David Reibstein Professor of Marketing, The Wharton School
It’s hard to imagine there is anyone anywhere that thinks more about marketing ROI than David Reibstein, the William Stewart Woodside Professor of Marketing at The Wharton School of the University of Pennsylvania. He has written dozens of research papers on the subject. He writes books with titles like, “Marketing Metrics: The definitive guide to measuring marketing performance.” He hosts a Sirius XM radio show called “Measured Thoughts” that explores the metrics of success in marketing. And he regularly interviews CMOs on his YouTube channel of the same name.
Lately, he’s been thinking a lot about changing the way finance accounts for marketing budgets, and how it treats the value of the brand when listing assets and liabilities on the balance sheet. He shares his progress here.
Why is it so hard to measure marketing ROI?
Marketing has both short-term and long-term effects. In the short term, it’s not hard to measure. For example, if I run a promotion and send out coupons, I see how many people use the coupons. Or if I offer a sale price on a particular item, I see a spike in sales. This is obvious cause-and-effect.
What is less obvious is how marketing contributes to future sales. Many aspects of marketing have more enduring results. And during the lifetime of a customer, a myriad of other things also affect their relationship with the company, above and beyond marketing. So between the extended period of time over which marketing value manifests itself, and the muddying of the waters by other factors, separating out marketing’s contribution to a particular customer’s value becomes very difficult.
It seems like marketing return has eluded quantification since forever. When did we start getting serious about measuring marketing ROI?
For many years, I was the executive director of the Marketing Science Institute. And every year we asked the member companies their most pressing issues. And I think it was in 2001 that marketing ROI became the number one topic of concern.
Remember, that was right in the middle of a major economic slowdown, and budgets were being cut. In fact, finance executives were going around asking all parts of the organization for ROI figures. Most departments had good, solid numbers to report. For example, operations might say, “We just installed this new piece of equipment and the throughput is x and this is what our payback period is, and considering this added level of productivity, the return on this investment is y.” You could go to different parts of the organization and get hard numbers like these; quantifiable ROI.
Marketing’s response was different. They said, “Well, look at our brand awareness. And look at our brand value. And our customer satisfaction and retention levels.” Not surprisingly, this frustrated the finance executives, because marketing couldn’t tell them exactly what kind of return they were producing. So when they made their recommendations to the CEO, they suggested investing in the things with the highest ROI, and cutting back on everything else.
But were these CFOs focused on the highest ROI or the least ambiguous ROI?
I suspect it’s some of both. The irony is, a majority of the value in companies now is in intangible assets. And the majority of those intangible assets are driven by marketing. We’re talking about brand value and customer relations. Huge value centers. And yet those marketing budgets got cut back in 2001. Not because they weren’t providing value, but because marketing didn’t know how to demonstrate that value. You can imagine the frustration on all sides.
So how do we fix a problem like that?
One way is through accounting. In 2004, I joined a group now known as the Marketing Accounting Standards Board. What we’re trying to do is come up with some clear understanding of terms, and a better way of capturing marketing’s contributions to financial outcomes. We are working closely with the Financial Accounting Standards Board to change the financial accounting toward marketing, and we’re making great progress. There are two main facets to this work:
First, as it is now, all marketing expenditures are expensed against a company’s income in a particular year. That flies in the face of the long-term effects of marketing. It changes the expectations of the value we are supposed to be getting from marketing. As opposed to an investment in a new manufacturing facility, which is expected to provide return over time, marketing investments are expected to provide all of the return in the same year.
The second question we’re grappling with is whether or not we should put brand value on the balance sheet. We now have developed some good techniques to measure the value of a brand. But we are not listing that as an asset on the balance sheet. The only exception—and here’s where it gets weird—is if a company buys a brand (through acquisition), they can put it on their balance sheet. But if they build a brand, they cannot. For example, Procter & Gamble shows the value of the Gillette brand on their balance sheet, because they acquired the company. And they get to show it on their balance sheet ad infinitum. But they cannot show the value of Tide, because they built that one. It doesn’t make any sense at all.
Sounds like these changes would fundamentally change the relationship between the CFO and CMO. Do you see any resistance to this change, from either side?
Unfortunately, yes. Some of the biggest resistance I have seen comes from the marketing side. Some CMOs would rather not be measured in this way. The transparency is great if the brand value is going up. But if you’re spending money and the value is going down, that’s not so good.
“Marketing Metrics: The definitive guide to measuring marketing performance” by Paul Farris, Neil Bendle, Philip Pfeifer and David Reibstein. February 2010
Measured Thoughts available on Business Radio on Sirius XM, hosted by David Reibstein.
Measured Thoughts by David Reibstein