Measuring

Marketing Payback
A best practice guide
“This is a timely publication as the marketing landscape
develops across new media channels and technologies.
With this our ability to measure the effectiveness of the
capital employed in marketing and how it can add value
has improved significantly. It is a practical guide for
understanding the most appropriate basis for valuing
brand contribution to profits and for appreciating the
difference between the metrics of ROMI, ROI and straight
Payback.”
CHRIS SAHOTA
Member of the IPA Finance Policy Group and
COO Northern, Central, Eastern Europe and Africa, McCann Erickson

“Advertisers are constantly searching for the holy-grail

formula which will help quantify the impact marketing
communications investment has had on their bottom line
– what’s the real payback?! Consequently when the IPA
approached ISBA’s Remuneration and ROI sub-group
with the concept of this document we were delighted to
endorse the approach. This guide is packed with useful,
intelligent guidance for any marketer or procurement
professional who would like to explore the concept of
marketing payback in greater depth – it’s a great starting
point.”
DEBBIE MORRISON
Director of Consultancy & Best Practice

“This publication offers finance, marketing and

advertising executives, very useful and practical
guidance to measure the effectiveness of marketing and,
as importantly, should also assist in promoting and
enabling a common understanding between functions.”
RICHARD MALLETT
Technical Director, CIMA

1
Acknowledgements

This best practice guide is the result of a valuable collaborative effort between
the IPA and ISBA. We are particularly grateful to Les Binet of DDB Matrix for
his authorship of the paper and to Gurdeep Puri of Leo Burnett and Martin
Deboo of Investec Securities for their most useful contribution.

We would also like to acknowledge the advice and support of ISBA and its
COMPAG Group members, and of the IPA’s Value of Advertising and Finance
Policy Groups.

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Contents

Foreword 4

Introduction 5

Step one: measure the sales effect 6

Measuring the sales effect: top tips 9

Step two: calculate payback 12

Calculating payback: top tips 14

Return on marketing investment (ROMI) 17

Return on marketing investment: top tips 18

Longer and broader effects 21

References and further reading 22

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Foreword

I remember when I judged the IPA Effectiveness Awards competition being

preoccupied with the importance of knowing each case’s hard financial
performance measures. “Where’s the demonstrable commercial return on the
investment”, I’d ask.

At Volkswagen we believe in the importance of measuring payback. We’ve

also been a regular entrant, and winner, at the IPA Effectiveness Awards since
1998. So I am delighted to endorse this latest best practice guide.

It is becoming increasingly important that all members of Boardroom plc, not

just the chief executive officers, financial and marketing directors, have an
understanding of the success, or not, of their marketing strategy. It is in this
ideal scenario that a Board can successfully mine its measurement statistics to
forecast future performance trends and make any necessary changes to
strategy to grow their business.

This guide tells you the how; what to focus on and what to avoid. It also goes
into some detail about a number of key performance indicators such as the
loosely used ROI or ROMI.

I commend it to you, and your colleagues.

ROBIN WOOLCOCK
Managing Director, VW Group UK

4
Introduction

Increasingly, marketing personnel are being asked to measure the effects of

marketing and to demonstrate how it adds value. A wide variety of metrics are
used, from media exposure measures like ratings or clicks, through attitudinal
data like awareness or image, to behavioural measures like response rates
and actual sales.

But for commercial firms, the ultimate measure of marketing effectiveness is

financial payback. Profit-making businesses do not indulge in marketing in
order to increase awareness, or even to generate sales these are just means
to an end. Businesses spend money on marketing because they think it will
increase shareholder value at some point, even if the payback comes some
time afterwards.

Yet despite the fact that profit is the ultimate motive beyond all marketing,
research commissioned by the IPA suggests that less than 20% of marketing
activity is evaluated in terms of financial payback. Worse still, data from the
IPA dataBANK suggests that when payback is assessed, the calculations are
often flawed.

This brief guide will try to remedy this situation. It’s aimed at anyone who
wants to measure marketing payback in financial terms. It offers some simple,
practical tips on how to measure the effects of your activity, and how to
calculate the contribution to shareholder value. It won’t solve all your problems,
this is a complicated area and there are no simple answers. But it should help
you to avoid some of the obvious pitfalls.

