To clarify how important marketing is to a brand Les Binet, European director of DDB Matrix, has written a definitive guide to calculating marketing payback as part of the IPA's publication Advertising Works 17.
Binet calls these calculations ‘crucial'. He says: ‘When Peter Field and I reviewed the IPA
dataBANK for our book Marketing in the Era of Accountability, we found that, of the 880 papers submitted since 1980, only 39 actually calculated ROI correctly.'
The first step to getting these sums right is measuring the incremental sales effect. To do this an estimate of the base sales (how much would have sold without the campaign) is needed. It's important to be sure there were no other factors affecting sales during the test period this figure is taken from.
The next step is to calculate net payback. This is the revenue generated for the client, taking account of the retailer's cut and any incremental costs incurred.
The final step is to work out the return on marketing investment (ROMI). Net profit generated is the ultimate measure of marketing effectiveness, however, to measure financial efficiency, the ROMI is needed.
In order to avoid confusion with other measures of financial return, such as return on capital employed (ROCE), Binet recommends that the term ‘ROMI' be used rather than just ‘ROI'.
The Advertising Works 17 also looks at the common errors made when working out these figures. One big set back is agencies failing to measure financial payback at all restricting themselves to intermediate measures such as awareness shifts or direct response rates.
Confusing sales increases with incremental sales is another mistake. Measuring incremental sales is not the same as measuring sales growth. Sales may grow despite ineffective marketing because of external factors.
For a full copy of ‘Advertising Works 17' visit the IPA website www.IPA.co.uk or the official publishers of the IPA Effectiveness Awards cases, WARC, at its website .
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