Building consensus on the allocation of marketing investments between advertising and sales/channel support is a challenge for many companies. Historically, determining the effectiveness of even one marketing tactic for a single product is an exercise in educated guesswork. In contrast, sales teams can track their impact with a reasonable degree of certainty. Since there is always a competition for scarce resources, the resulting tug of war between marketing and sales can cause organizations to lose focus on company end goals.
To balance between sales, which is easily measured, and marketing, which is not, companies are using new approaches such as econometric modeling and portfolio management. This helps align sales and marketing, ensuring that the optimum and most synergistic combination of efforts is used to meet business objectives.
The sales and marketing challenge: allocating resources for optimum returns
Sales and marketing goals are fairly well defined. Sales must push immediate sales through the distribution channels, while marketing must pull long-term demand and drive price premium through differentiation. These goals are not at odds with each other; a combination of both is required and they are mutually supportive. In fact, any individual case could be a combination of the factors, so evaluating "who gets credit" can be a challenge. Over time and across markets, econometric models can tease these factors apart to determine their relative weight and impact on sales.
What is a marketing econometric model?
A marketing econometric model is a mathematical representation of the sales and marketing landscape for a product or brand. The model is based on statistical analysis of several years of historical data. Models include variables to represent each factor that has a statistically significant influence on sales. Variables in a model can include price, sales and marketing activities, quality, competitive and environmental effects, etc. Importantly, models also capture the impact of interaction between tactics, so that opportunities for synergies are clear. For this reason, a number of Fortune 500 companies across consumer packaged goods, retail, financial services, telecommunications, and pharmaceutical have adopted the use of marketing econometric models.
Models can be used to look backward to determine the ROI for sales and marketing tactics, providing a single common metric for comparison. While programs are in flight, models can be used to help diagnose the reasons for changes in performance over time. But the most compelling aspect of well built models is that they are highly predictive, so they can be used to look forward for forecasting and to create what-if scenarios for response planning. This predictive aspect allows executives to anticipate the impact of different sales and marketing tactics and investments and determine the optimal allocation of spending across these tactics.
Making better investment decisions through portfolio management
Once the variables influencing sales are clear, the next step is to approach sales and marketing efforts as a portfolio of investments. A portfolio approach recognizes that different efforts have different time frames for payback (long term vs. short term) and different risk and reward profiles. Like a financial portfolio, a sales and marketing portfolio balances long- and short-term returns with risk and reward. For example, short term return on sales investments can be very reliable; however long-term reliance on tactics like sales incentives often erodes price and leads to commoditization. By contrast, marketing efforts hold the promise of long term differentiation, reinforcing end-user demand and price premiums. However, because these long-term benefits can be difficult to measure, it is easy for marketers to spend a lot of money chasing short-term results without achieving their desired long-term objectives.
In a model-driven portfolio approach, companies can allocate resources between sales and marketing tactics according to the risk and return characteristics of each, just as in balancing any investment portfolio. This helps ensure alignment between sales and marketing. It reduces unnecessary organizational competition by having all groups share visibility to the allocation considerations, ROI measures, and synergies between tactics. Over time, the portfolio performance can be tracked against the modeled expectations so that tactics that are not meeting expectations can be corrected or have resources can be reallocated to the current needs of the business.
The five steps industry leaders are taking to sales and marketing alignmentBuild econometric models to represent the sales and marketing environment.Use the models to determine historic ROI measures by tactic.Identify synergies between tactics, particularly between sales and marketing.Recognize long- and short-term considerations and risk; gain agreement on a portfolio of sales and marketing tactics that meets company goals. Test it through simulation.Track the tactics in the portfolio over time, evaluating actual performance against the model. Course correct as necessary.
John Nardone is executive vice president of product development, marketing, and new business and CCO at Marketing Management Analytics. He can be reached at firstname.lastname@example.org. Doug Brooks is director of marketing and product development at Marketing Management Analytics. Mr. Brooks joined MMA in May 2004 as part of MMA's initiative in on-demand marketing planning. He can be reached at email@example.com