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Step one: measure the sales effect
The first step towards calculating financial payback is to estimate the
incremental sales generated by your activity. To do this, you need to
compare actual sales with ’base sales'; how much you would have sold if
you hadn’t run the marketing activity in question. Incremental sales can be
calculated by subtracting base sales from actual sales (the shaded area in
Fig1).

Estimating incremental sales is by no means easy, but various common

methods include:

Econometric modelling

Econometric modelling is a mathematical technique that allows you to identify

the various different factors that drive your sales, and to separate out their
effects. For example, the Kwik-Fit IPA paper from 2006 IPA Effectiveness
Awards used econometrics to measure the contribution of advertising to
overall sales:

6
For further information on econometric modelling, see Econometrics
Explained, available from the IPA.

Test and control

Another way of measuring the incremental sales effect is to look for some kind
of control; for example a group of people or products that has not been
exposed to the activity in question. The classic approach is the regional test.
For example, the No More Nails IPA Effectiveness Awards paper from 2000
presented the results of three regional TV tests. Each time the TV advertising
ran, rate of sale in the test region increased compared to the control region:

7
However, regional testing is not the only approach. For example, one might
compare sales of advertised with non-advertised products. Or one might
compare sales amongst individuals who were exposed to communications with
sales amongst those who weren’t exposed.

The most sophisticated analyses use fine variations in levels of support to

measure the effects. For example, the 2004 IPA Effectiveness Awards paper
for Cravendale milk showed that there is a clear correlation between the
number of TV ratings a region received and the sales performance in that
region:

Extrapolating from a trend

In some cases, you may be able to plausibly argue that, without the marketing
activity in question, sales would have remained static or continued along a
certain trend. In that case, it may be valid to estimate the incremental effect by
extrapolating from the trend. For example, the 2004 IPA Effectiveness Awards
paper for The Guardian argued that, without the ’Fresh‘ campaign, the
newspaper would have continued to lose market share.

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However, be sure to consider the other factors that were affecting your brand
at the time. In order to use this method, you must be sure that other factors
were not responsible for the deviation from the trend.

Measuring the sales effect: top tips

1. Monitoring sales growth is not enough
Measuring incremental sales is not the same as measuring sales growth.
Lack of growth is not necessarily a sign of ineffective marketing – it may be
that sales would have been even worse without marketing support.

You need to estimate what would have happened without marketing

support, and to do that, you need to take some view of what effect the
many other factors affecting sales would have had. Econometrics is the
most sophisticated way of doing this, but the test-and-control method is
another simpler option. And if you can show that market conditions were
similar to the period before the activity ran, then extrapolating from the
trend during that period may give a reasonable estimate of the underlying
sales trend.

2. Look out for carry-over effects

The effects of your marketing may persist some time after the activity itself
has stopped. This is particularly true of brand-building activities such as
advertising. Econometric analysis shows that advertising may continue to
generate incremental sales months or even years after it appears.

So don’t forget to take account of these carry-over effects when estimating

the incremental sales generated (see Figure 1). This may require you to
forecast sales some way ahead into the future.

9
 Note that carry-over effects are not always positive. Sometimes marketing
brings sales forward, so that sales slump once the activity ends. There is
evidence that this is particularly true of price promotions (see Figure 6).
These ’post-promotional dips’ need to be taken into account, otherwise the
payback from promotions will be over-estimated.

3. Think about revenue as well as volume

Too many marketing personnel focus on sales volume and neglect
revenue. Ideally you should measure both revenue and volume, but of the
two, revenue is the more important.

When estimating the incremental sales revenue generated, bear in mind

that your marketing may affect the prices and margins as well as volume.
For instance, a price promotion might cut average prices paid and increase
the percentage of that price that goes to the retailer, depending on how it is
funded. On the other hand, brand-building activity might improve quality
perceptions, allowing you to charge a higher price for the same volume.
Such price effects need to be factored into your incremental revenue
calculations.

