Most-downloaded Paper Tackles Marketing ROI “Ambiguity”
February 10, 2016
“Marketing Return on Investment: Seeking Clarity for Concept and Measurement” by Paul Farris, Dominique Hanssens, James Lenskold, and David Reibstein earned the 2015 MSI Top Download Award as the paper most downloaded by marketers and academics in its first year of publication.
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.
In their paper, Paul Farris, Dominique Hanssens, James Lenskold, and David Reibstein seek to remove the ambiguity around MROI. They define MROI and review variations in its use and resulting ambiguity in interpretations:
- MROI calculation method 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.
- The scope and granularity of MROI calculations can range from assessing the return on one particular marketing tactic to that of a complete marketing mix strategy.
- 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).
They argue that MROI estimates will be more transparently described if those providing the estimates use the following: Our analysis measured a (total, incremental, or marginal) MROI of (scope of spending) using (valuation method) over (time period).
In five case studies, they 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.
Finally, the authors focus 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.
Overall, they write, as a concept, MROI is marketing’s most important summary productivity metric since 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.
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“Marketing Return on Investment: Seeking Clarity for Concept and Measurement”
Paul W. Farris, Dominique M. Hanssens, James D. Lenskold, and David J. Reibstein, 2014,