Two Ways to Improve Your ROI Credibility

With the fourth quarter of 2019 well underway, many marketing leaders will have already started planning for 2020. In most cases, the planning process will include an analysis of how well marketing performed in 2019. and many marketing leaders will use return on investment (ROI) as the primary tool for conducting this assessment.

Over the past two-plus decades, ROI has become the "gold standard" for measuring marketing performance and for communicating the performance and value of marketing to senior company leaders. So you would think that, by now, marketing leaders would thoroughly understand what marketing ROI is, and how to calculate it correctly. Unfortunately, however, that is not always the case, as a recent survey conducted by LinkedIn Marketing Solutions makes clear.

The LinkedIn Research

The Long and Short of ROI report is based on a survey of 4,000 B2B and B2C marketing professionals from 19 countries. Survey respondents worked in a wide range of industry sectors, including technology, financial services, professional services, and manufacturing. The survey was conducted in June 2019.

Most of the results presented in the survey report refer to "digital marketers." Unfortunately, the report does not define who "digital marketers" are, nor does it indicate whether all of the survey respondents were "digital marketers." With that caveat in mind, here are the "headline" findings from the LinkedIn study:

• 70% of digital marketers claim they are currently measuring ROI.
• 77% of digital marketers measure ROI during the first month of a campaign, even though 55% of those marketers reported having a sales cycle that is at least three months long.
• When most digital marketers say they are measuring ROI, they are actually measuring a variety of key performance indicators (KPIs), but not true ROI.
• 63% of digital marketers don't have a high level of confidence in the "ROI" metrics they are currently using.

The LinkedIn survey report argues that marketers should (a) clearly distinguish between KPI-based metrics and ROI, and (b) measure ROI over the length of the sales cycle in order to obtain accurate results.

When You Say ROI . . .Mean ROI

The findings of the LinkedIn survey highlight two of the still all-too-prevalent ways that many marketers are misusing ROI. First, many marketers use "ROI" as a catch-all term to describe a wide variety of benefits produced by marketing activities. But return on investment is a specific financial metric that has a well-established meaning among management and financial professionals.

This means that none of the following constitutes ROI:

• Increased brand awareness
• Increased market share
• Increased customer lifetime value
• Increased average deal size
• Improved conversion rates
• Improved response rates
• Improved NPS/customer satisfaction scores

For many companies, tracking some or all of these performance measures will be valuable, but they do not constitute marketing ROI. Calling any of these benefits "ROI" reflects a misunderstanding of what ROI is, and if a marketing leader presents one of these kinds of ROI calculations to a CEO or CFO, his or her credibility will be weakened.

Calculate ROI Correctly

The second way that many marketers misuse ROI is to calculate it incorrectly. The basic formula for marketing ROI (MROI) is:

MROI = (Gain from Marketing Investment - Cost of Marketing Investment) / Cost of Marketing Investment

So the basic MROI formula contains only three components:

1. The financial gain from the marketing investment
2. The cost of the marketing investment
3. Time - Although the formula doesn't expressly contain a "time" value, MROI is always measured for a defined period of time.

While the basic MROI formula appears to be quite simple, that simplicity is deceptive. In reality, calculating MROI accurately can become a complex task because every component of the formula presents questions that require thoughtful answers and sound judgment calls.

I've addressed many of these issues in several previous posts, so I won't repeat that material here. However, I've provided links to my ROI-related posts below. If you're involved in calculating MROI, I encourage you to take a look at these posts and carefully consider the issues they discuss.

Image courtesy of Rick B via Flickr CC.

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The Power and Peril of Performance Metrics

Measuring performance has been a major feature of the business landscape ever since double entry accounting made its appearance in the 14th or 15th century. "You can't manage what you can't measure" is one of the most widely-repeated cliches in the business world, and it's been an article of faith for several generations of executives and managers.

It's easy to understand why business leaders view performance measurement as critical for effective management. Metrics give us a way to make sense of our environment and to describe our objectives and results in concrete terms that are easy to understand and communicate.

The fixation on performance measurement has affected virtually all business functions, including marketing. For the past several years, marketers have faced growing pressure to prove the financial impact of their activities and programs. As a result, they're placing greater emphasis on measuring the performance of marketing tactics and channels, and some marketing leaders are allocating budgets and basing marketing mix decisions on performance metrics.

Overall, this has been a positive development. It's hard to argue that business leaders, including marketers, shouldn't measure the performance of their activities and use metrics to guide important decisions. But, it's also important to remember that performance metrics must be used carefully because they can produce unintended consequences. These unintended consequences can result from several factors, but two are particularly important.

The Power of Performance Metrics

The first important thing to remember about performance metrics is that they have the power to shape human behavior. Almost a decade ago, Dan Ariely, the noted behavioral economist and author of Predictably Irrational, described the power of performance measures in a column for the Harvard Business Review. He wrote:

"Human beings adjust behavior based on the metrics they're held against. Anything you measure will impel a person to optimize his score on that metric. What you measure is what you'll get. Period. This phenomenon plays out time and again in research studies."