4. Keep the big picture in mind

Remember your aim is to measure the overall effect of your marketing on
total sales, not just the effect on the specific product that your marketing is
focussing on.
Marketing for one product may also boost sales of other products in your
portfolio. Such ‘halo effects’ are the main way brand-building contributes to
shareholder value, so don’t forget to take them into account.

On the other hand, marketing may promote one product in your portfolio at
the expense of others. When this kind of ‘cannibalisation’ occurs, focussing
on sales of the featured product will exaggerate the apparent payback from
your marketing.

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 For both these reasons, it is advisable to look at sales of the brand overall
when calculating payback, rather than just looking at sales of individual
variants.

5. Direct response data does not give you all the answers
For direct response activity, it may actually be possible to link people who
responded to the communication with actual sales data in some way.
However, this is still not the same as measuring incremental sales.

Firstly, direct response activity may have other effects besides generating
direct responses. Some people may respond to your activity long after the
event, via a completely different channel. Wherever possible, these indirect
effects should be taken into account when measuring payback. This is
particularly important for ‘brand response’ channels like DRTV. It is not
uncommon to find that 90% of all responses to DRTV are indirect. For this
reason, evaluating DRTV in terms of direct responses alone may well
underestimate the payback by a factor of 10!

Secondly, not all direct sales are incremental sales. Those sales might
have been achieved anyway, even if the direct activity hadn’t run. Once
again, you need to find a way of measuring the base level of sales, even for
direct marketing.

All of the above applies to online marketing just as much as it does to more
traditional channels. Online activity may have a halo effect on offline sales –
Google estimate that around 60% of all sales that result from online searches
occur offline in ordinary shops – or it may cannibalise on them. In order to
measure the payback from online marketing properly, you must take account
of offline sales if there are any.

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Step two: calculate payback
Payback is closely related to the concept of return on investment (ROI.) We
will discuss ROI in more detail below but, at the outset, the two key metrics to
have in mind are the incremental profit contribution (the financial return) from
the activity versus its incremental cost (the investment). While measuring the
cost of the activity is straightforward, measuring the incremental profit
contribution requires a couple of steps.

The first step is to calculate the revenue generated for the client, remembering
to take into account any effects on price. Most agencies work with data
sources such as Nielsen and IRI which measure sales at their retail price.
However, what your client actually gets are the value of wholesale sales, which
are retail sales less the retailer’s (or other channel intermediary’s) mark-up. So
the first step is to take account of the intermediary’s cut. The equation is
therefore:

Incremental revenue = Incremental retail sales value – Intermediary

cash margin

Table 1 shows a worked example. Suppose that a marketing campaign for

Brand X generated 1,850,000 extra sales. If the average retail price paid for
each unit was £1.49, then the incremental retail sales were worth a total of
£2,756,500:
Table 1
A Incremental sales volume (units) £1,850,000
B Average price paid per unit £1.49
C=AxB Value of incremental retail sales £2,756,500
D Retailer gross margin (%) 12.5%
E=DxC Retailer cash margin (£) £344,563
F=C-E Incremental sales revenue to manufacturer £2,411,938

However, the retailer takes a 12.5% gross margin, which amounts to £344,563
in cash terms. Subtracting the retailer’s cut leaves £2,411,938 of incremental
revenue for the manufacturer of Brand X.

As it’s often difficult to get exact data on intermediary margins, here are some
rules of thumb based on experience:
Table 2
Product & Retailer’s gross So, for every ..and the
channel margin on retail £100 of retail intermediary’s
sales sales, the client cash margin is
sells:
Foods in a 25% £75 £25
supermarket
Computers in a 10% £90 £10
high street
retailer
New cars in a 5% £95 £5
dealership

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Having calculated the value of the incremental sales to the client, the next step
is to calculate the contribution that those sales make to profit. To do this, one
needs to take account of the incremental costs incurred. As sales go up,
clients need to buy more raw materials and pay more wages. These variable
costs need to be deducted in order to work out the payback:

Incremental costs = Variable cost per unit x Incremental units

For instance, suppose that for Brand X the variable cost per unit was 57p.
Then Table 3 below shows that the 1,850,000 of extra sales that we generated
would mean £1,054,500 of extra costs:

