ROMI in the Digital World

ROMI in the Digital World

          
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ROMI in the Digital World

Technology & Digital, Marketing & Sales
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  • In this Interview

    Jeff Hill is a BCG partner and managing director and senior member of the Marketing and Sales practice.


    Neal Rich, a principal in BCG’s Chicago office, is an expert on analyzing marketing investment and returns and coauthor of the report, No Shortcuts: The Road Map to Smarter Marketing.

     

    As companies devote increasing portions of their marketing budgets to new digital platforms and tools—including mobile apps and social media—they face questions about how the effectiveness of these digital investments should be measured. Recently, BCG’s Neal Rich, an expert on analyzing marketing investment and returns, spoke with Jeff Hill, a BCG partner and managing director and senior member of the firm’s Marketing and Sales practice, about how the underlying principles of the return on marketing investment (ROMI) analysis help ensure that companies get the desired bang for their marketing buck—although the approach may need to be adjusted to reflect a changing marketing mix.

    Neal Rich: The question we frequently hear from clients today is, Does the inclusion of new elements of the marketing mix such as social media, mobile, and other emerging platforms change how I should look at return on marketing investment (ROMI)?

    Jeff Hill: No, ROMI is still valid and can incorporate social media and other components of online marketing so long as the variables are measurable. The main points of the report you cowrote, No Shortcuts: The Road Map to Smarter Marketing, are just as relevant as ever. Managers still need to embrace the complexity of optimizing returns on marketing by integrating a top-down strategic perspective on commercial investments with a rigorous bottom-up analysis. Nothing about social media changes that.

    This kind of approach incorporates all the tactics for calculating ROMI—as well as those that fall under the broader banner of return on commercial investments (ROCI). It enables managers to evaluate commercial investments dispassionately, on the basis of their ability to drive incremental sales, influence consumers at every point in the purchase decision, and build brand value for the long term. Rather than following marketing rules of thumb, which our research shows are not necessarily reliable, companies using the ROMI approach spend money on the right things, spend it in the right ways, and are able to measure and optimize that spending continuously.

    So how does social media change the equation?

    There’s been a lot of press about big advertisers that have decided social media isn’t working for them; at the same time, others are moving more money into Facebook and similar platforms. The question I have is, How rigorously are all these advertisers measuring the returns? We talk about “investing in marketing” or “investing in the brand,” but in reality, the majority of marketing money is thought of as cash out the door. Many companies spend just as much—or more—on advertising expenses as they do on capital expenditures (a balance sheet item) yet apply far less rigor and a much shorter time horizon for payback on the advertising dollars. Social media complicates the equation because it needs to be assessed in a different way.

    Traditional advertising is based on reach, that is, the goal is to hit a lot of people in the hopes that some decide to buy. With social media, the focus is on a small group of advocates among whom the companies hope to create referrals and a PR multiplier. At the end of the day, the ROI calculation for both approaches is similar in the sense that I want to know whether I achieved more or less than $1 of return for every dollar I spent, but the math of the reach and conversion cascade differs from that of the word-of-mouth cascade. Both need to be applied with rigor and objectivity. Adding social media to the marketing mix presents an opportunity to rethink the metrics and to focus harder on what’s working.

    How do companies go about it?

    Every company is different, of course, which means you have to develop the approach that will work for your situation. That requires, perhaps most importantly, defining success in advance, before you jump into a big investment of both time and money. Social media is one component of the overall marketing mix. You need to think holistically about what you are trying to achieve. It’s never about just one metric. It’s just as important to have what we call “shared transparency and common currency” around the objectives, the metrics of success, and the toolkit being used to produce those metrics.

    The mistake too many companies make is having the consumer marketing team measuring how well they are performing with one tool, the digital team using another, the social team with another, the trade marketing group with still another, and so on. Ultimately, neither the finance team nor the strategy team believes what any of them are saying. A lot of companies look at ROMI as one more tool or metric. It’s really an approach, an analytical way of approaching the marketing function. It needs to be tailored to the specifics of each company, but once that’s done, it will demonstrate the value of marketing spending for the whole organization.

    Within the holistic framework, speak specifically to social media—how do clients make sure that they are getting the most bang for their Facebook buck?

    Be clear about what you want to achieve—up front. In the context of the “six Rs” of the marketing funnel—research, reach, relevance, reputation, relation, retention and advocacy—social media has its biggest potential impact in the last three categories. It can move the needle on retention and advocacy, for example, in ways that other tools can’t—or can’t as effectively. But if you focus on the impact that social media has on reach, you’re likely to get a misleading result. Similarly, we’ve found many instances of the ROI being higher for TV spending than for online spending.

    The response curves for different advertising vehicles are unique to the client context and the historical investment level. The pitch you frequently hear today, that you should shift money from traditional media to digital—specifically social—media, is not universally true. Determining whether and how much to shift is going to be a situation-specific choice. The consumer response to advertising is not linear: it varies across vehicles, and it varies marginally according to where companies are on the response curve. There are times when shifting $1 from TV to online produces a more efficient result.  Equally, there are times when you are better off leaving the money in TV.  Beware blanket generalizations about shifting the marketing mix.

    What are the risks to “going social”?

    One of the biggest risks is doing it because everybody else is doing it—the “my competitor is on Facebook, I need to be there too” syndrome. If you don’t take the time to put in place shared transparency and currency around objectives, metrics, and tools, you’re jumping in blind. It’s also instructive to look back into the not-so-distant past and remember that only a few years ago MySpace was Facebook, and before MySpace it was Second Life. Fads come and go, which is why a clear framework that helps you state—and then measure—objectives in a common, shared manner is critical.

    Social marketing is still very new, so companies need to experiment. There is a huge shift in the “investment” part of ROMI toward spending more on what might be called “nonworking” components in the average campaign. Online media in many cases is cheaper to buy on a CPM [cost per thousand] basis than, say, TV, but this can be misleading. First, there’s a whole bunch of other investments required to run a proper digital campaign—production, agency fees, campaign management software, metrics, and attribution engines, for example. Second, many online ROMI metrics and tools, such as attribution engines, can sometimes provide incorrect results because they are focused solely on the online environment—they do not account for traditional marketing and other external variables.

    Marketing is much more complex than it used to be, so measuring its success is more complicated too. When it comes to using social media or tapping into the mobile revolution, companies need to build new capabilities, skill sets, and ecosystems of partners. They may also want to rethink decades-old paradigms of how they employ internal versus external resources.

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