.000) = Incremental sales revenue is $5.400.000
A variable cost of $0.65 pr unit produced. 3.000.000 * 0.65 = Incremental cost is $1.950.000
$5.400.000 - $1.950.000 = Incremental Profit contribution from sales is $3.450.000
3. The cost of the marketing action is $1.200.000
$3.450.000 - $1.200.000 = Payback (Net profit) is $2.250.000 (ROMI 2.250.000/1.200.000= 1.88)
ROMI is the ratio of Net Profit generated divided by Cost of Marketing action. But it´s just a measure of efficiency of media allocation and not Marketing Effectiveness. ROMI is NOT a indicator of marketing success."
Much of Gurdeep Puri´s conclusions are entirely consistent with the viewpoint put forward by @ LIVE 365 when setting up our developed 365 Marketing Dashboard for brands - which is a strategic and operational scorecard on business, communication and tactical level that enables brands to measure 365 days a year how well they perform and provides evidence-based recommendations on how to improve performance.
We also could not agree more about the importance of Marketing to be seen upon as an commercial investment and not a cost on the balance sheet. To achieve this we need to avoid marketing myths, causality studies/findings in our marketing efforts and start documenting the results properly.