Measuring Romi Slide Deck

Measuring the Return on
Marketing Investment
E. Craig Stacey, Ph.D.
The Center for Measurable Marketing at NYU Stern

Outline
Measuring the Return on Marketing Investment
1 The Need for Marketing Accountability
2 A Framework for Marketing Productivity
3 Marketing Mix Modeling and Marketing Planning
4 MMM: Econometric Time-Series Analysis
5 Model Estimation
6 MMM for Today’s Media Landscape

Outline
✓ 1 The Need for Marketing Accountability
2 A Framework for Marketing Productivity
5 Model Estimation

“Half the money I spend
on advertising is wasted;
the trouble is I don’t know
which half.”
- John Wanamaker
Corporate marketing is
the last bastion of
unaccountable spending in
corporate America.”
- Eric Schmidt
2008 – 2010 Research Priorities
1. The Need for Marketing Accountability
1. Accountability and ROI of Marketing Expenditures

2. Understanding Consumer/Customer Behavior
3. New Approaches to Generating Customer Insights
4. Innovation
5. Marketing Strategy
6. New Media
www.msi.org

2010 – 2012 Research Priorities
“Marketing Management and Practice in an Evolving

Landscape”
1. Delivering Value through Enhanced Media and Channels

2. Managing Brands in a Transformed Marketplace
3. Allocating Resources to Marketing Activities
4. Leveraging Research Tools and New Sources of Data
www.msi.org

The Center for Measurable Marketing
Research Priorities
• Measure marketing performance and integrate into business

process
• Develop metrics and methods for existing and emerging

communication channels
• Measure and manage brand equity

Outline
✓ 2 A Framework for Marketing Productivity
5 Model Estimation

“Metrics for Making Marketing Matter”
2. A Framework for Marketing Accountability
Lehmann (2004)
Marketing Metrics Hierarchy
Marketing Capabilities
Marketing Activities (Inputs)
Individual (Customer) level attitudes and behaviors
(Aggregate) Product-market outcomes

Outputs
Financial results (Performance)
Expectations of future performance (Valuation)
Donald R. Lehmann and Dominique M. Hanssens, Marketing Metrics, Wiley International

Encyclopedia of Marketing, 2010.

Framework for Marketing Performance Measurement
What marketers and competitors do

• Advertising
• Price
• Promotions
• Distribution
What customers think & feel

Direct Effect Awareness Consideration Liking Feedback Effect
What customers do
Brand purchases
Adapted from Lehmann and Reibstein (2006)

Advertising Campaign Testing

• Advertising
• Price
• Promotions
• Distribution

What customers do
Brand purchases

Brand Health Tracking

• Advertising
• Price
• Promotions
• Distribution

What customers do
Brand purchases

Marketing Mix Modeling

• Advertising
• Price
• Promotions
• Distribution

What customers do
Brand purchases

Mindset Metrics & Marketing Mix Modeling

• Advertising
• Price
• Promotions
• Distribution

What customers do
Brand purchases

Outline
✓ 3 Marketing Mix Modeling and Marketing Planning
5 Model Estimation

Marketing Mix Models…
3. Marketing Mix Modeling and Marketing Planning
• … are representations of marketing systems that are useful for

understanding the behavior of markets and for predicting the
impact of marketing actions.
• … describe the relationship between performance measures,

such as sales or market share, and controllable variables, such as
price and distribution.
• ... are designed to aid managers in planning and forecasting.