So the power of performance measurements to cause us to change our behaviors is reason enough to use them with care.

The Surrogation Problem

Another factor that makes performance metrics potentially dangerous is a psychological phenomenon known as surrogation. Surrogation is the human tendency to lose sight of the real objective or strategy and instead focus only (or almost entirely) on the metrics that are meant to represent the objective or strategy. In other words, we have a strong tendency to decide (often subconsciously) that scoring well on the metric is the desired objective or strategy.

The process of surrogation is easy to illustrate. Suppose that one of your company's important objectives is to provide outstanding customer experiences, and you decide to measure progress on that objective using a customer survey. The surveys are conducted periodically, and the results are shared with customer-facing employees and frequently discussed at management and staff meetings.

Under these circumstances, some employees may begin to think that the objective is to maximize scores on the customer survey, rather than to deliver outstanding customer experiences. This can become a serious problem if those managers or employees begin to entice customers to give only high scores on the survey even if they weren't completely happy with their experience.

Surrogation is likely to occur when three conditions exist:

1. The actual objective or strategy is complex and relatively abstract.
2. The metric is concrete and easy to understand.
3. The person involved does not consciously reject the substitution of the metric for the actual objective or strategy.

In an article appearing in the current issue of the Harvard Business Review, Michael Harris and Bill Tayler describe three ways to reduce the odds of surrogation occurring:

1. Make sure the actual objective or strategy is thoroughly understood by all relevant managers and employees. Involve as many of these people as possible in the formulation of the objective or strategy.
2. Avoid linking compensation to metrics. Research has shown that tying compensation to metrics increases the likelihood that surrogation will occur.
3. Use multiple metrics. Surrogation is less likely to occur if multiple metrics are used to measure the success of a strategy or the attainment of an objective.

As noted earlier, measuring the performance of marketing quantitatively has now become a common practice, and overall, this is a positive development. But marketing leaders must recognize that like any business tool, performance metrics need to be used carefully and wisely.

Image courtesy of James Whatley via Flickr CC.

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How to Address the Marketing Measurement Paradox

One of the marketing thought leaders I pay close attention to is Mark Schaefer. Mark is the author of several highly-regarded books and the principal author of the widely-read {grow} blog.

Last month, Mark published a blog post arguing that today's marketers are working in a world dominated by malignant complexity. Mark wrote that malignant complexity means "that the insane complications and unintended consequences of rapid technological change makes it difficult to understand our world, let alone predict what's next."

In the future, Mark wrote, the most successful marketers will have to relax their expectations for "predictable outcomes and reliable measures." He summed up his view this way:

"In an age of malignant complexity and unrelenting change, some aspects of marketing measurement will become a leap of faith. In some cases, the speed of business will outstrip our ability to forecast and measure. Perhaps non-measured, speed-driven marketing management will become the norm, a best practice."

Mark's post is sure to raise the eyebrows of many marketing leaders because the conventional wisdom in the marketing community is that measuring the performance of marketing is now more achievable than ever. But then, Mark has always been willing to tell us when he believes "the emperor has no clothes." If you need proof of that, go back and read his 2014 blog post about "content shock."

Expressions of the conventional wisdom are easy to find. For example, I took the following quotation from the website of a major provider of marketing technologies:

"Building analytics into your marketing strategy empowers your marketing and sales teams by giving you the ability to measure the impact of each marketing investment. Data enables marketers to confidently identify which parts of the marketing efforts deliver the optimal return on investment (ROI), including the performance of channels, specific calls-to-action (CTAs), and individual pieces of content, such as blog posts or gated resource guides."

A more skeptical view is captured in the following quotation from a recent article published at the Harvard Business Review website:

"Marketing's environment is typically much 'noisier' that the factory floor in terms of unknown, unpredictable, and uncontrollable factors confounding precise measurement. Marketing activities can also be subject to systems effects where the portfolio of marketing tactics work together to create an outcome . . . Marketing actions may also work over multiple time frames . . . Finally, it is often difficult to attribute financial outcomes solely to marketing, because businesses frequently take actions across functions that can drive results."

Which of these views is correct? The answer is, both are accurate, at least in part. Some aspects of marketing performance are more measurable now than ever, largely because of the explosion of available data about customers and the expanding capabilities of marketing and analytics technologies. At the same time, however, measuring the impact of marketing on business financial outcomes is just as difficult and challenging today as ever.

So how should marketing leaders deal with the measurement challenge? The first step is to accept the measurement paradox part of the reality of marketing. F. Scott Fitzgerald once said, "The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function."

Marketing leaders must also effectively communicate the realities of marketing to other senior business leaders. This means the senior marketing leader needs to have evidence-based conversations with other senior executives about what aspects of marketing can be measured precisely, and what aspects will always require the use of assumptions, correlations, and probabilities.

These discussions will help establish reasonable expectations for marketing measurement and simultaneously enhance the credibility of the marketing leader in the C-suite.