Table 3
A Incremental sales volume (units) £1,850,000
F=C-E Incremental sales revenue to manufacturer £2,411,938
G Variable cost per unit £0.57
H=GxA Incremental variable costs £1,054,500
I=F-H Marginal contribution from incremental sales £1,357,438
J=I÷F Contribution margin (%) 56%

Subtracting these costs from the incremental sales revenue gives the marginal
contribution to profit:

Marginal contribution = Incremental revenue – Incremental costs

So, for Brand X in Table 3, subtracting £1,054,500 of incremental costs from

£2,411,938 of incremental revenue gives a marginal contribution of
£1,357,438.

Alternatively, rather than using unit costs, one can do exactly the same
calculation using the contribution margin, if this is known. The calculation then
becomes:

Marginal contribution = Incremental sales revenue x contribution margin %

For instance, for Brand X in Table 3, the contribution margin is 56%. So the
marginal contribution to profit will be 56% of the incremental sales revenue
(56% of £2,411,938), which is £1,357,438. This is exactly the same result as
before.

Having calculated the marginal contribution, the final step is to subtract the
cost of the campaign to calculate the net profit it generates:

Net profit generated = Marginal contribution – Cost of campaign

For Brand X, the marginal contribution of the campaign was £1,357,438. But
suppose the campaign cost £1,150,000? Subtracting the cost of the campaign
off, we find that the net profit generated by the campaign was £207,438:

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 Table 4
A Incremental sales volume (units) £1,850,000
F=C-E Incremental sales revenue to manufacturer £2,411,938
I=F-H Marginal contribution from incremental sales £1,357,438
K Cost of campaign £1,150,000
L=I-K Net profit generated by campaign £207,438

The net profit generated is the ultimate measure of effectiveness, the measure
of how much money the campaign made for the brand’s owners.

Calculating payback: top tips

1. Revenue is not the same as profit

Marketing effectiveness is often assessed in terms of incremental revenue
generated, rather than profit, usually because profit data is unavailable.
This is perfectly valid, of course, but such measures should never be
referred to as measures of payback or ROI.

If a campaign costs £1m, and generates £10m worth of sales, then it is not
true that it pays for itself 10 times over. Once the retailer has taken his cut,
and the extra manufacturing costs are taken into account, it is quite
possible that the campaign made a loss. True payback calculations can
only be based on incremental profit.

2. Don’t subtract fixed costs

The kind of sales uplifts produced by successful marketing can usually be
accommodated within existing production capacity, at least in the short
term. So the only additional costs incurred are the variable costs
associated with production (raw materials, packaging, etc.) and the cost of
the campaign itself. These are the only costs that should be subtracted
when calculating payback. Do not subtract fixed costs, otherwise you will
underestimate the payback from your campaign.

(This guide is mainly focussed on short-run decision making. However, be

aware that more major long-run marketing investment decisions need to be
thought about differently. For example, if a client wants to double his long-
run rate of advertising spend and to open a new factory to cope with the
additional anticipated demand, then the fixed costs of the new factory
become relevant incremental costs in any payback assessment.)

Labour costs are something of a moot point. The workforce is usually fairly
fixed in the short term, and sales uplifts can usually be met within normal
levels of manning. However, most firms include labour costs within their
variable cost data. You should follow the client’s convention here, but be
aware that treating labour costs as variable costs may cause marketing
payback to be somewhat underestimated, at least in the short term.

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3. Make sure you use the correct profit margin
It’s very important to base the payback calculation on the contribution
margin, rather than the net profit margin that appears in the client’s
accounts or other management data. The net profit margin takes account of
fixed costs, whereas the contribution margin only accounts for variable
costs (see previous section).

As the table below shows, contribution margins are often much higher than
net profit margins. Indeed, in service businesses like airlines and telecoms,
the marginal cost of an additional airline seat or phone call is close to zero,
and so the rate of marginal contribution is almost 100%. So basing payback
on net profit margins will lead to a serious underestimate in payback.

