By M. Isi Eromosele

Marketing expenditures in the U.S. have grown exponentially over the past several years. In several industries, especially consumer goods, marketing represents more than half of total COGS, and yet there is no consensus on how to measure the financial impact of such an important part of capital expenditure.

Brand value, which forms the bulk of intangible assets for many Fortune 500 companies has the ability to positively influence the consumer decision-making process, ensuring a higher price premium, both resulting in increased long-term cash-flows.

In spite of this, very few models measuring marketing effectiveness include measures of brand equity as mediating variables.

Apart from driving sales directly, marketing is considered to be an important driver of brand equity, which itself is considered an ‘intangible asset’. Marketing is assumed to have a benevolent impact on brand equity, and brand equity itself supports the brand through incremental leverage and increased marketing effectiveness.

Brand equity leverages marketing and media that targets all consumers in a “buy and hold approach”, even if they are not customers today, with the expectation that the stored equity will provide an added leverage when these consumers are ready to become customers.

Branding on the other hand traditionally require large amounts of investment of both time and money based on just the expectation that they are building a positive attitude towards the brands in the minds of consumers.

This has lead to differences in opinion between brand-managers who base their decisions on qualitative factors and the financial stakeholders of companies, who measure investments based on the expectation of a future return on this investment.

Also from an acquisitions standpoint, a firm can no longer just amortize the premium they paid for an acquisition over a 40 year period, instead they have to calculate it every year to see if the goodwill, and hence brand equity/value has eroded or been impaired, which requires the measurement of brand value and how the year’s marketing activities have affected it.

All this focus and the proliferation and accessibility of high frequency

sales and marketing data has lead to the development and proliferation of techniques like marketing-mix models that measure the ROI on individual marketing vehicles.

 Adverse Effect on Branding

So are Marketing ROI and Marketing-Mix Modeling the panacea for all that ails marketing today? Not quite. It is certainly a win for marketing accountability, but branding takes a beating. Marketing ROI as it is most commonly measured has an Achilles heel; standard marketing-mix models only account from the short-term

sales lift due to marketing.

Several studies have suggested a longer-term effect of marketing on sales resulting in either an improved baseline or an improved profit margin.

Consistent and quality advertising effort tends to build increased awareness and premium associated with the brand, which results in increased ‘brand equity’. Brand equity is defined as the marketing effects or outcomes that accrue to a product with its brand name as compared to the outcomes if that same product did not have the brand name.

Most standard marketing-mix models and pricing and promotion analysis measure the impact of marketing and promotions via the short-term effects route. This measures the immediate effect of brand management activities on sales and enables development of tactical strategies to enhance the performance of the brand in the short-term (3 months to 1 year out).

Promotional tactics are especially the most easily countered by competition so their effects are usually short-lived. Apart from the short-term impact, some marketing activities are also believed to have a long-term impact, which accumulates over time into an overall increased awareness about the product or the brand and helps to differentiate the brand from others. This construct is captured in the ‘equity of the brand’.

The solution lies in measuring Marketing ROI as a function of both the short-term and the long-term. Different marketing measures impact short-term and long-term brand sales differently and adjusting the marketing portfolio to maximize either the short-term or the long-term alone will be sub-optimal.

For example, the short-term positive effect of promotions on consumers’ utility induces consumers to switch to the promoted brand, but the adverse impact of promotions on brand equity carries over from period to period.

Therefore the net effect of promotions on a brand’s market share and profitability can be negative due to their adverse impact on the brand.