Marketers need a better answer to the ROI question

Criticism is often levelled at marketers and marketing departments for their inability to speak the language of the boardroom and prove return on investment (ROI). The topic has been the subject of innumerable conferences, events and pieces of research as the industry desperately attempts to shake off its “weak and fluffy” reputation and prove real financial results.

Just in the past few months, two of the industry’s biggest advocates – the IPA and Thinkbox – have looked to bring the issue of ROI and effectiveness up the agenda.

At its second effectiveness conference, speakers took to the IPA stage to bemoan the fact that analysts and chief financial officers (CFOs) don’t understand the great work they are doing. And more recently Thinkbox, bored of all the questions over whether TV advertising actually works in the face of growing claims to the contrary from digital players, linked up with Gain Theory and Ebiquity to prove what it calls “profit ROI”.

READ MORE: Getting to the business case for advertising

By analysing hundreds of ad campaigns, it found that for every pound spent on advertising, profit ROI was an average of £3.24 over three years. So the industry knows it has a problem. And it is working to solve that problem. But it seems clear the message is not getting across.

A survey by Gartner of more than 350 marketing executives with $250m (£188m) or more in annual revenue found that the average share of revenue allocated to marketing budgets was 11.3% in 2017, down from 12.1% last year and a return to 2015 levels.

The risk is that CMOs are either being too nearsighted to be strategic or too visionary to deliver against marketing’s objectives.

Only 15% of those surveyed say they expect a significant increase in budget next year, with a third thinking their budgets will be cut or frozen. In some ways this should come as little surprise. This year has seen turmoil for companies – Brexit in the UK; Donald Trump in the US; natural disasters such as hurricanes Harvey and Irma; political issues in North Korea, Spain and Germany. And amid that backdrop there is also the challenge of digital disruption – whether in the guise of new businesses entering the market or big changes to how certain industries do business.

Yet Gartner does not believe these issues are to blame for the fall in marketing budgets. Ewan McIntyre, research director at Gartner, says the problem is that “weighty” expectations for returns from previous budget increases have not been met.

“The time has come for marketing to show its financial management credentials, proving it can deal with financial constraints, assume accountability for business performance, build budgets based on future returns rather than past assumptions, and grow the business while making hard choices,” he says.

That is a damning indictment of the position that marketing clearly still holds at many large businesses.

The suggestion is that marketers throw their toys out of the pram if they are asked to be more effective, don’t think their performance should be related to the business, are just guessing at what their budgets should be and are not making the difficult choices.

Specialist effectiveness units emerging

Clearly, this isn’t the case at all companies. The IPA, in its recent ‘Culture First’ report into marketing effectiveness, found that a third of the brands it spoke to have developed specialist marketing effectiveness units and three-quarters have increased the resource for this area.

Meanwhile, companies, particularly FMCG businesses such as Unilever and Coca-Cola, are increasingly turning to zero-based budgeting to decide annual spend.

READ MORE: Zero-based budgeting – Critical to growth or a distraction?

Nevertheless, most marketers are still unable to justify budget increases because, as McIntyre says, they are not using the metrics that matter. And they are either being too tactical or too visionary, he claims.

“The risk is that CMOs are either being too near-sighted to be strategic or too visionary to deliver against marketing’s objectives,” he adds. “The result is a lack of focus on the metrics that matter to CFOs and the business – how marketing activities deliver return on investment and profitability to the organisation.”

Yet this really shouldn’t be the case. Ebiquity and Gain Theory have shown that it is possible to quantify advertising’s profit ROI, even breaking it down by sector. Marketing mix modelling is hardly a new idea either. And yet research by the Lenskold Group in 2013 found 65% of marketers are using either no tracking at all or only single-channel attribution. Only 3% are using marketing mix modelling.

It is clear marketers are failing to find that happy medium between driving short-term sales and looking at long-term strategy that helps drive annual business growth. Perhaps marketers are looking for a silver bullet, but this doesn’t exist.

Getting to a place where you understand how budget should be spent, what is effective and how that drives business outcomes requires an astute mix of insight and analytics and an understanding of what the CFO wants – there are no shortcuts.

Proving ROI is hard work and expensive, but without it marketers are acting on gut instinct and feelings, not what actually works. And in the long run the job to convince the rest of the company of marketing’s worth will be even more difficult and costly.