• Strategy
  • McKinsey & Co.

Boosting Returns on Marketing Investment

Rules of thumb from the 1960s and '70s are losing their effectiveness. What's required is a more rigorous approach that treats marketing expenditures as investments.

Today’s chief marketing officers (CMOs) confront a painful reality: their traditional marketing model is being challenged, and they can foresee a day when it will no longer work.

The declining effectiveness of mass advertising is only the most visible sign of distress. Marketers also face a general proliferation of media and distribution channels, declining trust in advertising, multitasking by consumers, and digital technologies that give users more control over their media time. These trends are simultaneously fragmenting both audiences and the channels needed to reach them. The danger for marketers is that change will render the time-honored way of getting messages to consumers through TV commercials less effective at best and a waste of time and money at worst.

Among marketers, there’s much frustration and little agreement about what to do next. Some are reaching for marketing-mix models that use sophisticated econometric methods to tease out the different effects of the marketing mix on business results (see “Beware the Quantitative Cure-All,” at the end of this article). But the historical data that fuel such techniques may prove an unreliable guide to future returns.

Marketers need a more rigorous approach to a fragmenting world — one that jettisons mentalities and behavior from advertising’s golden age and treats marketing not as “spend” but as the investment it really is. In other words, it will be necessary to boost marketing’s return on investment (ROI). By adhering to the same investment principles that other functions follow, a CMO can improve the alignment between marketing and financial objectives, capitalize on a brand’s most distinctive elements with greater success, more precisely target the consumers and media vehicles yielding the largest and fastest payoff, manage risk more carefully, and track returns more closely. In short, only by thoughtfully and systematically applying investment fundamentals to marketing can CMOs respond to the complex challenges they face.

The ROI Challenge

Today’s ROI challenge has its roots in the halcyon days of mass advertising, in the 1960s and ’70s. Back then, marketers wrote the rules that still inspire many marketing investments — or, as some tellingly say, marketing spend.

Legacy issues… When network television was king, marketers and the ad agencies serving them rightly focused on the massive audiences that tuned into the most popular shows. The emphasis was on “mass messaging”: the development of powerful advertisements imprinting themselves on the minds of consumers. Many marketers based their TV spending on “share of voice,” which meant making sure that the advertising budget of a brand was in line with its market share, the spending of competitors, and the company’s growth expectations. Plans for other media expenditures received less attention.

Golden-age marketers often relied on tools such as day-after recall (a metric tracking how well consumers remembered ads) and compared the results with internal benchmarks to assess the effectiveness of ad copy. As it became clear that recall wasn’t the best measure of creative effectiveness, leading companies developed more elaborate testing regimens, such as the audience response system (ARS), a technique for determining the persuasive impact of new messages as compared with those of competitors. Meanwhile, more precise reach and frequency assessments made media-spending decisions better informed.

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