Unsympathetically, many are now requiring that any brand communication budget be substantiated by financial measures of return. "If we give you $X for advertising, how much will we get back?"
Though return-on-investment projections would be ideal, in many instances any finance-based justification would likely suffice. Yet marketers still don't have satisfactory answers. So both parties continue to fuss and fret about how much should be spent on advertising this year, next year and the years following.
THE WRONG QUESTIONS
Why does it continue? Not because the CEOs and chief financial officers are not concerned. It's because they are asking the wrong questions.
The good news: Numerous client-side and consulting organizations seem to be sharpening their focus on finance-oriented measures and analysis techniques. For example, at a recent marketing-mix modeling conference researchers from Bayer Corp., Coca-Cola Co. and Kraft Foods shared how they have utilized statistical models to determine the "optimal investment mix" across communication channels.
The models commonly rely on two classes of data: (a) year-over-year brand sales and (b) corresponding spending data incorporating advertising, sales promotion and other communication types.
By monitoring historical sales levels, along with respective spending levels for each communication activity over time, researchers profess they can determine which combinations of communication types and spending levels result in the highest revenue generated. The output is usually an equation representing the optimal investment mix across communication channels.
The bad news: The problem is these mix models declare "optimal" spending outputs without considering the most important inputs: namely, which customers and prospects represent the brand's most lucrative business opportunities. Equally important, they don't identify which communication channels will reach these high-value customer groups.
In good conscience, how can we trust a marketing mix model to tell us how many millions of dollars to invest in advertising (or some other communication form) if it fails to directly address these two crucial factors?
THE RIGHT REASONS
To make sure marketing and communication investment decisions are being made for the right reasons, CEOs and chief financial officers should be taking the following steps:
nDemand a customer focus. Ask marketers who the investment will reach, not what the communication investments will be used to buy. Remind them the company wants to invest in customers and prospects, not forms of communication programs.
If the marketing people can't answer the "who" question, then it is definitely premature for them to present or tackle the "how much" question.
nPrioritize customer targets. By quantifying the current value and opportunity value for each of the brand's customers and prospects, customer targets can be selected and prioritized based on what they are currently and potentially worth to the firm. For example, a major package-goods organization recently learned that only 15% of total U.S. households purchased one of its 70 or so brands. And, more important, only 5% of the households were responsible for more than 80% of profits on those brands. Yet this organization had been using mass media in an attempt to "reach everyone with a mouth" at an increasing cost each year.
nSet return-on-investment goals. Marketers should be able to demonstrate: (a) which customers and prospects the advertising or promotion will reach; (b) how much will be invested in each customer or customer group; and (c) how much incremental revenue (or profit) opportunity exists among those targeted customers.
Ask your marketing gurus to describe expected profit returns on a per-customer or per-customer-group basis and in an aggregated total. This information will demonstrate why one investment level is more appropriate than others. At the very least, it will ensure that brand communication investments are reaching the firm's most lucrative customer and prospect targets.
PRACTICAL AND FEASIBLE
Does this approach sound like nirvana, that unreachable and unattainable level of knowledge and understanding that only occurs occasionally in a business career? It shouldn't. What we have just described above is not only possible, it is practical and financially feasible.
But it requires a different thought pattern than just "here's what we want to buy and here's what it will cost." It forces marketing people to think instead about "here are the customers we want to invest in, here's the investment level we are willing to make in them and here's what we will likely get in return."
So why aren't marketing people doing this now? Probably because the CEO and chief financial officer aren't asking the right questions, and if you don't ask the right questions, you never get the right answers.
Mr. Hayman is VP at customer relationship management company Targetbase Marketing, Dallas, and Mr. Schultz is professor of integrated marketing communication, Northwestern University, and head of consulting company Agora,