The Penny Falls: Marketing Mix Optimisation in a Digital World

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Look around these days and it seems that many companies – even some of the world’s largest – are finding it hard to know exactly how much to spend on each type of communication. In most cases, however, we find the difficulties are rooted in not being able to “see the wood for the trees”.

Discussions about integrated campaigns, digital media, on-line marketing, multi-channel, multi-layered, multi-faceted, and multi-mixed campaigns get lost in the vast web of competing possibilities for perpetual interconnections.

What is needed is some rational simplicity.

Most people lead “busy” lives and whilst they are, in principle, accessible to every possible means of marketing communication – off-line, on-line, above-the-line, below-the-line, through-the-line and, no doubt, “down-the-line” – to develop the optimum media mix the marketing director must still think in terms of reach and frequency.

Put simply, the role of most communication budgets is to use media (of all kinds) to address three key questions “do they know my brand exists?”, “do they know its features and benefits?”, “do they consider it to be a viable solution for their needs?” If we can achieve ticks in these three boxes then we can move to the higher levels of gaining trial, conversion and loyalty.

The use of differing media, including digital, should be viewed in terms of how effective each will be in helping you achieve those initial 3 key communication objectives.

So the first step is to think about reach.

If all communication channels are worth the same in terms of the connection you could make with your target group then if you were to spend one pound on social media marketing what would be the probability that you would gain an additional buyer? How does that probability compare with having spent that same pound on radio advertising instead? And would the efficiency of both be heightened if you spent a second pound on pay-per-click?

Now add to this the value of repetition. Is one contact via social media worth three contacts via radio? If so, then that changes the cost ratio.

You may be thinking at this point, “but it will vary depending on the strength of the creative”. If you are then you need to take a step back for a moment. All we are comparing here is the relative effectiveness of the channels (singly or, where required, in combination) in delivering the same message. In other words, the equivalent of hearing the communication via the radio versus getting the same message from a friend.

We would picture all this as like using an old-fashioned penny falls machine on the pier in Brighton.  You can choose a number of slots into which you can place your coin – but you can’t be absolutely certain how it will bounce all around on its way to bottom. But what you can be sure of – because you can see it – is which slots are the most likely places to use to get the biggest return – the places where you are most likely to get a payment after inserting the fewest amounts of coins.

And that, in reality, is all you really need to know.

As a real life example, think for a moment about choosing how you might want to travel to the airport to catch your plane. You can drive yourself, go by taxi, by rail, by coach or get a friend or relative to drop you off and pick you up.

In this situation you probably wouldn’t go on-line to work out your personal mathematically-optimum solution as to which of these you would choose. But if you heard a radio ad that highlighted the benefits of driving yourself you might consider that option. And then you might go on-line to compare prices, canvass some opinions, and make a booking. Or you might just think the information provided in the radio ad was enough to convince you.

So in this situation the best marketing strategy is to first get the maximum number of people to consider the mode of transport we wish to advocate. That is likely to favour “display”-type advertising rather than “search”. Both will have an effect, but one is more efficient at it than the other.

Understanding these relative probabilities – and how they work singly and in combination across multiple streams – is at the heart of econometric analysis for marketing. The answers tell you how many coins you need to put into each slot at the top in order to maximise the pay-out you get at the bottom. How they bounce around on the way to the bottom will always be a bit of lottery. What econometrics does is stack the odds in your favour so you can be sure you will get the highest payback from the media budget in your pocket!


Why a Baseline Sales Forecast is more important than ever

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New technologies have made consumers both better informed and harder to engage. While traditional “one-to-many” mass marketing tools like TV and newspapers remain important, businesses now feel that their reach and influence have declined significantly. This leaves companies with a different and more difficult problem. In a world saturated with media platforms and marketing messages, where attention spans are short and consumers increasingly cynical, what’s the best way to engage consumers and create preference?

Once upon a time life was simple. Choices within the marketing mix were relatively few in number and analysing the past performance and planning the future spend and mix was comparatively easy.

But today the choices facing the marketing executive are numerous and complex. For example, advertising is no longer just a decision between the four major media platforms but now has to take into account the rise of the internet and the explosion of more choice and variety within the old traditional broadcast media platforms.

Now the challenge is managing a mix within the marketing mix – which element of the media mix delivers the best ROI? More importantly, what is the impact of the various elements of the media mix working together?

The old analytics – pencil, graph paper (and then the spreadsheet) don’t provide the right kind of analytics to answer these questions. The reason is that we find it difficult to determine relationships between cause and effect for more than two dimensions.

Just look at the chart above. It shows the variation between just two elements of the marketing mix – price and distribution – and their possible effect on sales. You have admit it is impossible to determine the relationship between these two factors and sales. And it is likely that other factors, not shown in the chart, have had greater impact on sales performance.

How can one tell?

The only safe way of determining the real drivers of sales, and the contribution of each one to sales performance is to undertake Econometric Modelling and determine Baseline Sales – what will be the outcome from maintaining the same marketing mix? Then the results of the modelling, which calculate the relationship between each part of the marketing mix and sales response, can predict how Baseline Sales will change in response to different marketing mix scenarios.

There are four main reasons why this type of data modelling will give you the answers you are looking for:

1. Because the model “thinks” in more than two dimensions
2. Because it identifies relationships that are ‘causal’ rather than just ‘coincidental’
3. Because it can derive the sales effect of each activity, singly and in combination
4. Because it can evaluate and model the impact of changes to the marketing mix and other assumptions on future sales and share performance

Econometric Modelling is at the heart of P&G’s Business Sufficiency program which enables them to look at the outcomes of alternative marketing strategies before they take the decision on which one to pursue.

Now, what’s your excuse for not doing the same?


Paying for Time or Results?

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On April 20, Coca-Cola announced that it was moving to a “value-based” remuneration system for the advertising agencies that work on its 400 brands – a reward based on sales and market share achievement. Procter & Gamble have been running performance related fees for 12 major brands for some time.

This type of remuneration system is also spreading to other service agencies – accountants and lawyers, for example.

Could it work for Sales Promotion Agencies? Wouldn’t a remuneration system based upon achievement of ROI on sales promotions rather than one based on hours worked be better? This would have the benefit of getting clients and agencies working even more closely together – aligning agency compensation with client profitability.