Return On Investment, a pending issue of datalization
Positive returns are expected from investments; the key is to jointly agree on expectations.
José A. Miranda, Sebastián Morales, Andrea Martínez
Companies need to measure the impact of their investments in order to make future decisions. The sooner they do so, the better they will be able to manage those moments of crisis.
Generally, when times of crisis arrive, business problems increase within organizations and management teams start asking too many questions about the impact generated by the different investments made. And, particularly, this directly affects the areas of marketing.
The main reason for this pressure on marketing areas in rough times is that as an intangible asset to which significant investment is dedicated, the demand on the arguments of its contribution to the business is also.
Since the previous crisis, in early 2010, a race began to generate new customers in the most efficient and fastest way. And many companies dedicated large marketing investments to what is called Performance, that is, marketing actions that potentially generate new customers in the short term.
It is right at that moment when the frustration of those marketers begins, also in the short term, about the return that such investments generate. And some doubts about the marketing effectiveness become widespread.
The main cause of these disappointments comes from the fact that those responsible for such management, both strategic and operational, expect a “good response”. But what does it mean to get a good response?
It is very common to hear in digital marketing operational conversations that the return generated is in a range between [5-10] times for each monetary unit invested; and that anything below that is a low return, which is almost despised.
It is not acceptable for managers to demand speculative levels of return on investment for marketing actions
Is it reasonable for a business to invest $1 and get $3 back, within 4 to 8 weeks, or even within the next 12 to 24 months, and claim for low return on investment?
Obviously, it is a form of speculation on business management that is allowed continuously; and that does impact negatively on the marketing areas and their managers.
Therefore, one of the great challenges for marketers, especially in rough times, is not to be advised by the simplistic discourse on the direct and short-term impact of marketing actions in terms of return.
The almost exclusive focus on generating high levels of ROI in the short term is a way of neglecting the strategic impact that marketing activity has on business in the medium and long term, in other words, on customer value
Potential consumers are reached by a huge amount of impacts along a variety of points of contact that many brands launch daily to persuade us.
In this context, it is important to consider the impact that some actions generate on others; for example, paid search is driven and benefited by activities such as display, television, or outdoor, whose effect is undoubtedly, in the medium and long term.
If both the analysis of the incremental demand and the cost of the different marketing activities is not done as exhaustive and integral as possible, the marketing management discussion will be incomplete by lack of rigor, and will undoubtedly affect the performance of those responsible for these areas.
The enormous amount of data generated through the digitalization of processes allows us to make tangible a discipline as intangible as that of motivating and modifying people’s behavior.
However, this advance in “datalization” is not being accompanied by a continuous, rigorous, and consistent measurement that generates the marketing investment on business results, integrating all points of contact that make up the marketing strategy. Hence, three main points to elaborate the ROMI calculation :
1.Isolate the incremental impact generated by each marketing action.
2.Allocate the cost of marketing actions in the most honest way.
3.Work with accessible algorithms that are not “black boxes” for marketing managers.
No single analysis technique is capable of answering all the questions needed to evaluate the impact of marketing on the dynamization of demand.
But, undoubtedly, different technical approaches allow us to address the complexity of understanding how to manage the marketing budget.
From econometric models based on multivariate or Bayesian regression techniques and structural models to factor and classification analysis, each of these approaches forms the strategic process of measuring the business, fundamental for marketing to have a key role in the management of the company.
If levels of return on investment based on inconsistent and sustainable analysis continue to be accepted, the marketing area will likely have little relative weight within the organization.
Difficult moments open a great opportunity to manage the marketing areas in a more professional, more tangible way and to build the brands with a sustainable objective in the medium and long term.
So the only thing to do is looking up and going beyond what we usually do in our daily lives.
José A. Miranda is Managing Partner at Naawa, Sebastián Morales is Analytics Partner at Naawa, Andrea Martínez is Analytics Consultant at Naawa.
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