Illustration courtesy of Zeev Barkan via Flickr CC.

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Expert Advice on How to Communicate Marketing's Value

In the February 2019 edition of The CMO Survey, senior marketing leaders were asked what marketing leadership activities they find most challenging. The top challenge identified - by a wide margin - was demonstrating the impact of marketing activities on financial outcomes to other senior company leaders.

Measuring the performance and financial impact of marketing has been a persistent challenge for marketing leaders. In the 2019 Marketing Measurement & Attribution Benchmark Survey by Demand Gen Report, 58% of surveyed marketers said their ability to measure and analyze marketing performance and impact needs improvement or is poor/inadequate. The comparable percentage was 54% in the 2018 edition of the survey, and 49% in the 2017 survey.

Last month, an article published at the Harvard Business Review website described concrete steps that marketing leaders can take to improve their ability to demonstrate the value of marketing. "8 Ways Marketers Can Show Their Work's Financial Results" was written by Paul Magill, Christine Moorman, and Nikita Avdiushko.

Paul Magill is a Managing Director with Deloitte Consulting and the former CMO for Abbott. Dr. Moorman is the T. Austin Finch, Sr. Professor of Business Administration at Duke University's Fuqua School of Business and the Director of The CMO Survey. Nikita Avdiushko is a recent MBA graduate from Duke.

Eight Steps for Demonstrating Value

This article provides valuable advice for marketing leaders, and I would like to see the authors address this vital topic in a longer, more in-depth version of the article. In the meantime, here's a very abbreviated version of the eight steps described in the already brief article.

1.  Start with business value - "Marketing leaders should frame their impact broadly, to include all the ways marketing benefits the organization."

2.  Understand what business value means to each function - "Marketing leaders should translate the definitions of their value creation for the different [business] functions they interact with."

3.  Know your own metrics - Most marketing leaders have a set of KPIs they use to demonstrate impact on financial outcomes, and it's critical to be thoroughly knowledgeable about them."

4.  Explain the inherent uncertainties of marketing measurements - "Deep knowledge of the metrics can build your credibility when you're discussing them with other executives, but it helps to explain marketing's inherent uncertainties."

5.  Emphasize validity over precision - "CMOs should emphasize that their metrics are valid when evaluating whether marketing activities are working as expected, and that the inherent imprecision in measuring marketing's financial outcomes does not undermine their validity."

6.  Have a budget strategy - "Provide visibility on total spend, show how spend is aligned with business strategies and key priorities, and demonstrate how working spend has been optimized and non-working spend streamlined."

7.  Have a marketing transformation story - "Further credibility can come from demonstrating ongoing improvements in marketing effectiveness and efficiency."

8.  Meet one-on-one - "Marketing leaders usually attend monthly meetings of the senior management team . . . Our observations suggest these are often poor environments for demonstrating the impact of marketing on the bottom line . . . That work should happen one-on-one, with the CMO investing considerable time in educating their functional counterparts about these points above."

First Among Equals

All eight of these steps are important, but I suggest that Steps 4 and 5 stand out as "firsts among equals."

Over the past two-plus decades, various technologies have significantly enhanced our ability to track and measure some aspects of marketing performance. Today, for example, most forms of digital marketing are highly "trackable." We can know who has opened our emails and who has viewed our content. We can even know how much time was spent with our content.

In addition, technology is now enabling marketers to develop and use more comprehensive revenue attribution models that leverage the strengths of both marketing mix modeling and multi-touch attribution.

But as the authors of the HBR article observed, marketing involves "unknown, unpredictable, and uncontrollable factors confounding precise measurement." Unfortunately, much of the hype surrounding marketing performance measurement makes the job seem to be easier and capable of more precision than is actually the case.

So it's important for marketing leaders to have open and frank discussions with other C-suite executives about what aspects of marketing performance can be measured precisely, and what aspects inherently require the use of assumptions, correlations, and probabilities. Such discussions will help set reasonable expectations regarding marketing performance measurement and ultimately enhance the credibility of marketing leaders in the C-suite.

Illustration courtesy of GotCredit via Flickr CC.

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Measuring the Maturity of Marketing Operations

A recent survey conducted by Econsultancy in partnership with Sojourn Solutions provides several valuable insights regarding the state of marketing operations (MOPS) at large and mid-size B2B companies.

The 2019 Marketing Operations Maturity Benchmarking Report was based on a survey of 171 senior executives at B2B companies with 2018 revenues of more than $250 million. Thirty-eight percent of the respondents reported 2018 revenues of more than $1 billion.

Sixty-three percent of the survey respondents were located in North America, and 32% were based in the U.K. All respondents were manager level or above, and all described themselves as either a member of their company's marketing operations team (45%) or very familiar with its operations (55%).

The objective of this research was to benchmark the performance of the marketing operations function along several dimensions and to identify what aspects of marketing operations companies are doing well, and where there is room for improvement.