Table 5
Industry What are typical What are typical Typical Typical
marginal costs? fixed costs? contribution average
margin 1 profit margin
Foods Raw materials & Factory 50% 10%
packaging overheads,
head office etc.
Personal care Ditto Ditto 70% 20%
& household
products
Retailer Cost of goods Stores, logistics, 20% (but varies a 5%
sold head office etc. lot by category)
Airline seat None (fuel isn’t Aircraft, ground 100% 5%
a true marginal staff, head office
cost if the plane etc.
is going to fly
anyway)
Telephone None Network 100% 10%
minute infrastructure,
head office etc.

4. Calculating longer-term payback

So far, we have assumed that payback is calculated over a fairly short
period, say six months to a year. But much brand-building activity does not
pay back over such a short period. Yes it can still be sensible to invest
heavily now behind the promise of growth (or the avoidance of decline) in
the future.

This takes us into the realm of estimating long-term payback. The methods
used are basically the same as before, but the complication that you need to
take account of is what financiers call the time value of money – the idea that
profits in the future are worth less than profits now. A campaign that generates
£1m of extra profit immediately is better than a campaign that takes five years
to generate the same profit.

1
These are typical levels of revenue less standard cost, which is the unit cost the marketing
department are usually required to assume. While true marginal contribution rates are
probably higher than this, this is the most credible and pragmatic number to use.

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Managers and financiers deal with this by using discounted cash-flow analysis
(DCF). DCF allows you to convert any stream of future payments to its Net
Present Value (NPV) – the value of that income stream as a lump sum here
and now.

The method for calculating payback in the DCF framework is basically exactly
the same as before, except that one must now consider all incremental
revenues and costs as cash-flows over time, and one must calculate and
compare their NPVs. So, rather than net profit, the ultimate measure of
payback becomes the NPV of the incremental cash-flow generated by the
campaign, which is:

NPV (Incremental revenue) – NPV (Incremental costs)

As before, incremental costs will include both marketing costs and costs
associated with incremental sales. However, as we noted before, you may
need to take account of some additional costs when calculating long-term
payback – for instance, a long-term increase in demand might require an
increase in production capacity.

The mathematical details of DCF are outside the scope of this publication, so
your CFO should be able to help you here. You should always use DCF for
assessing the payback from longer-term marketing investments.

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Return on marketing investment (ROMI)
Net profit generated is the ultimate measure of marketing effectiveness.
However, if you want to measure financial efficiency as well, then you need to
do a return on investment (ROI) calculation.

The ROI from any kind of investment is simply the ratio of the net profit
generated to the amount invested:

ROI = (Net profit / Investment) x 100%

For example, when calculating the return on capital investment, the
appropriate ROI measure is the Return on Capital Employed (ROCE):

ROCE = (Net profit / Capital investment) x 100%

Similarly, for marketing investments, the appropriate ROI measure is the

ROMI:

ROMI = (Net profit / Cost of campaign) x 100%

We recommend that the term ROMI is always used when calculating the return
from marketing, in order to avoid confusion with other ROI measures like
ROCE.

In our previous worked example, an investment of £1,150,000 in marketing for

Brand X yielded a net profit of £207,438, which equates to a ROMI of 18%:

Table 6
A Incremental sales volume (units) £1,850,000
F=C-E Incremental sales revenue to manufacturer £2,411,938
I=F-H Marginal contribution from incremental sales £1,357,438
K Cost of campaign £1,150,000
L=I-K Net profit generated by campaign £207,438
M=L÷K Return on marketing investment (ROMI) 18%

(Once again, for long-term payback, the calculation of ROMI is slightly

different. Discounted cash-flow analysis allows you to convert the stream of
extra revenues and costs from your campaign into an equivalent annual rate of
return (called the internal rate or return or IRR by accountants.) This can then
be compared with the ROI from other long-term investments.)

ROMI is a useful measure, because it allows you to compare the efficiency of

different campaigns with different budgets. It also allows you to compare the
return from your campaign with the returns from other alternative investments.
For instance, you might compare the return from advertising with the return
you might earn from investing in a new factory, or from NPD, or from simply
keeping the money in the bank and earning interest. This allows you to assess
the opportunity cost of spending money on marketing.

