Taking a Swing at ROI

ROI. To hear some people tell it, these are the three most important letters in promotional marketing. Today you’ll be hard-pressed to attend any agency pitch, budget-planning session or marketing conference without hearing ROI discussed in reverent tones.

While marketing measurement is nothing new, the call for return on investment has grown louder in recent years as budgets shrink and managers demand to know where every nickel goes. According to a survey conducted by PROMO and the Promotion Marketing Association earlier this year, nearly 70% of brand managers said that measuring their promotion’s ROI would be a higher priority in 2003. There’s plenty of room for improvement: In 2002, 44% of brand managers did not measure ROI on promotions at all, per the survey.

But marketers’ biggest financial priority is their biggest research quandary: how to know what results they get for money spent on marketing.

The good news is that marketers can usually correlate dollar-for-dollar the cost of executing a promo to the sales bump a promotion gives. For example, if a $1 million program produced incremental sales of $3 million, with a 50% profit margin, the ROI is then 50%. How do you get there? Three million dollars times 50% equals $1.5 million in incremental profit. Subtract the $1 million expense from the $1.5 million return and you’ve got $500,000 profit in excess of the cost. That $500,000 is half the original cost, so the ROI can be factored at 50%.

“If you can measure the incrementality, the margin and the cost of the program, you can come up with an ROI,” says Bob Pifke, senior VP-marketing services at Visa, San Francisco. “With something like promotion, it should be practical to get ROI, more so than something like advertising. I don’t have a lot of sympathy for marketers who can’t get an ROI — they haven’t been looking hard enough.”

Visa is not looking at ROI simply to justify cutting costs — although that’s happening more often as companies slash budgets to improve their bottom line. “Operating efficiency is really co-dependent with ROI measurement,” Pifke says. “But you can get too caught up with operating efficiency. It’s a numerator and a denominator and while you can cut costs to increase profitability, after a certain point, you’re no longer in business.”

And there’s more to it than simple math. “There’s no Holy Grail of measurement,” says Julie Zdziarski, executive VP at Wilton, CT-based Sponsorship Research International (SRI). “There’s no formula that spits out the answer. That wouldn’t give you a true indication of the program.”

Many marketers are looking at ROI piecemeal, and not at the overall picture. When e-mail newsletter Reveries.com and Marketing Management Analytics (MMA), a Wilton, CT-based based marketing and media management consultancy, asked marketers what tools they use to gauge ROI, responses included 7% who said none, 16% who said sales data only, and 22% who said they use some kind of research, such as focus groups, syndicated data analysis, brand awareness studies or competitive benchmarking.

“ROI isn’t that scientific; there is some magic involved,” says Janet Oak, VP-strategic planning at Allied Domecq, Westport, CT. “Unfortunately, ROI measurement has been more art than science. We need to try to limit the amount of creativity that goes into the process.”

Oak says that Allied Domecq measures its return on 80% of its promotions, starting with a pre-analysis of the company’s expectations and a post-mortem on the numerical results — including results they got but didn’t expect. Allied Domecq takes the cost of the promotion and measures a list of incrementals, then uses a proprietary calculation to come out with an ROI percentage.

Simon Cunningham, executive VP-marketing for Allied Domecq North America, went to Europe this spring to create a worldwide measurement platform for Allied Domecq. “We need a common methodology,” Oak says. “So often people aren’t looking at the same thing, even when they’re in the same company. The sales people and the marketing people might be weighing different aspects of a promotion for ROI.”

ROI definitions

But measurement talk doesn’t necessarily mean action. “People are using the term ROI very loosely. These days it could mean anything,” says Peter Szarka, Partner at the Hudson River Group, a marketing measurement company that recently formed an ROI advisory board that includes marketers from Colgate-Palmolive and Schwinn/GT Corp. “A lot of people say they’re measuring ROI, but that’s not quite what they mean. Half the time when marketers talk about ROI, they’re referring to the efficiency of the buy. In advertising, if they get a discount on what they spend, they think that’s ROI.”

When hard numbers don’t apply, marketers need to fill the gap. “We often have to use proxies for ROI, such as customer loyalty,” says Scott Deaver, executive VP-marketing for the Cendant Car Rental Group, which manages the Avis and Budget brands.

Companies are looking to reconcile hard numbers with the less quantifiable factors. The Hudson River Group analyzes several years of data, ranging from transactions to market penetration, even external factors such as weather during a promotional period. “We don’t throw things in a little black box that produces a number,” says COO Debra Campbell. “But anything that you have a measurement on, we can use to help assess ROI.”

