Last week, we took a brief look at two of the major decision-making metrics marketers rely on to demonstrate impact. And we named the elephant in the room:
Neither awareness nor short-term ROI helps marketers make better decisions about how to drive business growth.
This week Keen’s CEO and co-founder Greg Dolan explains marginal ROI and why it is the emerging go-to metric for helping marketers make informed decisions about how to invest successfully to drive business growth.
The Future is Here: mROI
One thing I’ve learned in my life experience so far is that you can’t change the past. This reality drove me crazy as a marketer with P&L responsibility. Tasked with making decisions to drive millions of dollars of sales and profits, I often found I had to base these decisions on a historical marketing mix or attribution study.
And that leads to a second undeniable truth: The past is not a reliable indicator of the future. So, why do we as marketers continue to make decisions based on historical metrics?
All ROIs are Not Created Equal
When marketers throw out the term ROI, it usually refers to a historic, short-term ROI, one that takes spending on a program and divides it by total sales revenue generated, with success equal to an improvement over the previous, baseline ROI. But as discussed in last week’s post, historic ROIs aren’t telling you the full story.
Marginal ROI instead calculates response curves for each week into the future to predict a marketing channel’s return. These response curves account for interactivity among marketing channels as well as the impact of such external factors as competition and seasonal effects.
As a result, mROI allows you to optimize spending in a given channel on a week-by-week basis to maximize profit.
For example, mROI can highlight the rapid-response decay you should expect in a transactional channel like FSIs, versus the longer return life of traditional broadcast advertising. But it’s also be much more specific: Run the numbers and you can see how much to spend (or not) on any particular channel in your specific marketing mix.
In other words, mROI’s ability to model the future has huge implications for the here and now.
mROI’s Superpower: Revealing Hidden Truths
What does this look like in practice? Here’s an example.
Take a typical CPG brand; we’ll call them CookoutCommander. And let’s start with traditional ROI. As you can see in the graph below the orange bars indicate that in the previous year, CookoutCommander delivered positive ROI across all tactics except trade and had no investment in print. Nice to know…but so what?
Because the historic ROI metric is not predictive, it also is not useful for determining the best future marketing buys.
How can we tell? Well, consider this: If CookoutCommander made decisions based solely on historical analysis, they’d probably decide to bump up the investment in paid search, since it has the strongest ROI. As it turns out, that would be a mistake, as the mROI (blue bars) make clear.
The blue bars show mROI—the return CookoutCommander can expect if they take into account a detailed analysis of the response curves. Here we see that paid search isn’t really so impressive; in fact, it’s destined to fall toward the bottom of the pack. The more profitable play for CookoutCommander is to first reintroduce print into it marketing mix, then boost TV advertising—at the right time of the year, of course.
The Response Curve: Long and Short Tails.
The mROI approach solves for the optimal spend based on a given financial objective. That could mean maximizing the impact of a fixed budget, hitting a specific revenue target, increasing long-term profit—whatever data point CookoutCommander’s CMO decides is most important.
The “optimized investment” graph (above) shows what CookoutCommander’s response curves look like. Each week, the system pulls the latest data and takes into account both internal and external factors. As you’d expect, with a name like CookoutCommander, there are big seasonal impacts on the business.
Evolve Your Thinking: Put mROI to Use
As our example shows, without examining mROI it’s tough to make informed decisions about the future with confidence.
Sure, an understanding of past ROI has its place, but that place is certainly not at the center of a marketing mix analysis. Dynamic markets require a dynamic tool—the kind of tool that doesn’t assume a short-term ROI is “good enough” or conversely that a lackluster historical ROI means the death of an otherwise promising program.
In fact, with the right unified marketing measurement and optimization system, CMOs can look ahead to something downright revolutionary: a brighter, more profitable future.