10/3/2012 11:52 AM
By Mike Carberry, CEO, Priam Communications, LLC.
Increasingly, client CFO’s are asking their marketing, advertising and PR leaders, "What is the Return on Investment for the money we’re spending on advertising and public relations?"
The CFO and most agency executives know the basic formula for determining Return on Investment. It varies by company and by industry but usually it’s determined by dividing the gain from an investment by the cost of the investment.
So what is the problem for the chief marketing officer, the VPs of advertising and PR and senior agency execs? Why is there often ROI pushback?
The biggest problem is how to factor out all the other influences on sales revenue and end up with the contribution due solely to advertising or PR? Influences usually beyond the control of advertising and PR include price or packaging changes, increased emphasis on trade and consumer sales promotion, sales force actions, acts of nature, crisis management spending, etc. Additionally, how do we quantify the amount of sales due to past years’ PR and ad investments? How much of future sales depend on how much we invest this year?
Arriving at a Return on Investment number and methodology will never be easy. It will never be totally accurate. But a motivated client–agency team can arrive at an approximate baseline percentage against which future promotional investments can be evaluated.
I don’t think that an agency can develop an acceptable, long-lasting ROI methodology without the active involvement of client marketing and financial executives. Unless baseline development is a client-agency team effort the resulting ROI number will likely be viewed by some client execs as an “agency number”. A number that perhaps is a little inflated in order to support the agency’s campaign and budget. The objective is to end up with a number and a calculation method that is readily accepted by a client’s CFO.
To get to the baseline ROI, the client’s staff provides their financial data, assumptions and suggested computation methods. The agency does the same. The team then, usually after compromise, reaches agreement on the correct components and methods to measure ROI.
Clearly, client executives know that promotional activity is absolutely vital to their top line. It is also increasingly clear that marketing executives are becoming much more quantitatively driven than they were even five years ago. It’s not going to be easy to come up with a ROI formula, but the best way to get started is for agencies and clients to work together to develop a baseline that can be adjusted as internal and external circumstances change.
No longer can agency executives say, as I said for many years, that there are too many factors weighing on sales to isolate the impact of the promotional spend. It will be difficult but in our data-driven marketing environment it definitely needs to be done.
If a client hasn’t yet pushed for ROI, hopefully agency senior execs will take the lead and propose a methodology that, with the client’s input, will work to help evaluate the impact of the investment in advertising, sales promotion, PR, and other communications efforts.
Two parting thoughts:
1. Every company’s method of calculating promotional ROI will likely be unique. It will vary depending on circumstances unique to a company’s position relative to the competition, other factors in the marketplace and in the company’s internal situation. There is no "one size fits all" solution.
2. In developing an ROI methodology, remember the KISS rule. If it’s easy to understand it has a good chance of being accepted by all levels of an organization’s management. If the calculations are too complex, acceptance by senior management will likely be problematic.