Marketing ROI

Here is a great article from Strategy+Business about marketing ROI. What's the problem with the way marketing is done now?

"Some companies use metrics well, especially for things like advertising, reducing prices, or issuing coupons," says Jagmohan Raju of Wharton's marketing department. "When they drop the price or put out a coupon, they know how many extra sales they get. But what's not clear is whether extra sales represent the right metric to look at in the first place. Should a company be looking at increased sales or should they be looking at the profit impact of the price change or the coupon? They should ask how many new customers they got from that marketing campaign and what their lifetime value is. I don't think companies do that."

The article goes on to give some very good case studies that demonstrate how companies have improved their marketing ROI. I'll give the example of Disney, since Eisner has been in the news a lot lately. (He used to be a great CEO, but now is a has-been)

A good example of a strategic initiative inspired by marketing analysis occurred during Michael Eisner's early years as chief executive at Disney. Instead of asking how a division's profitability could be improved, Eisner asked: How much did a family spend on a vacation and what percentage of that amount could Disney capture? To address that question, Disney had to move from using product-centric metrics to customer-centric metrics. It turned out that Disney was not capturing nearly enough value from vacation spending, even though its theme parks were quite profitable. Disney's theme parks were primary destinations for vacationers, who spent an average of, say, $3,000 on their vacations in Orlando, but Disney was capturing only 25 percent of that spending; the rest went to airlines, taxis, hotels and restaurants.

What did Disney do with the data? Well, those of you who have been to Orlando know – they built everything Disney. You can go there and take an entire vacation without ever leaving a Disney resort.

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Why don't most companies figure this stuff out? Probably because it is hard to measure marketing, and they don't want to do the work. But if a company is really trying to maximize long-term shareholder value, they should be diligent with shareholder money, and figure out the return on their marketing investments.