Econsultancy broke survey respondents into two groups, and the survey report provides data for each of these groups. Top Performers were the respondents who reported that their marketing function exceeded it top business goal in 2018. Top Performers accounted for one-third of the total survey panel. The remaining two-thirds of the survey sample were called Mainstream respondents.

The differences between Top Performers and Mainstream respondents revealed by the survey results are both significant and consistent. The following table contains nine of the performance benchmarking statements Econsultancy included in the survey. The table also shows the percentage of Top Performers and Mainstream respondents who said that each statement was fully or mostly true for their marketing operations function.

As the table shows, there is a gap of at least 24 percentage points between Top Performers and Mainstream respondents on all nine of the performance benchmarks, and a gap of at least 31 percentage points on seven of the benchmarks.

Econsultancy captured the essence of the difference between Top Performers and Mainstream organizations in these terms:

"Relative to their mainstream peers, top performers are further along in the marketing operations evolution in every measure. This striking consistency reflects the interconnected nature of modern marketing; few disciplines within MOPS can exist independently. Top performers are far more likely to have reached a point of marketing-led change, effective implementation or cultural acceptance across a variety of measures."

The Econsultancy survey provides several interesting insights about the maturity of MOPS at B2B companies, but there are a couple of things to keep in mind about this research. First, the survey only produced 171 total responses, which means that the Top Performers group contained fewer than 60 respondents. We should be cautious about giving a great deal of weight to data derived from such a small survey sample.

My second point relates to how Econsultancy divided the survey panel for analysis and reporting purposes. As I indicated earlier, Econsultancy classified respondents who reported that their marketing function had exceeded its top business goal in 2018 as Top Performers. This group represented about one-third of the total respondents. Econsultancy classified the remaining two-thirds of the respondents as Mainstream.

About one-third (35%) of the total respondents reported that their marketing function had met its top business goal in 2018. These respondents were included in the Mainstream group along with those who said their marketing function had not achieved is top 2018 business goal.

I wish Econsultancy had divided these respondents into separate groups for reporting purposes because that would have provided a good picture of the attributes of "average" performers. I suspect that the gaps between the "average performers" and the Top Performers would be narrower, while the gaps between the Top Performers and the laggard group (those who missed their top 2018 goal) would be even wider.

Top image courtesy of Personal Creations via Flickr CC.

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Marketers Are Embracing Advanced Marketing Measurement

Demand Gen Report's 2018 Marketing Measurement & Attribution Benchmark Survey makes one point abundantly clear:  Measuring marketing performance is both a top priority and a major challenge for most B2B marketers.

Eighty-seven percent of the survey respondents said that measuring marketing performance is a growing priority for their company, but more than half (54%) also said their ability to measure and analyze marketing performance needs improvement or is poor/inadequate.

The widespread interest in measuring marketing performance indicates that the demand for performance measurement software is poised to grow substantially. In a September 2018 report, Forrester Research said that marketers spent about $1.09 billion on marketing measurement solutions in 2017, and the firm estimates that spending on such solutions will reach $2.1 billion by 2023.

The Demand Gen research also revealed what is motivating marketers to improve their measurement capabilities. When survey participants were asked what is increasing their need for deeper metrics, the top two drivers identified were:

• The desire to show marketing's impact on pipeline and revenue (70% of respondents)
• The push to show ROI from all marketing investments (60%)

As these results show, the key motivations for improving marketing measurement capabilities are to demonstrate the economic value that marketing creates for the business and to optimize the mix of marketing programs based on economic performance.

Both of these objectives require the use of financial metrics, and this makes marketing measurement more challenging. The heart of the challenge is attribution, which is the process of assigning revenue and costs to marketing programs. 

There are three robust methods for attributing revenue to, and measuring the financial impact of, advertising and marketing programs. Two of these methods - marketing mix modeling (MMM) and multi-touch attribution (MTA) - have been in use for several years. The newest and most sophisticated method is unified marketing measurement (UMM).

Marketing Mix Modeling

Marketing mix modeling involves the use of advanced statistical techniques to estimate the impact of advertising and marketing activities on incremental sales and/or other desired outcomes. Marketing mix models are usually based on many months of historical information about sales and marketing/advertising spending across both digital and offline channels. MMM also incorporates factors such as weather, competitive activity, seasonality, and overall economic conditions.

MMM is a top-down approach that estimates the impact of distinct marketing programs and channels on incremental revenue. These models do not evaluate the actions of individual prospects or customers. Because MMM is backward-looking and doesn't consider the actions and responses of individual people, it doesn't provide the timeliness or level of detailed information that are required to support tactical marketing decisions.

Multi-Touch Attribution

Unlike MMM, multi-touch attribution is a bottom-up approach that analyzes information about the actions and behaviors of individual prospects and customers. Ideally, this data will include every exposure that an individual has had to a marketer's messages and his or her responses (or lack thereof) to those messages.