Measurement works best for hard-dollar accountability, things like weight decisions, promotional pricing and Internet construction. “ROI is all about the numbers,” says Cindy Mielke, incentive sales manager at Omaha Steaks. “That is why we track all variable costs back to each marketing project.”

But how much of marketing return comes in hard numbers such as sales and redemption, and how much does marketing pay off in less quantifiable factors, such as consumer loyalty and brand buzz? “There are a lot of answers to how important [mathematical] ROI is,” Deaver says. “In a perfect world, ROI would be the only thing that matters. But in practice, it can’t be.”

Marketers obsessed with numbers run the risk of ignoring the emotional reaction of marketing partners and customers. “With the advance in measurement technology, we’ve drifted away from the relationship component,” says Stephen Woods, president of Portland, ME-based Pierce Promotions & Event Marketing, Inc.

The stumbling blocks

Marketers are also pressured to come up with an ROI quickly, almost as a formality to keep the business cycle going, rather than doing an in-depth analysis of the promotion’s long-term effect. “People are under so much pressure that it’s almost like the hamster on a wheel — running and running,” says Pam Batalis, VP-business development at Brand Keys and co-chair of the PMA’s new ROI council.

“Brands don’t have time to do things like tracking studies. They just look at sales, which only scratches the surface,” Woods says. “The natural effect is to look for easy answers. Brand managers are under a lot of financial pressure and there’s a lot of turnover in big companies, so people aren’t that worried about how a four-year plan will play out because they won’t still be around. Companies used to be focused on annual results. Then they started with quarterly. Pretty soon they’ll want to have updates each minute. If the technology exists in the future you’ll see a marketing team clustered around a stock ticker, watching updates on their brand share.”

“ROI has become part of every conversation between agencies and clients,” says Sue Furlong, president and COO of DVC Worldwide, Morristown, NJ. “The problem is that when you want to measure and track every program, it requires an enormous amount of data points and people who can track it down to the source.”

Of course, combining both hard data with consumer feedback can be time-consuming and expensive (almost prohibitively so). Visa is working on streamlining its measurement process by developing its own surrogate measures like TV surveys to offset the costs and the time requirement. “That way we wouldn’t have to do the term paper each time, we can just get the Cliff notes,” Pifke says. But long-term benefits can’t be determined by a nice, neat equation.

“There’s a bias in promotion toward short-term measurement,” Deaver says. “Long-term effects are hard to quantify and that’s why they’re being neglected. When ROI is the basis of the concentration, it becomes harder to say ‘I’m going to build an element into the brand forever.’ People need to take seriously the long-term health of the brand and realize that promotion can be an enhancer of the brand, not just a short bump like a coupon or discount.”

Many brands plead ignorance when it comes to measuring ROI, even when they have the tools right in front of them. According to MMA’s ROI survey, 72% of respondents said they lack the necessary data to accurately assess the return on their marketing investments. It may be a lack of time and money for analysis, rather than a drought of data — and analysis is on the rise. “We’re seeing a pick up in the demand for measurement this year after a lull last year — measurement is the first thing cut,” Zdziarski says. “There is a trend toward brands collecting as much data as they can and looking for someone to pull it all together in a coherent manner. They have all this information but don’t know what it means.”

A more insidious problem than ignorance is hindering the development of accurate ROI measurement. Despite the lip service many executives give (to their bosses, to their clients, to their shareholders) regarding the supposed necessity of ROI, a lot of people don’t want to know what the ROI is.

“We haven’t found anyone yet who says they aren’t ready to track ROI, but in reality, ROI can upset the status quo,” Szarka says. “Think about the person speaking. Do they really want to know how well they’re doing? If you’re the head of advertising, do you want someone coming back and saying you’re doing a bad job? You see a big call for analysis of what’s been done when there’s a management change but not so much when you’ve had the same CMO for years.”

Brands need to know how to balance hard facts with the creative process. “We pitched a company that said they didn’t want to change. They knew their marketing wasn’t really paying off, but considered themselves very creative marketers,” says Sunil Garga, president and COO of MMA. “Consumer perception is nice but it doesn’t mean much if it doesn’t generate sales.”

It’s also crucial to know what’s relevant and what isn’t. “Marketers shouldn’t laud themselves for brand awareness or customer satisfaction awards,” says Batalis. “These days, those things are like table chips. If you don’t have them, then you’re not a brand anyway.”

The executive in charge of measuring ROI has to be thick-skinned; if he’s new to the job, he needs to become a crusader.

“[For ROI to work] the company has to have a culture of accountability,” Garga says. “Marketing needs to be treated like any other financial investment.”