Maximize Return on Marketing
Marketing
ROI
Marketing Incremental
Expenditure Contribution
Costs Margins
Marketing Incremental
Model
Support Volume

Dimensions of Marketing Planning
Product
Time
Geography

Types of Marketing Planning
Product
BRAND
PLANNING
ASSORTMENT
PLANNING
Time
PORTFOLIO
MANAGEMENT
Geography

Marketing Mix Planning
TRADEMARK
BRAND
PACK/SIZE
ACCOUNT DMA MARKET

Outline
✓ 4 MMM: Econometric Time-Series Analysis
5 Model Estimation

Model Design
4. MMM: Econometric Time-Series Analysis
• Model objectives
• Selection of variables
• Relations among variables
• Data sources
• Functional form

Objectives Specified in Model
• Sales
• Market Share
• Traffic, Average check size, …
• Awareness, purchase intent, …

Selection of Variables
Examples of dependent
variables:
sales, market share, brand
choice, awareness, attitudes,
trial rates ...
Examples of explanatory
variables:
marketing mix activities, Variables
macroeconomic factors ...

A Simple Model
Y (Sales Level)
}b (slope of the
a salesline)
}
(sales level when 1
advertising = 0)
X (Advertising)

Response Function
Max
Sales
Response
Response
Function
Current
Sales
Min
Current
Effort
Effort Level

Data Sources
• Dependent and Independent Variables
• Internal vs. Syndicated
• Levels of Aggregation

Multiplicative Models
H
si = exp(α i ) Π xhi ε i βh
h =1

Q = eB0 XB1
(0 < B1 < 1)
12
10
6
Series1
4
0
0 20 40 60 80 100 120

Q= e X1 1
B0 B X2B2 ….. X Bj
j
Multiplicative model
• Only highest order interaction
• Constant elasticity model
• Log-log model
Most widely used sales response

function
• Cobb-Douglas Production Function (1928)

lnQ = B0 + B1lnX1
(Linear in logs)
5
4.5
4
3.5
3
2.5
Series1
2
1.5
1
0.5
0
0 1 2 3 4 5

Outline
✓ 5 Model Estimation

How Modeling Works
5. Model Estimation
Fit a model… Calculate contributions…

120 100
90
100
80
Advertising
80 70
Promotion
60
60 Seasonality
50
sales
Distribution
40
40 Price
30
20 20 Base
10 Sales
0
0
Sept
Feb
Oct
Apr
Jul
Jun
Aug
Mar
Dec
Nov
Jan
May
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Sales Model
10
to minimize the errors… …over the year
Advertising
15% Base
Promotion 20%
5 12%
Price
sales
17%
Seasonality
0 15% Distribution
21%
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
-5
error

Example Model
5. Model Estimation
R2 – 0.92
MAPE – 4.4%
Sales Volume
Sales Volume Fitted Model

Example Model Decomposition
5. Model Estimation

Outline
✓ 5 Model Estimation
✓ 6 MMM for Today’s Media Landscape

Traditional mix modeling does not work
for integrated online measurement
6. MMM for Today’s Media Landscape
• Treating online marketing (especially digital media) as just

another direct driver of sales leads to misattribution of sales to
drivers and ultimately bad mix decisions
• Even the best of today’s commonly used approaches have failed
to keep up with today’s challenges
• The following picture simply no longer holds true:
TV x PRINT x COUPONS TRADE
X
Online SALES
A far more complex marketplace exists in which online activity acts

as an outcome of offline marketing, as well as a driver of sales.

A new approach is needed to manage
complexity of the new media paradigm
SALES SALES
Paid Paid
Media Media
Owned Owned
Media Media
Earned Earned
Media Media
Trade Trade
Coupon Coupon
Organic Organic
Search Search

How Marketing Influences Sales
As well as feedback effects
TV
In-Store
It’s amazing what

soup can do
Radio
Print
Online
Display
Direct Impact Sales
How Marketing Influences Sales
Marketing drives customers both directly and indirectly
TV
In-Store
It’s amazing what

soup can do
Radio
Print
Online
Display
Direct Impact Sales
Drivers to Sales
Immediate, Persistent, and Indirect

Knowing what
consumers say matters
7/4/2010
7/18/2010
8/1/2010
8/15/2010
8/29/2010
9/12/2010
9/26/2010
10/10/2010
10/24/2010
11/7/2010
Black Friday
11/21/2010
12/5/2010

