The Truth About Measuring the Long-Term ROI of Marketing

The Truth About Measuring the Long-Term ROI of Marketing

Measuring Marketing ROI: The Truth

The Marketing Accountability Standards Board (MASB) recently held a meeting to discuss the important research being done about the financial impact of marketing investments. The Board’s mission is to “Establish marketing measurement and accountability standards across industry and domain for continuous improvement in financial performance and for the guidance and education of business decision makers and users of performance and financial information.” Several of the world’s foremost authorities who are studying the effects of marketing activities on financial results discussed aspects of their work. A growing body of empirical evidence suggests that (in general) only 20% of the financial returns from a marketing investment occur in the year of the expenditure… the other 80% of the benefits carry over to future years. This finding could change the way companies account for marketing expenditures – shifting a short-term view of marketing as an “expense” to a longer-term “investment” perspective. It’s not out of the question that, at some time in the future, marketing investments will be capitalized and amortized much as R&D is treated today.

Four Key Takeaways from the Research

1. The long-term effects of marketing investments CAN be isolated (i.e. statistically “disentangled”) from other long-term forces, and the marketing effects can be substantial!

In 1995, Hanssens and Dekimpe introduced a new statistical modeling approach called “Persistence Modeling.” The approach first determines whether a time-series of sales is stable or evolving (trending) over time. If there is a trend, then subsequent procedures determine the strength of the trend and to what extent it can be related to marketing activity.

The authors observe that there are often other factors which can impact long-term sales, many of which can have negative impacts … such as competitive reactions and new (substitute) product introductions. Yet, the ability to disentangle the effect of a firm’s marketing investments allows managers to “see” the contribution that marketing investments make. “If the distinct nature of evolving environments is not taken into account, one may seriously underestimate the long-run effectiveness of advertising.”

2. Long-term marketing effects come from 6 “channels” … 3 are related to Customer Response and 3 are related to changes in the firm’s internal behavior and adoption of best practices.

Consumer Responses

a. Immediate response to marketing

The immediate response to marketing stimuli is the “temporary lift” that is the focus of most advertising research – particular single-exposure copytesting. A substantial amount of academic research has concluded that it is essential that a marketing program generate short-term effects for the creation of any long-term impact.

b. Carry-over effects

Carry-over effects reflect delayed buyer response, especially in durable goods markets. These are often determined with distributed-lag models, or with intermediate metrics (e.g. “leads” in B2B markets). The carryover effect is the result of time-shifting between the delivery of a marketing stimulus and actual time of an effected purchase. It is not fundamentally different from the temporary sales lift identified as an immediate response.

c. Purchase reinforcement

Purchase reinforcement refers to repeat-buying as the result of the initial marketing-induced purchase. It is equivalent to the concept of “customer retention” in relationship oriented businesses, and can be built by word-of-mouth.

Purchase reinforcement builds long-term sales … without it, long-term impact cannot materialize.

Internal Behavior

d. Feedback effect

Feedback effect is the influence of the initial (measured) sales lift on subsequent marketing spend. Companies that treat each campaign as a separate go/no-go investment decision may not realize this long-term benefit, while companies that make long-term “spending policy” decisions AND who measure short-term effects to ensure that the marketing stimuli are working, will see long-term sales impacts from their marketing investment.

e. Decision rules

Decision rules refer to the effect of advertising spending on other parts of the marketing mix. For example, reductions in trade promotions to offset advertising spend or increases in sales calls or increases in retail pricing to capitalize on positive consumer response to advertising.

This source of long-term marketing impact results from coordinated marketing strategy and mix decisions informed by management’s learning from observed short-term effects.

f. Competitive reaction

The intensity of competitive reactions to marketing tactics determines the ultimate level of marketing rivalry in an industry.

The overall long-term impact of marketing investments can be 5+ times stronger and longer-lasting when organizations:

  • Use advertising response metrics that are predictive of transactional results
  • Spend on activities that create the desired temporary lifts necessary for long-term build-up
  • Develop ongoing better business processes to repeat successful marketing behaviors

3. Highly volatile marketing spending has negative effects on overall financial performance … it is better to maintain a steady marketing pressure to minimize volatile effects on sales and cash flow.

Volatile marketing spending, particularly high-low or pulsing strategies, has been shown to shift primary demand to the high-spend periods. This strategy increases the volatility of sales and cash flow, and results in higher cost of capital financing charges.

Brands that consistently spend at competitively higher levels enjoy some protection against performance volatility. A key conclusion is that marketing spending can reduce the systematic risk of a firm.

4. The value of companies (as determined by stock prices) which increase marketing investment tends to drift upward, suggesting that the stock market takes time to fully incorporate implications of strategic marketing decisions … in effect, updates in a firms valuation occur when the outcomes of marketing investments are realized in future periods.

The authors compared daily stock prices to the announcements of various events and signals of future events. They concluded that the stock market initially misvalues the impact of changes in marketing investment levels, but that “the initial misevaluation is correct over time.” An important managerial conclusion: “Managers who increase intangible investments will eventually see greater profitability and higher stock market valuations of their firms.”

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