How to measure influencer marketing ROI?
As the need for accountable marketing spending continues to grow, companies must develop sound metrics and measures of marketing’s contribution to firm profitability. The leading metric has been returned 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. This paper seeks to remove the ambiguity around MROI to guide better measurements and analytics aligned to financial contribution. The authors first provide a formal definition of MROI and review variations in the use of MROI that are the root cause of ambiguity in interpretation. The authors come to the conclusion that MROI estimates would be more transparently described if those providing the estimates used the following form:
Our analysis measured a (total, incremental, or marginal) MROI of (scope of spending) using (valuation method) over time period. The paper proceeds to describe five case studies that illustrate the various uses of MROI, covering different marketing initiatives in different business sectors. The authors describe the important links between marketing lift metrics (such as response elasticities) and MROI. The final section of the paper 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) versus 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 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.
ROI, marketing impact, marketing metrics, marketing resource allocation, marketing budgeting
THE PURPOSE OF THIS PAPER:
An important responsibility of the marketing function is to enable economic decisions on budgeting and allocating the corporate resources devoted to marketing efforts. Marketing return on investment (MROI), aka return on marketing investment (ROMI), is the metric that is increasingly used to
evaluate marketing spending and to guide strategic and tactical decisions. Practitioners and academics agree that, if dollars are spent or valuable assets committed to marketing purposes, then the firm should strive to monitor and improve returns to marketing efforts in financial (dollar) denominated metrics. MROI is arguably the most widely employed measure of enterprise marketing productivity (output/input), even if it is not as universally embraced and implemented as many would wish. As such, it is important to ensure that
definitional ambiguity does not plague the already-difficult job of assessing marketing’s contribution to the firm’s health and profitability. The goal of this paper is to improve conceptual and definitional clarity, as well as to suggest specific terms to identify the several variations of MROI that are being used and reported by practitioners and academics. Although the history of MROI goes back at least to 1971,
1. and was used at AT&T in the late 1980s (Lens old, personal communication), the measure has no clear genesis. Its adoption was undoubtedly influenced by the widespread use of ROI to measure firm and strategic business unit (SBU) profitability in the late 1970s; for example, the PIMS project focused on ROI as the primary performance metric.
2. For many years, communicating marketing’s contributions to the CFO and others in the finance function has been important to marketers. Part of this desire to demonstrate marketing productivity is related to budgeting, as finance often holds the key to obtaining approval for marketing spending, and hence the ambition of its strategic objectives. So it is natural that marketing would strive to speak the same language. Finance also struggles with finding the ‘right’ measure of profitability, however. Consider these examples of profitability metrics used by finance: ROA, ROS, ROE, ROIC, EPS, EBIT, net profit, economic profit (also known as EVA — economic value added), EBITDA, etc. Each has advocates and advantages for particular applications, but the terms are not interchangeable. We believe that marketing should strive for the same kind of precision in our common language and that belief motivates this paper. MROI can and is being used for a number of different purposes:
assessing historical and projected marketing productivity; reviewing and approving marketing budgets; allocating limited marketing funds among competing products, markets, customers, marketing mix elements and media, and evaluating specific marketing campaigns for ‘go no- go’ decisions.
3. Marketers differ widely, however, in their understanding, acceptance and
implementation of MROI. Better understanding can help add precision to the terms, increase acceptance for appropriate applications, design necessary analytic measurements, and speed the implementation of sorely needed metrics to assess and improve marketing productivity. In a survey of 194 senior marketing managers and executives,
4. 77 per cent reported that they believe that ROI is a very useful measure and 67 per cent also think that market share is very useful. Less than half (49 per cent) reported that ROMI was ‘useful in managing and monitoring their business’. A major reason why managers may not find ROMI (aka MROI) as useful stems from a lack of understanding of the measure.
5. Another possible reason is that respondents might have been confused about if and how ROMI differs from MROI or ROI. Furthermore, Rogers and Sexton. 6.report that there is a lack of effort within companies to measure their marketing ROI, in part because rewards are not being tied to this measure. Yet Offer and Curium,
7. based on a survey of 439 managers in the USA, show that the use of such
performance metrics leads to significantly better performance. Clearly, there is a need for and a benefit to better understanding measures that capture marketing productivity.
In this paper the authors will:
(1) provide a formal definition of MROI;
(2) discuss the variations in specific MROI calculations and confusion that may result from differences in the domain of MROI under consideration;
(3) illustrate several of those MROI variations with specific management applications and suggest specific names/labels for each major variation;
(4) analyze relationships of these variations to other response metrics, such as
elasticities and linear response coefficients of marketing mix models;
(5) review different perspectives on what an appropriate objective function is for
marketing (since maximizing MROI is only sensible for fixed budgets); and conclude with some suggestions for future work to help marketing achieve a common understanding of how to assess and use its most important summary productivity metric, MROI. MROI DEFINED
MROI is the financial value attributable to a specific set of marketing initiatives (net of marketing spending), divided by the marketing ‘invested’ or risked for that set of initiatives. MROI (aka ROMI) is a relatively new metric. It is not like the traditional ‘return- on-investment’ metrics because marketing is a different kind of investment. ROI metrics for firm or SBU performance are almost always annual returns, but other uses of ROI, such as the return on specific financial investment, often leave unspecified the time required to generate the return.