Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Both marketing practitioners and researchers need a valid measurement of return on marketing investments. Marketing has traditionally been considered an expense and the contribution of marketing to the bottom line is less obvious than that of manufacturing and R&D. This book provides a timely straightforward formula for marketing ROI: it builds a comprehensive view encompassing fundamental principles to advanced strategic applications. The book is divided into three sections:
“Understanding ROI Principles” (5 chapters), which builds the basic ideas of marketing ROI and establishes its importance;
“Building the ROI Formula” (3 chapters), which covers issues related to both the return and the investment sides of the ROI formula; and
“Applying Marketing ROI” (8 chapters), which discusses the applications at the campaign, customer, and corporate levels.
The basic principal ideas underpinning the ROI concept are presented in chapter 2: terms explained include net present value, gross margin, discount rate, incremental customer value and customer lifetime value. ROI threshold and hurdle rates are also discussed, since ideally marketing ROI measures incremental return generated by incremental marketing investment.
Chapter 3 explains how marketing ROI is different from common financial ROI measurements. In particular, marketing investment prioritization and selection differ due to the frequency of investments, the relatively small increments, and the need to be flexible and dynamic.
Chapter 4 discusses how technology advancement (especially software) has made the implementation of marketing ROI practical. Finally, Chapter 5 concludes by discussing the marketing ROI implementation process. In an ideal environment, marketing ROI is implemented at the campaign, customer and corporate levels to maximize company profits. Marketing ROI serves as the guiding light in the strategy development stage as well as the evaluative tool for the results: ROI analysis provides input and output evaluation, thus supporting strategy creativity, modification and feedback loops.
Core principles, trouble areas, and potential inaccuracies in measurement in using ROI are discussed in Part Two of the book. Chapter six defines the basic formula for marketing ROI, which is presented as a percentage return divided by investment. Gross margin equals the net present value of revenue and expense income flows which equals the net present value of the incremental customer value less incremental customer expenses plus incremental savings and plus gross margin of referrals. Investment is calculated as the net present value of the sum of all at‐risk marketing expenses. Data sources, data estimation, and common errors are also outlined in this chapter.
Chapter 7 shows some possible patterns to highlight the dynamics of marketing investments and provides a visual demonstration of where new strategies can drive different profit outcomes. Differences are outlined in terms of acquisition marketing and retention marketing, and methods to calculate the marketing investments and returns in both cases were discussed. Managers are advised to direct more investments to vulnerable customers.
Chapter 8 compares drivers of retention marketing and acquisition marketing and their implications for strategy formulation. A further comparison between retention and acquisition marketing in terms of ROI measurements and a list of key principles of using ROI effectively are given in this chapter.
Part Three addresses how to apply marketing ROI in decision making, with Chapter 9 providing an overview of the process. Specific responsibilities are assigned to manage profitability at the corporate, customer and campaign levels, and steps are outlined to customize marketing ROI effectively to each level.
Chapter 10 focuses on managing the corporate level profitability. For example, companies need to fund marketing programs that generate acceptable returns on investment. Some major concerns for the planning process include period of time, incremental customer value, discount rate, referral value, expense allocation, investment and residual value.
Chapter 11 discusses the application of marketing ROI to customer profitability. Customer profitability can be maximized by viewing marketing ROI over the lifetime of customer relationships, and emphasis is given to the future impact of each contact with the customer and to interdependencies among campaigns. Customer‐level marketing ROI needs supportive ROI practices at the campaign and the corporate levels.
Chapter 12 relates the marketing ROI to the customer pathing strategies. Identifying the overlap, synergies and interfaces between independent marketing activities and using measure and projections based on independent, aggregated and incremental ROI for various investments make it possible to create customer pathing strategies.
A better organization of the book might be to merge chapter 11 and chapter 12. Even though chapter 11 is titled “Customer Profitability”, the discussion is more on the campaign level. It is only when interpreted together with chapter 12 that we can really see how the marketing ROI can be applied at the customer level.
Chapter 13 focuses on campaign‐level profitability. Individual campaigns work as the building block for the success at the corporate and division levels. Either increasing returns or decreasing costs can improve campaign profitability. Tactics for achieving these are detailed in this chapter.
Chapter 14 focuses on the measurement process. Measurements must have an acceptable level of accuracy, be complete, and be aligned with business goals. Guidelines as well as advantages and limitations of different types of measurement processes are discussed.
Chapter 15 analyzes the potential gains from employing marketing ROI. It helps to manage the marketing budget as an investment portfolio and better control the outcomes. Investment strategies that can be applied to certain customer segments, key strategies that can maximize customer profitability, as well as how to effectively manage and control the portfolio are all laid out in great detail in this chapter.
Finally, Chapter 16 wraps up the whole book by identifying specific steps such as cross‐functional cooperation and technology that help to implement marketing ROI successfully. The author concludes the chapter as well as the whole book by calling for more companies to embrace marketing ROI measurements.
Overall, this is a very practical book that provides insightful ideas for managers. It lays out clear outlines and formulae that companies can utilize in order to make strategic marketing decisions. The points in the book are presented in straightforward fashion and demonstrate the author's real‐world experiences in the marketing field. However, organizations with goals other than profit maximization may find this book less valuable because the measurements suggested in the book are mostly profit‐driven and there is limited indication about how things like social welfare can be calculated. For academics, this book is suitable for MBA classes in order to build up a student's sense of how to measure the profitability of marketing activities. Graduate marketing majors may also find this book good supplementary reading. Researchers may find the value of this book rather limited: they are not the primary target audience. However, it does provide some potential guidelines on methodologies in measuring marketing effectiveness and profitability.