Tuesday, November 30, 2010

Send THIS to Your CFO (Anonymously)

Attention, all finance executives seeking to understand the ROI on marketing investments…

Over the years I’ve learned that if I come home to find something in the house broken or missing, I’m much more likely to get the truth if I ask my kids “does anyone know anything about ” than if I ask “who broke this?” or “who took my ?” The later approach immediately sends everyone into damage control mode, while the former gives them a bit more latitude to respond in a responsible way. They sense somehow that I am more interested in addressing the problem than finding someone to blame for it. Even the kids who know they never touched the object of my immediate interest learn from my approach and become more proactive in disclosing their borrowing or breaking events in the future.

There are similarities where finance and marketing interact. Finance is often perceived to have parental-like authority in its control of the budget and its audit/oversight responsibility. So it is an unfortunate truth that too often the journey towards better insight into marketing payback gets derailed right at the start when finance asks what they believe to be a logical and simple question, but which marketing interprets in the form of a challenge – e.g.
  • “Is our marketing generating any value for shareholders?” or
  • “How do we know that marketing is working?”
These questions have the immediate and profound effect of putting marketing into “justification” mode and encouraging them to respond defensively. And since marketers are pretty creative and articulate people, they usually answer with a long stream of ad-hoc evidence, anecdotes, and metaphors which individually may not be so convincing, but in the aggregate create enough uncertainty within the executive committee to neutralize the question and deflect the discussion. The result is a stalemate; where the inherent subtleties of marketing are explained with superior powers of persuasion to cast doubt on the wisdom of cutting marketing spend.

Of course this doesn’t help the organization get any smarter. In fact, it actually has a significant “insight opportunity cost” since all the resources that could have been directed towards the pursuit of true insight get diverted to “proving” that marketing works.

Successful marketing measurement, like many other challenging tasks within the company, is a function of effectively deploying constrained resources on a few key focal points rather than fracturing the effort in a broad search for the “preponderance of evidence”. Imagine the payback insight you seek is trapped inside a large wooden log, and splitting the log open is the only way to extract it. You can split the log with a sharpened axe striking the right point in a single blow (two at most), or you can endlessly pound it with a sledge hammer until it (or you) slowly turn to dust. Which approach would you prefer?

The CFO is much more likely to get the answers they’re seeking by approaching the dialogue on marketing payback from an angle that generates productive engagement rather than defensive deflection. Doing so requires three specific attitudinal changes in how most CFOs would normally pursue the answers:

  1. Acknowledge that good marketing always creates shareholder value. If necessary, suspend your disbelief and be willing to concede that if we did things better, we would see a beneficial result. Use questions intended to discover:
    • “What can we achieve with good marketing?”
    • “How well is our current marketing performing?” and
    • “How can we improve the payback we’re getting?”
  2. Embrace uncertainty – especially in the early stages of measurement when the unknowns will outnumber the knowns. Be patient with ambiguity and willing to accept “I don’t know…” as an answer from marketing in the near term, provided it is followed in short order by “…but here is what we can do to find out.” Premature demands for precision will backfire in the form of higher weighting of the more measurable marketing elements such as web site traffic and direct response programs – even if those aren’t the real drivers of your success in the marketplace.
  3. Exercise patience. The questions you’re asking will take some time to fully answer. Expect to see some progress made soon, and then more made in measured increments, but don’t assume that applying time pressure will speed the discovery. More likely, impatience will be met with passive-aggressive resistance which will surface many more complex obstacles than you or the rest of the finance team have the time or ability to conquer.

There are other more targeted questions you can ask of marketing to put the measurement effort on the right track. But if the spirit of your inquiry is interpreted as a quest for insight rather than an attack on the marketing organization, you’ll get much closer to the answers you’re seeking, and get there much faster.

Pat LaPointe is Managing Partner at MarketingNPV – specialty advisors on measuring and improving the payback on marketing investments, and publishers of MarketingNPV Journal available online free at www.MarketingNPV.com.

