Measuring Marketing Impact

Businesses rely on solid marketing strategies to boost sales—yet the tools used to evaluate these strategies often provide misleading results, leaving managers with the inability to accurately measure how they can get the best bang for their marketing buck, according to an article by Dina Gerdeman. Find a shortened version of the article below.

Thomas J. Steenburgh, associate professor at Harvard Business School, has developed a new analytical tool that more accurately measures the effectiveness of various marketing efforts. Steenburgh and his co-authors Qiang Liu and Sachin Gupta believe that the model could help brand managers determine which marketing strategies work best to invest in.

‘Companies really need to pay attention to the effectiveness of their marketing instruments,’ Steenburgh says. ‘They need to look at whether they’re creating new customers or whether they’re just drawing customers away from competitors. It’s a fundamental question in the field, and this model helps measure that.’

The ideal mix
When planning marketing campaigns, brand managers have a wide portfolio of weapons to draw on, including in-store merchandising, advertising, coupons and sweepstakes, trade promotions, prices, and deployment of a direct sales force. The key is crafting the right mix between them — the ideal brew needed to achieve sales and market share goals.

If a business seeks to grow demand for a category of products, the effort may not elicit much of a reaction from its competitors; after all, if the entire category grows the rising tide lifts all boats. But a competitor’s reaction is typically quite different when a company attempts to move in on its market share, perhaps by offering price discounts. Since this strategy is viewed as more threatening, the competitor can be expected to retaliate with prejudice — often by firing off a campaign to win back many more customers than it lost.

‘We know that retaliation happens and that companies worry about that,’ Steenburgh says. ‘But nobody benefits when both companies are retaliating. One effort just offsets the other.’

Measuring the different effects of these marketing strategies can help brand managers make the right decisions about which strategies to use in their marketing mix. Steenburgh, Liu, and Gupta argue that the tools that have been used in the past to analyze the effectiveness of different marketing activities — called discrete choice models — can skew the results and misguide brand managers.

Traditional discrete choice models—logit, nested logit, and probit, for example—are flawed because they make it appear as if all marketing activities produce the same results, the researchers contend. In reality, differences between various marketing instruments are often significant.

Widening the view
So the professors created a new discrete choice model called Flexible Substitution Logit (FSL), described in their working paper The Flexible Substitution Logit: Uncovering Category Expansion and Share Impacts of Marketing Instruments. The model relaxes the IPS property and allows a wider variety of results to be analyzed when studying the effects of different marketing instruments. By doing so, ‘the FSL allows a wider variety of individual-level choice behavior to be recovered from the data,’ according to the researchers.

‘The FSL model is very useful if you want to predict consumer demand,’ Steenburgh says. ‘This model gives you a better way to do that.’

Figuring in payback
With results that provide a better analysis of how different marketing instruments work, brand managers can now decide how to best invest their marketing dollars. For example, if a brand manager is concerned about retaliation from competitors, the best decision may be to limit investment in detailing and instead put more emphasis on direct-to-consumer advertising or on sponsoring meetings and events, both of which are more likely to expand the category.

‘It would be interesting to apply the FSL model in a lot of other situations to see which ones expand the pie and which ones threaten other actions,’ Steenburgh says.

Read the full article here.

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