The company is still far from a metric that directly ties an advertising dollar spent to a revenue amount. “We have good insight,” says Woodward, “but as far as an absolute metric for advertising ROI, that’s much more challenging.”
Quality By DuPont
At the apparel and textile sciences unit of Wilmington, Delaware-based DuPont, advertising budgets are also set the old-fashioned way–as a percentage of product- line revenue–and are currently at 3 percent, according to Carol Gee, global director of brands for the division. The company markets the products from Gee’s division (including CoolMax, Cordura, and Lycra) to mills, retailers, and end consumers. It’s difficult, she says, to track the effect of its brand communications on the end consumer. “But if we just advertised to our direct [OEM] customers, we’d be a commodity overnight,” says Gee, explaining why some of the company’s advertising is directed at consumers. “At DuPont, that’s how we build the brand.”
Gee says measuring ad effectiveness is especially difficult for an ingredient brand, “since we have no way of knowing where that ingredient is going to end up.” Gee says her company is working on ways to quantify the bottom-line effect of its advertising spending by coupling a variety of traditional metrics with Six Sigma methodology.
The company has long used Six Sigma to analyze its manufacturing processes, but now it has launched efforts to begin analyzing its brands and advertising activities the same way. (Six Sigma focuses on deconstructing and analyzing processes, then improving process quality, lowering process defects, and optimizing process capacity.) Gee declined to discuss the specific outcome of initial efforts in this area, saying the results are too preliminary. But she has high hopes for this unusual application of Six Sigma. “Once we can start proving, with Six Sigma’s help, that advertising is critical in driving price premiums, for example, then we’ll know advertising is critical to our whole overall selling strategy.”
But increased awareness that advertising plays a quantifiable role in revenue generation is only a first step. While most companies lack an ROI methodology, a number of consultants and researchers are offering to do the complicated math for a fee.
Northwestern’s Schultz, for one, has developed an ROI methodology that uses marketing-mix modeling based on regression analysis techniques–the ultimate combination of art and science. He believes the key to estimating advertising ROI in the short term is to identify incremental financial returns from the ad investment. For the long term, he examines brand equity. In other words, he calculates the percent of total sales attributable just to a brand’s existing sales momentum and brand equity.
To determine brand equity, Schultz conducts a statistical analysis that identifies the financial value the brand contributes when compared with product value, distribution, pricing, services, and other factors. To figure out the short-term incremental impact of advertising on sales, Schultz takes 36 months or more of sales data on a particular product or brand. He then uses exponential smoothing to create a sales trend line. From that, using various regression analysis methodologies, he identifies the effects of advertising, promotions, pricing, and other factors in terms of their ability to generate “incremental” sales, or sales over what would be expected.