Wednesday, November 17, 2010


One of the most popular measures of relative marketing effectiveness continues to be monitoring share-of-voice (SOV) – a metric based on your total marketing/advertising spend as a percentage of the total spend in your category. Some even go a step further and look at an index of SOV to SOM (share of market). The argument for doing so is that if your SOV is less than your SOM, you are at risk of losing share. Presumably, the converse is then also true – that if your SOV is greater than SOM, you should expect to gain share.

For example, if your measured ad spend was $20MM in a category where total measured spend was $200MM, your SOV would be 10%. If your market share was 13%, you might argue that you are underspending on an SOV/SOM basis, and that more funding was required to maintain share. You may be right, but not for the reasons you cite. And even more importantly, more marketing credibility has been squandered on this simple argument than perhaps any other single metric over the past 20 years.

CEOs and CFOs see right through the SOV argument and regularly tear it to shreds in budget meetings. They tend to outright reject the premise that SOV drives SOM absent any clear data to the contrary.

If you understand the mindset of the CEO and CFO, you know they are very able to envision scenarios where spending even less money on marketing than our competitors could be beneficial if A) the existing core value proposition is better than the competitors’ and customers know it; B) the money would be better spent improving the core value proposition than investing in efforts to “sell” the current inadequate version; or C) the shareholders would benefit more by dropping the savings to the bottom line. Although not often stated, these intuitive expectations are almost always fueled by concerns about the relative effectiveness of the current marketing/advertising investments to begin with.

In this environment, the marketer who enters the meeting with an argument to raise spending levels to achieve some SOV target is actually heard to be saying “Johnny has more money so I want more”. And as soon as that impression is created, you might as well polish your resume because your influence over the marketing budget is now far smaller than even your most conservative hopes.

Nevertheless, relative spend pressure in the marketplace can and often is shown to have an impact on how market share migrates. So how do you bridge this gap credibly?

First, understand the difference between SOV and “Effective SOV” (ESOV). ESOV begins with relative spend, but then adjusts it up or down based on relative strength of your core value proposition and/or message execution. Taking our earlier example, if your spend was $20MM in a $200MM spend category, you would index your 10% SOV by looking at the relative stength of your ad copy execution. If copy testing told you your message was at parity with your competitors, your ESOV would equal SOV at 10%. But if your copy was 30% stronger or weaker than competitors, your ESOV could be 7% (10%*(1-.3)) or 13% (10%*(1+.3)). In other words, you may in fact need to spend more money to maintain an effective level of marketing pressure – even more than you originally believed. Alternatively, you may be benefitting from a strong message and providing an effectiveness dividend to shareholders by requiring less ad spend due to your very stong message.

Calculating ESOV by using ad effectiveness is good, but using relative strength of your value proposition, (the perceptions of the appeal of your product/service vs. your competitor’s before
taking ad execution into account), is even more encapsulating of the impact of marketing spend.

CEOs and CFOs see ESOV as a legitimate analyis of relative strengths and weaknesses. Consequently, using ESOV doesn’t cost you any credibility points. But it doesn’t unilaterally gain you any unless you are simultaneously able to explain the impact of ESOV on profitable share shifting. It’s one thing to know what your ESOV is as a starting point, but quite a bit more impressive if you know how a projected change in ESOV would translate into incremental revenue and margin flows.

There are several ways to determine the incremental impact of ESOV on financial outcomes. The first is with classic marketing mix models, which can help you better understand the historical relationship. If the category dynamics are relatively stable, this might be sufficient to project the outcomes into the future.

If you either cannot implement mix models OR are in a very dynamic category where the past is not a good predictor of the future, then you can use a combination of analytical and choice-options research techniques studying both your own and your competitor’s advertising to better understand the relative behavioral impact of each.

Neither method is perfect. But by triangulating on estimates of the relationship between ESOV and share, then consistently measuring it periodically to refine your understanding, you ensure that the next budget meeting will be a much more intelligent and fact-based discussion where both you and your recommendations come out alive and healthy.
Pat LaPointe is Managing Partner at MarketingNPV – specialty advisors on measuring and improving the payback on marketing investments, and publishers of MarketingNPV Journal available online free at www.MarketingNPV.com.

