Are You Measuring The Right Thing?

In a conversation with my financial advisor the other night I asked him why he thought brands advertise. His response was “to get people to try the product”. He couldn’t be more correct. The role of advertising is to generate trial, break penetration into households that have not previously purchased the brand.  We should measure our success based on how well we accomplish that, but in most cases we are not.

Over the last 20 years or so marketers have become enamored with marketing mix modeling in an effort to better understand the contribution of every effort against total sales. The modelers will tell you precisely what percent of sales for the year each effort contributed. It sounds like a good concept but in practice it doesn’t really work. Every market mix modeling exercise I have ever seen analyzes advertising impact against total sales. If advertising’s role is to generate trial for new products and penetration for existing ones why are we measuring its success vs. total sales? We end up undervaluing the impact of advertising and overvalue the impact of in-store promotions.

The modelers are counting every transaction as it crosses the scanner at retail. The model cannot distinguish between the first sale, the second, third or fourth by an individual buyer.  If a product is purchased four times in a year by an ad driven new buyer the model is understating the ads impact by 75%. The ad is only responsible for the first sale. The product performance/satisfaction is responsible for sales 2, 3 and 4. Why is this an important issue? Because sales promotion actually hurts the effect of advertising. Huh? Here’s how it works. Ads get people to consider buying without price incentives. If an ad driven potential new buyer is in the store they are going to take advantage of the price promotion that day. They will not ask to pay full price even though they were willing to before they got in the store. If it’s a repeat buyer whose first purchase was driven by an ad they may even pantry load, taking them out of the market for at least two cycles. The worst thing is since they bought on deal the model gives the in-store promotion the credit for making the sale—even the first one.

We now have the ability, with loyalty card data, to separate first time purchases from repeat ones. We can track not only total sales but the impact ads have on generating new customers. We can better understand individual users repeat rates. We can also test pricing strategies to determine if the in-store pricing is harming profitability/equity. If advertising’s role is to drive trial/penetration our single-minded focus should be on that. Ask yourself: “What am I doing today to bring in new customers?”

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9 thoughts on “Are You Measuring The Right Thing?

  1. Dale Gilliam says:

    Great post! I agree that the modeling shouldn’t be done simply on sales. My perspective on modeling is that it should be an on-going process rather than a template — which means that there should be guidelines about what variables to use, but that there are always exceptions.

    Very thought provoking post! Thanks!

  2. Peggy says:

    Updated Commentary by Peggy. please replace original

    I find the commentary very interesting and in line with my perspective of traditional marketing. In my years of selling advertising, merchandising, point-of-sale, and pricing, I have always felt the evaluation of total purchases and sales to be misleading. I agree with your assessment, and technology has certainly given us a better measure of first time buyers by location. The data we still are not sure of unless there is a questionnaire (not likely) is has the customer purchased the product somewhere else prior. Although understanding initial venue purchase behavior is of value, would not it be even better to know actual first time conversion to a Brand. Even more complicated to assess is the value of Experiential Marketing and its measurement of success. I appreciate any feedback you have relative to this tactic and how you would utilize the tool and evaluate results.

    • Peggy, thanks for the read and comment. The models currently on the market began as tools to measure in-store promotion. That is where their inherent bias is. Adapting them to try to measure something that happens removed from the store experience, whether it be advertising or experiential marketing, is difficult. Experiential has a role in the marketing mix if the product is best served by tasting/touching, etc. A good way to measure it’s value is to conduct the experiential in store and measure sales/penetration, etc. in stores with/without the experience. Does that help?

  3. Peggy says:

    I find the commentary very interesting and in line with my perspective of traditional marketing. In my years of selling advertising, merchandising, point-of-sale, and pricing, I have always felt the evaluation of total purchases and sales to m=be misleading. I agree with your assessment and technology has certainly given us a better measure of first time buyers by location. The data we still are not sure of unless there is a questionnaire (not likely) is has the customer purchased the product somewhere else prior. Although understanding initial venue purchase behavior is of value would, not it be even better to know actual first time conversion to a Brand. Even more complicated to assess is the value of Experiential Marketing and its measurement of success. i appreciate your feedback…

  4. Bryan says:

    All points extremely well taken. As a newcomer to this technically evolved industry, it is my (perhaps, naive) opinion that brand loyalty is the key to successfully madvertising a product. I know, I know, all companies want to increase their base of loyal consumers. And, that is precisely my point. I affectionately liken consumers to canines. Scientific studies show that dogs in the wild travel in packs. It’s their instinct to do so. And, there is no doubt that domesticated dogs are loyal to their masters. So, it is the madvertiser’s job to domesticate the wild consumers in order to increaese the loyal ones.

    I’ll be here all week. Please don’t forget to tip your server.

    Hello David. Is single-malt scotch gluten free?

  5. Ron, thanks for your insightful comments. Groupon, Living Social, and the rest are today’s version of the Newspaper FSI. They have created one-night stands between sellers and buyers. We know that you cannot build a long term respectful relationship on those.

  6. Ron Bender says:

    It is far too easy to train your customers to wait for the inevitable sale or coupon, and too many retailers and restaurants have fallen into this trap.

    Too many companies default to discounting before exploring better, longer-term marketing and brand positioning. Hmm, Groupon, Living Social, etc… Do any companies use that strategy a second time?

    Does anyone remember a small company named Quizno’s? They fell from grace in large part because someone in their marketing silo chose to compete with Subway on price alone. A ridiculous decision on positioning, this snowballed into lower profitability in stores, decreased satisfaction among consumers, outrage from franchise owners and the eventual closing of over half of their stores. Now, we in franchising aren’t even allowed to speak the “Q” word!

  7. Nader Ashway says:

    Excellent post, David. I remember that, over a year ago, we discussed a similar issue related to couponing – how today’s price incentives might be hurting tomorrow’s sales.

    I think your most salient point is related to the conflict that can exist between sales promotion and brand advertising. When a NEW user is driven to the store by brand advertising, they’re driven by INTEREST, not PRICE. Really excellent observation to note that an in-store price incentive might actually hurt the long-term brand value.

    I think the second theme of this post is channel integration. It would really help if one hand knew what the other was doing in terms of ALL outbound marketing activities. Your points make a great case for multi-channel coordination.

    • Joel Brodsky says:

      I agree that this is an excellent post.

      As an experienced marketing analytics executive and marketing mix modeler, I need to respond to one point in Ron’s comments. Almost 10 years ago, in our marketing mix models and subsequent strategies we were distinguishing between first time purchases and repeat purchases. From a marketing mix modeling perspective, the main requirements for such a distinction are (i) the advertiser having appropriate data for first-time and repeat customers and (ii) the modeler being knowledgeable on how to develop such models.

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