How cost effective is your marketing investment?

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It seems to be generally accepted that the main objective of every business is to fulfil its mission or vision statement, along with its green credentials. Laudable as this may be, in reality the purpose of any commercial business is to make profits for the benefit of its shareholders and employees by satisfying customers. The objective of the commercial manager is to maximize profitable revenue while minimizing costs and the use of assets. Maintaining the relationship of profit, costs and assets used is the marketing management problem.

“If you can’t measure it, you can’t manage it” said Peter Drucker. This statement applies as much to the Marketing function as it does to every other part of business. However, the statement does not say that “If you can measure it, you can manage it”, and that is certainly true of marketing. Measuring marketing performance does not guarantee good management, but is an indicator of management performance.

Is your marketing effort really cost effective? If your answer is yes, then how do you know? Does your organization actually measure the return it gets for all the money it invests in getting and retaining business? These are questions that everyone in business should ask, yet it would appear that few do so. Of those that do ask the question, it is probable that few would have a useful answer.

Marketing is not an activity in isolation. As the business function of getting and maintaining custom , marketing must be fully integrated with all the other operational activities involved in satisfying customer demand profitably. Marketing also may not be wholly divorced from other supporting activities such as finance, personnel and supply, as they all provide the necessary resources for the marketing function’s activities.

Much of what is written about marketing performance measurements relate to large companies involved in fast moving consumer goods (FMCGs). For many commercial managers it is difficult to relate these kinds of measurements and their relevance to small and medium sized businesses, especially if they are involved in services, partnerships or consultancies. Similarly, relating such measurements to businesses involved in industrial markets or in long term contracts is even more difficult, but it is not impossible. In fact, measuring marketing performance in both significant and useful ways is both essential and possible for every type of business.

Commercial managers will be interested in measuring performance in their own areas of responsibility, product management, advertising, or sales. However, measuring performance of the whole marketing function requires them to identify those measurements which are fundamental to the business.
Questions that commercial managers should ask are;

  • Are we making revenue?
  • Are we making profits and how much?
  • From where do the profits and the costs arise?
  • Is the market growing or shrinking and at what rate?
  • Are sales and profits growing in line with or different from the market?

Answers to these questions provide the initial framework on which more detailed analysis of marketing performance may be made.

The most effective way of measuring performance is by measuring output. In many businesses, the first measures of marketing are involved with sales, usually in terms of volume, value and customers. These areas are easy to measure, and having a true and tangible output that is quantifiable, are of fundamental importance. By contrast, measurements of customer perceptions may only be done by subjective surveys which have limited importance.

Measuring marketing performance should be done on a regular and continuous basis. Ideally, business data should be collected automatically and processed into usable form so that comparisons and trends may be easily made and identified. Marketing measurements are only indicators of performance, so comparison with other and previous measurements is essential if the data is to have any value. Performance measurements in isolation are of little or no value.

The prime objective of the marketing function is to generate profitable revenue. Performance measurements should therefore identify those areas of the market, that generate profitable revenue, as well as areas and activities, that incur costs rather than profits.

Two significant measures of performance are ROI and ROMI. “Return on Investment” (ROI), is often confused with that of “Return on Marketing Investment” (ROMI), but these terms should not be interchangeable. Return on Investment (ROI), refers to the net income divided by the capital employed. However, the “Return on Marketing Investment,” (ROMI) is generally used to measure the financial performance of specific marketing activities such as an exhibition or advertisement. Because it is difficult to identify which sales are attributable to which activity, ROMI is generally limited to measuring specific marketing investments, and is not readily applied to the marketing function as a whole.

Marketing performance measurements are there to answer the questions:

  • How much business has been gained and at what cost?
  • Is the cost too high or would more business be gained by more investment?
  • Is the balance of cost and investment about right in relation to the return of profitable revenue?

The most important measurements for any business will be those where there is a quantifiable output rather than a subjective analysis. Before collecting any marketing performance data, the commercial manager must be sure that they understand the true significance of any measurement, what it actually means, and how useful the information will be in forming informed decision making.

(881) © N.C.Watkis, Contract Marketing Service 28 Nov 23
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Nicholas Watkis, AE MA DipM CMC FCIM
Nicholas Watkis set up Contract Marketing Service in 1981, providing professional interim marketing management for a wide variety of businesses. Over 30 years practical experience in organizations, large and small, national and international, led to the development of Business Performance Maximized specialist in marketing performance measurement.

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