Marketing Return on Investment: Seeking Clarity for Concept and Measurement
Paul W. Farris, Dominique M. Hanssens, James D. Lenskold, and David J. Reibstein, 2014, 14-108
As the need for accountable marketing spending continues to grow, companies need to develop sound metrics of marketing’s contribution to firm profitability. The leading metric has been return on marketing investment (MROI), following the widespread adoption of ROI metrics in other parts of the organization. However, the ROI metric in marketing is typically interpreted and used in a variety of ways, which causes ambiguity and suboptimal marketing decision making.
Here, Paul Farris, Dominique Hanssens, James Lenskold, and David Reibstein seek to remove the ambiguity around MROI. They first provide a formal definition of MROI and review variations in the use of MROI that are the root cause of ambiguity in interpretation. There are three such variations; the first is due to the MROI calculation method, which can be a base-marketing lift assessment, a funnel conversion, or a comparable cost method. In turn, the calculations can refer to short-term or long-term MROI. Second, the scope and granularity of MROI calculations could range from assessing the return on one particular marketing tactic to that of a complete marketing mix strategy. Third, MROI can be measured at different levels of the market response curve, in particular, total return (of all marketing spending), incremental return (of a particular campaign or increment in spending), and marginal return (of the last dollar spent).
The authors conclude that MROI estimates will be more transparently described if those providing the estimates would use the following form: Our analysis measured a (total, incremental, or marginal) MROI of (scope of spending) using (valuation method) over time period.
Five case studies illustrate the various uses of MROI, covering different marketing initiatives in different business sectors. These and other case studies point to the critical need of determining top-line marketing impact before MROI can be derived. Such determination can be done using either experimental methods (A/B testing) or historical data analysis (market response models). The authors describe the important linkages between marketing lift metrics (such as response elasticities) and MROI.
The final section focuses on the connection between MROI and business objectives. While management’s prerogative is to maximize short- and long-run profits, that is not equivalent to maximizing MROI. The authors demonstrate that MROI plays a different role in the process of marketing budget setting (a marketing strategic task) vs. allocating a given budget across different marketing activities (a marketing operations task). They highlight the role of setting MROI hurdle rates that recognize not only marketing’s ability to drive revenue, but also the firm’s cost of capital.
The main managerial implication of the authors’ findings is as follows: as a concept, MROI is valuable as it recognizes marketing spending as investment and imposes rigorous criteria for marketing accountability. However, there is no single MROI definition that holds across all business decisions; instead, MROI needs to be carefully defined in each decision-making context so that its use serves the business objectives of the brand or the firm. The authors hope that their recommendations will help the marketing profession achieve a common understanding of how to assess and use what they believe is its most important summary productivity metric, MROI.
Paul W. Farris is Landmark Communications Professor of Business Administration, University of Virginia. Dominique M. Hanssens is Bud Knapp Professor of Marketing, University of California, Los Angeles. James D. Lenskold is President, Lenskold Group. David J. Reibstein is The William S. Woodside Professor and Professor of Marketing, University of Pennsylvania.
The authors wish to thank Eric Bradlow, Daniel Kehrer, Koen Pauwels, and Jeff Winsper for their careful reviews and useful suggestions for improving early version of this paper.
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