Most MTA solutions focus exclusively or primarily on estimating the financial impact of digital marketing activities, and their ability to capture the impact of offline marketing activities is limited. Therefore, MTA solutions can overstate the amount of revenue attributable to digital marketing programs. MTA solutions can also be inaccurate because they don't usually account for a baseline of revenue that would exist without any marketing efforts.

Most robust MTA solutions use advanced statistical techniques and computer algorithms to assign revenue to marketing activities, rather than relying on simplistic pre-set "rules" (such as first-touch, last-touch, etc.) that often produce wildly inaccurate results.

Unified Marketing Measurement

Given the inherent limitations of MMM and MTA, a growing number of companies have begun using a method known as unified marketing measurement that leverages the strengths and eliminates the weaknesses of MMM and MTA. UMM solutions are capable of measuring the impact of both digital and offline marketing activities, and they combine a top-down and bottom-up approach. In its report, Forrester estimated that UMM solutions now account for 28% of the measurement solution market. 

What About Cost?

These advanced marketing measurement solutions aren't exactly cheap. In a report published last year, Gartner estimated that companies pay from $100,000 to $250,000 on average for a one year MMM or MTA solution. And the cost can be much higher. 

Notwithstanding the cost, advanced marketing measurement solutions can be a smart investment for many companies. In its report, Forrester noted that these solutions often enable a 15% improvement in marketing ROI, and that overall spending on marketing measurement represents only 0.2% of total marketing spending.

Illustration courtesy of Kari Bluff via Flickr CC.

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What Distinguishes Top-Performing Marketing Organizations

A recent survey by B2B Marketing and The Mx Group identified several differences between top-performing and poorly-performing B2B marketers. Not surprisingly, the research revealed that the best-performing marketing organizations excel at maintaining accurate data and integrating data systems, fully leveraging technology, and closely aligning with sales.

This survey included respondents working in a range of industries, with technology (27%), professional services (16%), and industrial/manufacturing/engineering (13%) being the largest segments represented. Eighty-eight percent of the respondents were located in the U.S. or the U.K., and 83% were CEOs, CMOs/VPs of marketing, directors of marketing, marketing managers, or marketing executives.

To identify the distinguishing attributes and behaviors of top-performing marketers, B2B Marketing and The Mx Group polled survey participants about ten factors that affect marketing performance. Top performers (17% of all survey participants) were respondents who rated themselves as successful or very successful across all survey questions. Poor performers (14% of all survey participants) were respondents who rated themselves as unsuccessful across all survey questions.

The following table lists the ten marketing performance factors that this research addressed. The table also shows the percentages of top performers and poor performers for each factor and the percentage point difference between top-performing and poorly-performing respondents. As the table shows, there is a gap of more than thirty percentage points between top performers and poor performers for seven of the ten marketing performance factors.

The data from this survey is interesting, but with a few exceptions, the reported findings leave a significant "hole in the middle." As noted earlier, top performers included only those respondents who rated themselves as successful or very successful on all ten performance factors, while poor performers were respondents who rated themselves as unsuccessful on all of the factors. Together, the top performers and the poor performers account for only 31% of the total survey respondents. So, 69% of the respondents fell somewhere in the middle, and the survey report provides little data about the attributes of those respondents.

It does, however, include overall response data regarding two important issues. First, only 31% of all survey respondents said they have fully deployed their marketing automation system. I would have expected this percentage to be higher by now, given that B2B marketing automation is a relatively mature technology category.

But other recent research has produced similar results. For example, in the 2019 Data-Driven Marketing & Advertising Outlook study conducted by Adweek Branded on behalf of Dun & Bradstreet, only 26% of surveyed B2B marketers said they use the "advanced functions" of their marketing automation platform. Another 31% of the survey respondents said they only use the "basic functions" of their marketing automation system.

The other somewhat surprising finding in the B2B Marketing/Mx Group survey relates to marketing-sales alignment. The survey report states that most of the surveyed marketers claim success at aligning with sales. However, specific survey findings raise some doubt about the accuracy of this perception.

Only 25% of all survey respondents said they and their sales counterparts share a "full definition" of who constitutes a qualified lead. Another 56% of the respondents said they and sales have agreed on a "limited definition" of a qualified lead, but they have no formal documentation of that definition in place.

This finding is particularly concerning, given the undeniable need to have sales and marketing teams work collaboratively to maximize profitable growth. Obviously, effective marketing-sales alignment requires much more than a shared definition of a qualified lead, but that is one of the essential building blocks.

It's increasingly difficult to understand why marketing-sales alignment is still such a seemingly difficult challenge for many B2B companies. The need for better alignment and closer collaboration between the two functions is clear and unambiguous. And one thing is certain. In today's B2B demand generation environment, the lack of effective alignment and meaningful collaboration between marketing and sales is both intolerable and inexcusable.

Top image courtesy of Ron Cogswell via Flickr CC.