No two businesses look at ROI in the same way. “How well you can measure varies by business; you have to measure by different scales,” says Chuck Nardizzi, CEO at Stamford, CT-based BEN Marketing and former head of promotions at Pepsi. “In something like the hotel industry, it’s very easy to measure. They are not multi-tasked in the marketplace and they have great systems in place that makes it easy to measure things like call volume. Something like the soft drink business is a completely different ballgame. You’ve got national and local programs going on at the same time, you’ve got the bottlers doing their own thing. It’s not as easy to break down.”

SRI cautions that brands need to start thinking of ROI measurement as predictive, not just reactive. “Most people don’t think of measurement until after the fact,” Zdziarski adds.

When Delta Air Lines sought a tie-in with Major League Baseball last year to boost brand visibility, SRI conducted pre- and post-promotion phone interviews with baseball fans in New York, Boston and Atlanta. The interviews assessed impact of the promotion on driving awareness of Delta’s team sponsorship. “We were also looking to ascertain overall awareness among fans of the promotion, likelihood to participate, the promotion’s impact on choosing Delta and the overall effect on Delta’s image,” Zdziarski says.

The interviews showed that consumers who were aware of the promotion were more likely to consider flying Delta before other airlines as a result of Delta’s team associations. The data proved the baseball tie-in and accompanying sweepstakes were linked as a high percentage of respondents cited the sweeps directly as influencing their consideration.

Others are coming up with different definitions for ROI. DVC is proposing ROE, “Return on Expectations,” that adds in other consumer-driven factors such as stakeholder behavior, purchase intent and supply claims. “It’s hard to isolate one specific channel as the reason for success or failure,” Furlong says.

Don’t try to bottle magic

One of the most important factors is also the hardest to track: excitement.

Brands that rely heavily on buzz and image, like Snapple, keep ROI in perspective. “We use ROI as a guide but not the ultimate determination,” says Steve Jarmon, VP-marketing, community ventures at Snapple. “We would not hang our hat on a single piece of information. At the same time, you have to be disciplined. You can’t just fly by the seat of your pants.”

Snapple walks the fine line between buzz and accountable data. “Buzz is critical to our success,” Jarmon says. “We look for buzz on the street — consumers, retailers, and press pick up. We have an increasingly personal relationship with our consumers who call into our hotline. That may sound funny at first but it’s a good way to gauge consumer perception.”

Snapple’s agency, New York City-based Deutsch, looks at a combination of hard numbers and customer reactions, including event impressions, product seeding, retail stops, number of premiums distributed, and number of hours of TV stories. “What gets measured gets funded,” says Deutsch executive director of promotions Marke Rubenstein.

But some of Snapple’s most effective techniques don’t lend themselves to tracking. Follow-ups by Deutsch found that consumers were less motivated to open bottles to play a sweepstakes for instant-win prizes than they were to get the Snapple “Real Facts” — strange but true factoids featured under the cap.

No matter how good your ROI measurement gets, the most successful promotions will always bring a touch of magic. “When we put the Michael Jackson program in front of Pepsi bottlers in February of 1983, they were so excited that March was our biggest year in a over decade,” Nardizzi says. “However, the program didn’t even start until June. The point is, what do you measure with something like that? You’ve got to get the bottlers excited because they are the ones doing all the work in the field. If they’re not excited, don’t bother doing anything.”

That might be the closest thing to an ROI guide that we can hope for.

ROI Brain Drain

Many brands need to unlearn what they know about ROI from traditional media. “Everyone has a different definition of ROI,” says Pam Batalis, VP-business development for research firm Brand Keys. “But marketers need to take a broader approach. The impact of something like experiential marketing is not being maximized by traditional types of ROI measurement.”

When it comes to the consumer aspect of ROI, Brand Keys takes a psychological approach to get “under the consumer’s radar screen” and avoid pre-conceived responses, according to Batalis. The process takes three steps: Place respondents under psychological assessments to get beyond conscious control. Brand Keys gives customers a series of 20 questions with the intention of having them personify the brand.

Assign an Importance Rating by asking consumers about the value of the brand and what it means to them. This generates a brand equity multiple.

Put the feedback in a manageable form by converting results into statistical regressions.

That approach helped Cendant Car Rental Group realize benefits of its promotions that the company never anticipated. Cendant tapped Brand Keys to gauge feedback on its new LATCH child safety system. The company saw a good lift in leisure travelers and families with children (no surprises there). But Brand Keys revealed that the biggest benefit of the promotion was a favorable change in perception among customers who didn’t even have kids.