For Better Marketing Decisions, Think Incrementally

Measuring marketing return on investment (MROI) has become increasingly popular, as marketers face growing pressures to demonstrate the value of their activities and programs. Marketers are calculating and using MROI for a variety of reasons, including:

• To measure the effectiveness of individual marketing campaigns or programs
• To demonstrate and prove the value that marketing contributes to the company
• To justify and/or defend marketing budget levels

All of these reasons are valid, but the most important reason to use MROI is to improve the quality of marketing decisions. No single performance metric, including MROI, provides all of the information that marketers need for most significant decisions. However, because MROI is a ratio that compares economic returns with required investments, it has a unique ability to help marketers:

• Determine whether a particular marketing program or mix of programs should be undertaken
• Compare the projected and/or actual results of multiple and often dissimilar marketing activities or programs. This enables marketers to make sound choices when faced with alternative marketing investments.

Equally important, MROI can help marketers determine at what level a particular marketing program should be funded and executed. Unlike many investments, most marketing programs can be executed at any of several levels. For example, if your marketing database contains 10,000 contacts, you can run a direct mail campaign that is directed at all 10,000 contacts or at only a portion of the database. MROI enables you to analyze projected campaign performance at incremental levels.

To illustrate how this works, take a look at the example shown in the following table. This table contains the projected financial attributes of three alternatives for a prospective direct mail campaign. Option 1 would involve a mailing to 2,500 contacts, Option 2 would target 5,000 contacts, and Option 3 would target 10,000 contacts. For this example, we'll assume that the ROI Threshold (the minimum acceptable ROI for a marketing investment) is 25%.

Based on the projected results shown in the table, the company would not choose Option 1 because the estimated ROI is below the ROI Threshold. The projected ROI's for Option 2 and Option 3 exceed the ROI Threshold, so it might appear that either would be a reasonable choice. Even though Option 3 has a slightly lower projected ROI than Option 2 (26% vs, 28%), it would still exceed the ROI Threshold.

The real insight comes when you look at the lower portion of the above table, which shows the incremental financial performance differences between Option 1 and Option 2 and between Option 2 and Option 3.

Option 2 requires an additional investment of $30,000 (compared to Option 1), but it will produce a 41% ROI on that incremental investment. Option 3 requires an additional investment of $60,000 (compared to Option 2), but it will only produce a 23% ROI on that incremental investment. Since the incremental ROI generated by Option 3 is below the ROI Threshold, the company should typically choose Option 2 over Option 3.

In reality, the optimum "size" of this direct mail campaign falls between Option 2 and Option 3 (in other words, somewhere between 5,000 and 10,000 contacts). With additional data, that optimum size can easily be determined.

Because marketing programs can be executed at different levels, measuring MROI on an incremental basis can be a powerful tool for improving marketing decision-making and performance.