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Focus on Impact - Not ROI - for Better Marketing Measurement

Demand Gen Report's 2018 Marketing Measurement and Attribution Benchmark Survey makes one point abundantly clear:  Measuring marketing performance is both a top priority and an ongoing challenge for most B2B marketers. Eighty-seven percent of the respondents said that measuring marketing performance is a growing priority for their company, but more than half (54%) also said their ability to measure and analyze marketing performance "needs improvement" or is "poor/inadequate."

The Demand Gen research also revealed that the two most widely-shared motivations for improving measurement capabilities are:

• The desire to show marketing's impact on pipeline and revenue (70% of survey respondents)
• The push to show ROI from all marketing investments (67%)

Both of these objectives require the use of financial metrics, and for years, the gold standard for measuring the financial performance of marketing has been return on investment (ROI). However, measuring the ROI of marketing accurately can be quite challenging.The heart of the challenge is attribution, which is the process of assigning both revenue and costs to marketing programs. It's simply not possible to calculate marketing ROI accurately unless you can accurately attribute revenue and costs.

Assigning costs to marketing activities and programs isn't always easy, but it can be done accurately using principles of activity-based costing. Revenue attribution is more difficult to do accurately because of the number of variables that must be considered and the volume of data that's required.

The two most robust methods for attributing revenue to marketing and advertising programs are marketing mix modeling (MMM) and multi-touch attribution (MTA).

Marketing Mix Modeling

Marketing mix modeling involves the application of advanced statistical techniques to estimate the impact of marketing and advertising programs on incremental sales. Marketing mix models are based on several months of historical data about sales and about marketing/advertising spending across both digital and offline channels. The models also typically incorporate factors such as weather, competitive activity, seasonality, and economic conditions.

MMM is a "top-down" approach. These models do not evaluate the actions of individual prospects or customers. Because MMM is backward-looking and doesn't consider the behavior of individual prospects and customers, it doesn't provide the timeliness or level of granularity that is required to support tactical marketing decisions.

Multi-Touch Attribution

Unlike marketing mix modeling, MTA is a "bottom-up" approach that involves the analysis of data about the behaviors of individual prospects and customers. Most MTA solutions focus on digital marketing activities, and therefore they may overstate the revenue impact of online marketing programs. MTA solutions can also produce inaccurate estimates of revenue impact because they don't usually account for a baseline of revenue that would exist without any marketing efforts.

Most robust MTA solutions use advanced statistical techniques and computer algorithms to attribute revenue to marketing activities rather than relying on simplistic, pre-set rules that often produce wildly inaccurate results.

The Best of Both?

Because of the inherent limitations of MMM and MTA, the current state-of-the-art is to use a combination of both methods. But this can raise a significant cost issue. Gartner has recently estimated that companies pay between $100,000 and $250,000 on average per year for an MMM or MTA solution. And the costs can be much higher. Therefore, these solutions will be beyond the reach of many small and mid-size B2B companies.

What to Do? Measure Influence and Impact, not ROI

The marketing measurement space is evolving rapidly, and we may soon have revenue attribution tools that produce more accurate results, and are less complex to use and less costly to acquire. But, what should B2B marketing leaders do in the meantime?

The obvious solution is to use an approach to measurement that avoids or minimizes the need for revenue attribution, while preserving the ability to make sound decisions about the marketing mix and construct a persuasive business case for the value of marketing.

The key is to use a measurement system that captures the influence and/or impact of marketing programs on important business outcomes. In a future post, I'll describe the process for building this kind of measurement model, but here are the four basic steps:

1. Identify strategic business outcomes
2. Identify key outcome drivers
3. Link marketing programs to outcome drivers
4. Measure program influence/impact on outcome drivers

This methodology will not result in an ROI calculation for individual marketing programs, but given the inherent challenges of revenue attribution, the accuracy of most marketing ROI calculations is questionable at best. This approach will enable marketing leaders to understand the impact of their activities and programs and build a compelling business case for the value of marketing to the business.

Illustration courtesy of Kari Bluff via Flickr CC.

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Where B2B Companies Stand With Marketing Measurement

Measuring marketing performance is both a top priority and a persistent challenge for most B2B marketers. That's the primary theme of Demand Gen Report's 2018 Marketing Measurement and Attribution Benchmark Survey. The 2018 survey produced responses from 283 marketing executives, most of whom were based in the United States. Respondents represented several industries and a wide range of company sizes (from less than $10 million to more than $1 billion in annual revenue).

Eighty-seven percent of the survey respondents said that marketing measurement is a growing priority for their company. However, more than half of the respondents (54%) said their ability to measure and analyze marketing performance "needs improvement" or is "poor/inadequate." Another 34% rated their measurement capabilities as just "average."

It also appears that progress on measurement capabilities has been slow since last year. The following table shows how respondents rated their measurement capabilities in the 2018 survey and in the 2017 edition of the study. As the table shows, the percentage of respondents rating their capabilities as excellent decreased from 13% to 7%, while the percentage rating their capabilities as poor/inadequate increased from 9% to 14%.