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Return on marketing investment: top tips

1. Don’t call non-financial measures ROMI

ROI is a financial term, and ROI measures, such as ROMI and ROCE, are
financial ratios. Yet it is commonplace to hear marketing people using the
term ROI to describe response measures which have nothing to do with
finance. This is nonsense.

Your campaign may have increased awareness, generated responses,

gained press coverage, and even increased sales revenue, but none of
these are ROI measures. Only ever use the terms ROI and ROMI to
describe the profitability of your marketing.

2. Don’t confuse ROMI with profit

Some marketers use terms like return on investment loosely to describe
financial payback. But ROI has a precise financial meaning. Only ever use
terms like ROI or ROMI to describe the ratio of profit generated to amount
invested.

3. Aim for profit, not ROMI

We all know that shareholders are constantly looking to maximise the
return on their investments. Surely the whole point of the shareholder value
approach to management is to maximise ROI, isn’t it?

Well, yes and no. Shareholders try to maximise ROCE, not ROMI. And the
way marketing can help maximise ROCE is by maximising the net profit it
generates, not by maximising ROMI.

Too see how this works, look at our worked example once again. We saw
that a budget of £1,150,000 generated a net profit of £207,438, implying a
ROMI of 18% (rows A – C in Table 3 below).

Table 3
Budget 1 Budget 2
A Cost of campaign £1,150,000 £575,000
B Net profit generated by campaign £207,438 £114,091
C=B÷A Return on marketing investment (ROMI) 18% 20%
D Base level of profits without marketing £500,000 £500,000
E=B+D Total profit £707,438 £614,091
F Capital invested by shareholders £5,000,000 £5,000,000
G=E÷F Return on capital employed (ROCE) 14% 12%

In addition to the profit generated by marketing, there will also be a base

level of profits that would be achieved anyway, with or without marketing.
Suppose that this base level of profit amounts to £500,000, taking the total
profit to £707,438 (rows D and E).

If the shareholders have £5,000,000 invested in the company, then that

implies a Return on Capital Employed (ROCE) of 14% (rows F and G).

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 Now suppose that lower budgets turn out to be slightly more efficient at
generating sales. If we cut the budget in half, from £1,150,000 to £575,000,
ROMI rises from 18% to 20%. And increased efficiency is a good thing,
isn’t it?

No. Look what happens to the other numbers. The net profit generated
falls, from £207,438 to £114,091. As a result, total profits fall, from
£707,438 to £614,091. And that in turn reduces the ROCE, from 14% to
12%. Cutting the budget has increased ROMI, but has also cut profits and
destroyed shareholder value.

Looking at the numbers in Table 3, it’s clear that the aim should be to
maximise net profit, not ROMI. Net profit generated is a measure of
marketing effectiveness, and is the ultimate KPI for marketing personnel.
ROMI is a measure of marketing efficiency, and should only ever be of
secondary importance.

To make an analogy, if net profit is like the distance a car travels, then
ROMI is like the number of miles per gallon. If your aim is to travel from
London to Edinburgh, what matters most is whether you make the distance.
How many miles per gallon you do is a secondary consideration.

4. Don’t use ROMI to set budgets

Focussing too much on ROMI and too little on profit is a recipe for financial
disaster, particularly when it comes to budget setting. To understand why,
look at Figure 7.

This chart shows sales respond to different budget levels. As with most
such curves, there are diminishing returns. At low budget levels, the curve

19
 is steep, so every £1 generates lots of extra sales. But at high budget
levels, the curve gets flatter and extra spend delivers fewer extra sales.

So where is the optimum budget level? If we use ROMI as a guide, then we

will set the budget at Point A, because that’s where ROMI is at a maximum.
But the optimum budget level is actually at Point B, the point of maximum
profit.

This illustrates why ROMI can be a dangerous KPI, especially when it

comes to budget setting. If your aim is to maximise ROMI, then the easiest
way to do it is usually to cut your marketing budgets, even if this means
lower sales, lower profits, lost jobs and the destruction of shareholder
value.

