Modeling the Real Return on Marketing Investments

Dr. Peter Cain

A key decision facing the brand manager is how best to allocate an often limited marketing budget across a wide set of marketing activities. This is a challenging task in a competitive market place involving complex marketing strategies, where competitor activity can often upset careful planning. The conventional approach to answering this question is the single equation marketing mix model, which formulates a demand equation as a function of selected marketing drivers. Response parameters are then estimated using classical regression techniques and used to calculate ROI and inform optimal allocation of the marketing budget.

Such models, however, focus solely on incremental volume, often recommending a marketing budget allocation skewed towards promotional activity: short-run sales respond well to promotions, yet are less responsive to media activity - particularly for established brands. This, however, ignores the long-run view: that is, the potential brand-building properties of successful media campaigns on the one hand and the brand-eroding properties of heavy price discounts on the other. Acknowledging and quantifying these features is crucial to a complete ROI evaluation and a more strategic budget allocation.