It's not hard to understand why measuring the financial performance of marketing continues to be a major challenge. In most companies, the two most important reasons to measure marketing performance are:

1. To determine the economic value that marketing creates for the business; and
2. To enable marketing leaders to optimize their mix of marketing programs and channels based on economic performance

Both of these objectives require the use of financial metrics, and this requirement has a big impact on measurement complexity. It's relatively easy to measure the performance of most digital marketing tactics and some offline tactics (e.g. direct mail) using non-financial metrics. But it's another matter to measure the financial performance of a marketing program.

The crux of the challenge is attribution, which is the process of assigning both revenues and costs to marketing activities. It's impossible to accurately measure the financial performance of a marketing program or channel unless you can accurately assign both economic benefits and costs to it. So the accuracy of your measurement system ultimately depends on the accuracy of your attribution method or model.

The Demand Gen Report survey provides strong evidence that attribution is a significant barrier to effective marketing performance measurement. Only about 30% of the survey respondents indicated they are doing any attribution analysis as part of their marketing measurement efforts. Among those using attribution, only about half (51%) said they are using some form of multi-touch attribution, while 14% said they use last touch attribution, and 12% said they use first touch attribution.

Research from other firms points to the same conclusion. In a 2017 survey by Econsultancy, in-house marketers were asked to identify the specific attribution methods they are using and rate the effectiveness of each method. The following table shows the percentage of respondents using each attribution method, and the percentage rating each method as very or somewhat effective.

These findings are troublesome because the three most widely used attribution methods (and four of the top five) are methods that attribute all of the revenue from a sale to only one marketing touch point. Even more troublesome, large majorities of the survey respondents rated these methods as very or somewhat effective, when the reality is that no "single touch" attribution method will produce an accurate picture of marketing performance.

Developing an accurate marketing attribution model is not simple or easy. The current "state of the art" is data-driven or algorithmic attribution modeling, but even these advanced solutions aren't perfect. The bottom line is that measuring the financial performance of marketing - particularly at the tactic, program, and channel level - is likely to remain challenging for the foreseeable future.

So how can B2B marketing leaders measure and demonstrate the value of marketing given the complex and imperfect nature of attribution? There are no silver-bullet solutions, but I'll offer a few suggestions in a future post. 

Top image courtesy of Pat Pilon via Flickr CC.

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Why Proving the Impact of Marketing is Difficult

For several years, marketing leaders have faced growing demands from the C-suite to prove the value of their activities and programs. Marketing accountability has become the mantra for many CMO's, and return-on-investment has become the gold standard for measuring marketing performance. Several books and a host of white papers and ebooks have been written about marketing performance measurement, and dozens of webinars and conference presentations have been devoted to the topic.

But despite all of this attention and brainpower, proving the financial value of marketing is still challenging for many marketing leaders. Data from The CMO Survey - conducted by Dr. Christine Moorman with Duke University's Fuqua School of Business - demonstrates both the significance and the persistence of the challenge. The CMO Survey has been conducted semi-annually for the past several years, and the following chart shows the percentage of surveyed CMO's who have reported they are able to show the impact of marketing spending quantitatively.

Over the past three years, less than half of the surveyed CMO's have said they are able to quantitatively measure the impact of marketing spending on business results.

Proving the economic value of marketing is challenging for several reasons. A recent article in the Journal of Marketing summarized the difficulties as follows:

". . . marketing aims to create and stimulate favorable customer attitudes with the goal of ultimately boosting customer demand. This demand, in turn, generates sales and profits for the brand or firm, which can enhance its market position and financial value . . . As a result, marketing has multiple facets, some attitudinal, some behavioral, and some financial. However, the relation between the metrics that assess these facets is complex and nonlinear . . ."

Measuring the value of marketing activities is a complex undertaking, but the heart of the challenge is usually attribution. Attribution is the process of assigning both revenues and costs to a marketing activity or program, and it's impossible to accurately measure the financial value of a marketing program unless you can accurately assign economic benefits and costs to it. So, the accuracy of your value or ROI calculation ultimately depends on the accuracy of your attribution model. 

The State of Marketing Attribution

A few weeks ago, Econsultancy (in association with AdRoll)  published the results of a study regarding the use of marketing attribution, the goals and benefits of attribution, and the effectiveness of various attribution methods.

The State of Marketing Attribution 2017 report is based on a survey that produced 987 responses from both in-house marketing professionals ("company respondents") (74%) and professionals from agencies, consulting firms, vendors, etc. (26%). Respondents were based in Europe (53%), North America (22%), and Asia Pacific (22%). Company respondents came from both B2B and B2C enterprises operating in a wide range of industries.

Econsultancy found that the use of marketing attribution is growing. Eighty-one percent of company respondents said they are practicing attribution at some level, up from 79% in the 2016 edition of the survey. Thirty-nine percent of company respondents said they are using attribution with most or all of their marketing programs, up from only 31% in 2016.

Econsultancy also found that a growing number of companies are using attribution models that encompass both digital and offline channels. In the 2017 survey, 60% of company respondents said they are using some type of multichannel attribution, up from only 42% in the 2016  survey.