Tuesday, November 02, 2010

Tapping Into the Wisdom of Clouds

Prediction markets have been around for quite a while now. The Iowa Electronic Marketplace is world renown for accurately forecasting the outcomes of US elections often many months prior to election day. Sports betting sites in the UK and elsewhere move billions of dollars of wagers on the basis of the collective expertise of those betting on outcomes.

More recently, companies like Consensus Point, Crowdcast, and InTrade (among others) have brought the tools and technologies to the boardroom that allow managers to tap into global pools of “experts” to attempt to predict the future.

  • Hollywood movie studios have made “prediction markets” a key component of their forecasting efforts in deciding how much money to spend on advertising campaigns. (Interestingly, movies rated very high or very low receive relatively little advertising as WOM is expected to play its role at both ends of that spectrum; only movies in the middle-range receive significant ad spend).
  • Retailers use prediction markets to make decisions on which products to carry in inventory, as well as how to promote and price them.
  • Technology firms use them to decide which new platforms to bet on.
  • Pharma industry leaders use them to determine pricing strategies years in advance based on competitive pipelines and regulatory approval processes.
  • And B2B industrial companies use them to model the impacts of changes in sales force size, structure, and compensation.

Perfect? No. Helpful and insightful? Definitely, in several ways.

First, by identifying possibilities not previously within the imagination of your own executive team, and by considering factors which any small group of managers might overlook, they provide a more thorough and comprehensive assessment of uncertain outcomes.

Second, even if prediction markets cannot provide an exact answer (which they rarely can – being better at offering directional probabilities than precise forecasts), they can significantly reduce the uncertainty surrounding what a given market segment might respond to, or how a group of competitors might react to a significant change by one. This makes them good tools for setting performance targets and expectations in the absence of historical perspective.

Third, with the help of cloud computing and social networks, prediction markets are declining in cost to the point that they are often much faster-to-feedback and far less expensive than traditional survey-based research, while offering far greater flexibility to have respondents explore “what-if” scenarios.

Like any tool, they can be dangerous in the hands of amateurs. Garbage-in, garbage-out is a primary risk. So is being too confident in the absolute numbers, when the directional insights are often the most valid level of granularity.

Nevertheless progressive marketing measurers are using prediction markets to help them better understand and act on the insights they’re deriving from their mix models, their web analytics platforms, and their customer satisfaction and referral studies.

There is a whole lot more to learn about prediction markets before you jump into using them. But in general, you can benefit from using them to answer questions you might be struggling to answer with your current data streams if/when:

  1. You have a suitable pool of “experts” to engage in your marketplace. These experts could be associates, customers, prospects, or industry monitors. The exact number required differs by purpose. Sometimes you can get pretty reliable data from as few as 20 participants; other uses would require hundreds (or thousands) of participants.
  2. You can define your questions in terms of “what would happen if…”
  3. You can engage expert participants by offering something of true value in exchange for their effort and energy. Offering monetary rewards, special recognition, unique access, or other benefits of great interest will help ensure a more vibrant and active prediction market that explores new ground.

Finally, two quick learnings about how to get the most from your prediction markets (based on experience)

  1. Include some “noise” traders who inject provocative suggestions or wagers to ensure you draw reactions (supportive or contrarian) from the smarter traders with better insight.
  2. Run your markets as shorter-term events, and not continuous commitments over extended periods. Request only short-bursts of participants’ time; provide feedback quickly; and progress continually towards a defined end-point.

There’s a great deal of un-tapped insight potential in the clouds. Creative approaches are generating terrific new insights into marketing effectiveness and efficiency at increasingly faster rates. And the subset of “difficult to answer” questions is getting smaller and smaller every day.
Pat LaPointe is Managing Partner at MarketingNPV – specialty advisors on measuring and improving the payback on marketing investments, and publishers of MarketingNPV Journal available online free at www.MarketingNPV.com.