5. Be careful when using ROMI to allocate budgets

ROMI can be a dangerous metric for setting budgets, but it can be useful
for allocating them. Given a fixed pot of money, a good way to decide how
to spend it is to look at the ROMI for each channel and medium.
Nevertheless, there are still pitfalls.

Firstly, the ROMI for a given channel may partly reflect how much money is
spent in that channel. Consider the example below. TV, which accounts for
the bulk of the budget, is highly effective, delivering 24 times more profit
than local radio. But radio is highly efficient, delivering a much higher
ROMI. But that doesn’t mean one should spend the entire £4.1m on local
radio, because at that level of spend it’s highly likely that diminishing
returns would set in, making radio even less efficient than TV. The sensible
thing to do would be to shift some of the money from TV to radio, and then
measure ROMI again.

Table 4
Medium TV Radio DM
Expenditure £4,000,000 £100,000 £50,000
Net profit generated £600,000 £25,000 £15,000
ROMI 15% 25% 30%

Secondly, the ROMI for one channel may depend on how much money is
spent in another channel. For instance, in the example above, DM has an
even higher ROMI than TV or radio. But what if the ads are driving people
to respond to the direct marketing (DM)? Switching the entire budget into
DM would cause ROMI to collapse. Again, the sensible thing to do is to
proceed by steps, adjusting the budget allocation gradually, and re-
measuring ROMI as you go.

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Longer and broader effects
The basic calculation outlined above is fine for the simple marketing effects,
but there are various ‘longer and broader’ effects that you may wish to
consider.

Supporting higher prices

Rather than increasing volume, your advertising may be allowing the campaign
to sell the same volume at a higher price. Measuring such effects is tricky, and
may well require econometrics to measure price elasticity. However, the
payback calculation is basically the same as before, except that the increase in
sales value comes from higher prices.

Reducing costs

In principle, marketing might be used to reduce costs rather than increase

revenue. For example, better marketing might help a manufacturer to negotiate
better deals with suppliers, or to reduce the costs associated with staff
recruitment and retention. Measuring such effects is hard, but the payback
calculations do not change significantly, except that the incremental costs now
become incremental cost savings.

Creating options

As well as increasing profits from existing products and markets, marketing

may create options to launch new products or enter new markets. Little has
been written on this aspect of marketing, although Dias and Ryals (2002)
outline one possible approach.

Changing market expectations

Marketing affects investors as well as consumers. By improving market

expectations of a product or company’s future performance, marketing may
increase its financial value.

Increases in the financial value of brands or in a company’s share price can

generate real financial returns for the owners. Measuring such effects presents
an interesting challenge to the marketing community.

Reducing the cost of capital

If your campaign causes the City to re-assess your client’s company, then one
effect may be to reduce the cost of capital. Little research has been done on
this effect, but the potential benefits for highly geared firms might be large.
Measuring such an effect would be an interesting challenge for the marketing
community.

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References and further reading

IPA Publications

‘Demonstrating payback’, Chapter 4, Advertising Works 15, Andrew Sharp,

Director of Brand Economics & Finance, PricewaterhouseCoopers LLP
London (WARC, 2006)

‘What exactly is ‘proof’ anyway?’, Chapter 5, Advertising Works 16,

Merry Baskin, Founder, Baskin Shark (WARC, 2008)

‘Effectiveness is not just something you measure’, Chapter 7, Advertising

Works 16, Richard Storey, Chief Strategy Officer, M&C Saatchi (WARC, 2008)

Evaluation: A best practice guide to evaluating the effects of your campaigns

(IPA, 2005)

Little Book of Growth (IPA, 2008)

Marketing in the Era of Accountability, Les Binet and Peter Field

(WARC, 2007)

IPA Online

Econometrics Explained, Louise Cook and Mike Holmes, Ed. Les Binet
(IPA 2004)

IPA Effectiveness Awards dataBANK www.ipa.co.uk

Other

‘ROI is dead, now bury it’, Tim Ambler (Admap, Sept 2004)

‘Options theory and options thinking in valuing returns on brand investments

and brand extensions’, Sam Dias and Lynette Ryals (Journal of Product &
Brand Management, 2002)

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May 2008

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