On the surface, the growing use of marketing attribution looks like a positive development. However, Econsultancy's research also revealed some troublesome facts about how marketing attribution is currently practiced. The survey asked participants to identify the specific attribution methods they are using and rate the effectiveness of each method. The following table shows the percentage of company respondents using each attribution method, and the percentage rating each method as very or somewhat effective:

These findings are disturbing because the three most widely-used attribution methods (and four of the top five) are methods that assign all of the revenue from a sale to one marketing touch point. Even more disturbing, large majorities of the survey respondents rated these methods as very or somewhat effective - 92% for first touch, 86% for first click, 85% for last touch, and 74% for last click. In reality, none of these "single touch" attribution methods will produce an accurate assessment of performance of value.

The Econsultancy research also found that most companies don't act on the insights derived from marketing attribution. The survey asked participants to indicate their agreement or disagreement with this statement:  "We don't action the insights we get from attribution." Twenty-three percent of company respondents strongly agreed with the statement, and another 47% agreed somewhat.

It's likely that marketers aren't relying on the results they obtain from attribution because they lack confidence in the validity of the attribution models they are using. They intuitively recognize that those models are incomplete at best, and may be seriously flawed.

The Bottom Line

Proving the impact of marketing is likely to remain challenging for the foreseeable future. Accurately attributing revenue to a marketing activity is a difficult task, particularly for companies with complex sales cycles that involve multiple decision makers.

The most important first step is to stop using all forms of single-touch attribution (first-touch, first-click, last-touch, and last-click). Except in rare cases, any single-touch attribution method will produce inaccurate results and lead to poor marketing decisions.

Custom attribution was regarded as the best attribution method by participants in the Econsultancy research, with 48% of the respondents rating it as very effective. Developing and implementing a custom attribution model requires a fair amount of thought and time, but the benefit is a more accurate view of marketing performance.

Top image courtesy of Rick B via Flickr.

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Why Marketing Leaders Must Connect the Dots

In a recent article for dmnews.com, Mike Colombo, the CMO of Cloudwords, argued that many CMOs aren't ready for a seat at the C-suite table. According to Mr. Colombo, many CMOs aren't winning a seat at the "grown-up" table because they're still relying on performance metrics that are inconsequential to company leaders.

Recent research has confirmed that many marketers aren't doing a great job of communicating the value that marketing contributes to the business. In the 2016 Marketing Performance Management Benchmark Study by VisionEdge Marketing and Demand Metric, only 23% of survey respondents said their CEO would give marketing a grade of "A" on its ability to demonstrate its value and contribution to the business.

A disconnect between marketing and the rest of the C-suite can exist if CMOs don't clearly communicate the relationship between marketing programs and the business outcomes that matter to other C-suite executives. Most marketing leaders tend to focus on the programs they're running and the direct results of those programs (response rates, downloads, pageviews, etc.). The problem arises when these direct program results aren't linked to the high-level objectives that C-level executives really care about.

The ultimate mission of marketing is to drive revenue growth. Virtually all companies have a revenue growth goal as one of their top-line strategic business objectives. Many companies also have specific goals for new customer acquisition, customer retention and growth, and market share, but these objectives are all directly related to revenue growth. Therefore, every marketing activity is (or should be) designed to generate (or contribute to the production of) revenue.

To effectively communicate the connection between marketing activities and revenue, marketing leaders must develop a revenue growth strategy, which, at its most basic level, is a hypothesis that describes how the company will grow revenue. A revenue growth strategy is essentially a big if-then statement that says, "If we execute these specific marketing programs, then we will meet our revenue growth objectives."

However, many marketing activities don't directly produce revenue. Some marketing activities are several steps removed from the realization of revenue, but they are essential components of the revenue generation process. Therefore, a revenue growth strategy is a set of if-then statements, each of which describes a specific marketing activity and the anticipated results of that activity. These individual if-then statements are then combined to create chains of cause-and-effect relationships that connect individual marketing activities to the realization of revenue.

A simplified version of one of these cause-and-effect chains might look something like this:

• If we publish a blog that offers readers access to compelling content resources, then more potential buyers will identify themselves and consume our content.
• If more potential buyers identify themselves and consume our content, then we will generate more qualified sales leads.
• If we generate more qualified sales leads, then we will create more legitimate sales opportunities.
• If we increase the number of legitimate sales opportunities, then we will close more sales.
• If we close more sales, then we will produce more revenue, and that will help us reach our revenue growth objectives.

In short, CMOs can fail to earn a seat at the C-suite table if they don't "connect the dots" between marketing programs and revenue growth. To create and sustain credibility with other senior company leaders, CMOs must understand the links between individual marketing activities and revenue growth, and they must make those links visible to the CEO and other members of the C-suite.

For more on this topic, take a look at Laura Patterson's recent article at MarketingProfs. 

Illustration courtesy of Lisa Plummer via Flickr CC.

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