Part 1: An introduction to marketing effectiveness according to the research and literature.
Apart from raising marketing investment, how can a business get the most out of a small marketing budget? This is a question I’ve been faced with in recent months and although there is a load of theoretical and practical literature on the topic, very few actually seem to agree on an answer. As with most complex problems, the easy answer is “It depends”; but In the following series of reports, I will endeavour to give some guidance as to what it depends on.
To clarify, I am specifically looking at how to improve Sales Revenues, with the constraint being that you can’t significantly increase the advertising budget. Convincing the executive team to increase advertising investment is outside of the scope of this series. I have broken the issue down into its core components as shown below.
Firstly, I have broken down sales revenue into its two components, namely Price x Volume. On the Pricing end, the 2 main drivers are the competitors and the price sensitivity of the market (here we’ll handle the brand’s pricing power together with the market’s price sensitivity).
On the volume side, the main driving factors include physical/digital availability (distribution), products, and promotion. For physical and digital availability we can further look into presence (is the brand/products where it needs to be?), prominence (is it easy to find?), relevance (is it “buyable”). For products, we’re mainly dealing with the current product mix and potential new products. Finally, I looked at the main drivers of advertising effectiveness ie. creative quality, distinctive brand assets, excess share of voice, media channels, and long term/short term focus.
In this report (part one of six), I will begin by exploring adjacent issues which will lay the groundwork for the following reports.
There is a particular danger in confusing marketing effectiveness, with efficiency. Efficiency is primarily concerned with keeping costs as low as possible, while effectiveness is the measure of how successful the marketing is. An overemphasis on efficiency and inputs could lead to a neglect of the output. i.e. How can the firm increase profit by cutting more costs, as opposed to increasing sales? [i]
A first glance at the earlier diagram might prompt the question, “why did you break down sales revenue as price x volume (units) and not avg. customer value x number of customers?”. This is completely fine too. You could construct this logic tree in a number of different ways, with each version potentially highlighting another relationship. However, the breakdown of customer value x number of customers comes down to the Penetration vs. Loyalty debate. i.e. which one is better to focus on, the number of customers or the average value per customer?
Ergodicity Economics offers a particularly interesting view on this. Essentially ergodic theory postulates that the sequence of events often has a significant impact on the end result. For example, one person flipping a coin 100 times in succession, vs. 100 people each flipping a coin at the same time.
If the same result is observed in both cases, it’s said to be ergodic (like our coin example would be), however, most systems in the real world are non-ergodic. This means that in those non-ergodic cases, you need to adjust your strategy depending on the sequence of events. In order to decrease the risk of complete ruin, you ideally would want to diversify your "investment".
Applied to the marketing context, you might argue that it is easier to get 100 people to buy once, as opposed to getting one person to buy 100 times. On a balance sheet, these two scenarios look exactly the same, however, the amount of risk associated with the latter is much higher. Eg. if the one person in the second scenario would for some reason lose their ability to buy your product, it could completely change the outcome.
Said in another way, it is more rational to invest in getting as many customers as possible than it is to simply rely on selling more to the same amount of customers. This is why we will not be focussing on increasing avg. value per customer or customer loyalty, as a means of increasing sales revenue. [ii] [iii]
Finally, a firm has to consider that there are alternative ways of financing marketing expenditure. For example, one could organise some sort of barter agreement with a media firm or ad agency. This of course assumes that your firm has something to bring to the table; a much easier sell if the counterparts are familiar with your products/services and find them valuable.
Other options include profit sharing (where an agency receives a % of sales revenue generated through the campaign), or even payment on performance. This kind of approach might be best utilised with long term agency partners. The benefit for the firm is that the agency is now shouldering some of the risk, whereas the agency can now charge more because of that. As Peter Drucker put it, “All profit is derived from risk”.
Here the only real limit is your creative thinking and sales ability. Are you able to identify other ways to get the work done, and can you persuade people to get on board?
These principles have 3 important implications for any marketing practitioners or executive team members looking to increase sales revenue without increasing marketing expenditure.
In the following report, we’ll be diving into pricing and how a firm could use pricing to drive annual incremental sales.
i. Take a look at this article by Alex Murrel on the Errors of Efficiency
ii. Buy Byron Sharp’s book: How Brands Grow
iii. Read this article by Søren Langkjer Ravn: The case for acquiring new customers using the concept of ergodicity
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This report was a collaborative effort and without the aid of our colleagues, it might've looked very different. The following individuals have made significant contributions to this series of reports: J.Moolman, I.Barnard, S.Brealey, and E.Gentle. We thank you all for being so generous with your time.