Negative
12/19/2010
1/2/2011
1/16/2011
Neutral
1/30/2011
2/13/2011
2/27/2011
3/13/2011
Postitive
3/27/2011
4/10/2011
4/24/2011
Store Promo
5/8/2011
sentiment) is typically monitored
5/22/2011
Level of conversation activity (and
6/5/2011
6/19/2011
Deal
Online
7/3/2011
Coupon
7/17/2011
7/31/2011
PR
Event
Context of conversations matters:
Went to store/made a purchase
• Went to store\Made a purchase

Store/brand advertisements
• Store\Brand Advertisements

I love store/brand
• I love store\brand

Drivers of offline store traffic
• I love store\brand

•
So what can businesses do?
I love store\brand
• Track the content, not just volume and valence of social

interaction, and relate to marketing and sales
• Move beyond observer role by targeting paid marketing to

stimulate specific social interactions
• Encourage virtuous circle of social interactions leading to

purchase, which further induces social interactions about
purchase (e.g. Kohls Facebook)

References
• Lehmann, Donald R. and David J. Reibstein (2006),

Marketing Metrics and Financial Performance.
• Lehmann, Donald (2004), “Metrics for Making
Marketing Matter,” Journal of Marketing.
The Center for Measurable Marketing

NYU Stern School of Business
40 West Fourth Street, Suite 915
New York, NY 10012
measurablemarketing@stern.nyu.edu
MeasurableMktg

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Measuring the Return on

The Center for Measurable Marketing at NYU Stern

1 The Need for Marketing Accountability

2 A Framework for Marketing Productivity

3 Marketing Mix Modeling and Marketing Planning

4 MMM: Econometric Time-Series Analysis

6 MMM for Today’s Media Landscape

✓ 1 The Need for Marketing Accountability

2 A Framework for Marketing Productivity

3 Marketing Mix Modeling and Marketing Planning

4 MMM: Econometric Time-Series Analysis

6 MMM for Today’s Media Landscape

1. The Need for Marketing Accountability

1. Accountability and ROI of Marketing Expenditures

The Center for Measurable Marketing at NYU Stern

1. The Need for Marketing Accountability

“Marketing Management and Practice in an Evolving

1. Delivering Value through Enhanced Media and Channels

The Center for Measurable Marketing at NYU Stern

1. The Need for Marketing Accountability

• Measure marketing performance and integrate into business

• Develop metrics and methods for existing and emerging

• Measure and manage brand equity

The Center for Measurable Marketing at NYU Stern

✓ 1 The Need for Marketing Accountability

✓ 2 A Framework for Marketing Productivity

3 Marketing Mix Modeling and Marketing Planning

4 MMM: Econometric Time-Series Analysis

6 MMM for Today’s Media Landscape

Marketing Activities (Inputs)

Individual (Customer) level attitudes and behaviors

(Aggregate) Product-market outcomes

Expectations of future performance (Valuation)

Donald R. Lehmann and Dominique M. Hanssens, Marketing Metrics, Wiley International

The Center for Measurable Marketing at NYU Stern

What marketers and competitors do

What customers think & feel

Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do

What customers think & feel

Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do

What customers think & feel

Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do

What customers think & feel

Adapted from Lehmann and Reibstein (2006)

What marketers and competitors do

What customers think & feel

Adapted from Lehmann and Reibstein (2006)

✓ 1 The Need for Marketing Accountability

✓ 2 A Framework for Marketing Productivity

✓ 3 Marketing Mix Modeling and Marketing Planning

4 MMM: Econometric Time-Series Analysis

6 MMM for Today’s Media Landscape

3. Marketing Mix Modeling and Marketing Planning

• … are representations of marketing systems that are useful for

• … describe the relationship between performance measures,

• ... are designed to aid managers in planning and forecasting.

The Center for Measurable Marketing at NYU Stern

The Center for Measurable Marketing at NYU Stern

The Center for Measurable Marketing at NYU Stern

The Center for Measurable Marketing at NYU Stern

ACCOUNT DMA MARKET