• by March 30, 2005

By John Nardone

Marketing econometric models are helping marketers find their way through the challenges of a fractured market. For agencies to maintain their strategic relevance and a balanced budget, they must embrace quantitative techniques and experts.

Many marketers believe that the mass media approach that has built so many brands over the last 50 years has reached the end of its useful life. They believe that significant changes in the media and consumer landscape have so eroded the effectiveness of their tried and true marketing approaches, that they must find entirely new ways to approach the consumer.

Procter & Gamble embarked on a communications planning approach, placing the consumer at the center of the plan. Kraft Foods reaches consumers through a self-published magazine, and Pepsi is experimenting with developing custom content for television. These innovations are just a sampling of the changes underway.

Unfortunately, while marketers explore new routes to market, business pressure demands greater effectiveness for each marketing dollar spent. Marketing departments are under more scrutiny than ever, as years of belt-tightening in the supply chain have left them perhaps the last area of loosely managed corporate spending. Under increasing pressure to defend their budgets, many marketers have turned to analytic techniques such as marketing econometric modeling to support new approaches and justify their decisions.

Marketing econometric models are mathematical representations of marketing scenarios in which key drivers of sales are identified and isolated. Models are most often built for marketing mix analysis, pricing elasticity, or trade planning. The models are based on client data and incorporate non-linear behaviors such as advertising build, saturation, and decay, or forward buying associated with consumer promotions. A strong model can "look backward" to measure return on marketing investment (romi), or can "look forward" to enable planning and forecasting.

Many marketers are struggling to develop the new processes and skills needed to get the most benefit. There are three key areas of development that are critical for success:

Data Management: Building the models can be easily outsourced if corporate data is in order, so marketers are beginning to make marketing data management a priority.

Analytic Insight: Business owners must learn how to use and interpret models appropriately. They should be used as support tools in conjunction with the marketer's experience and judgment, not as a black box or Magic Eight Ball. New Processes: Marketers must incorporate analytics into the planning process so that the right information is available to the right decision makers at the appropriate time. This can be a challenge because many marketers take pride in making decisions based on gut and intuition, and may view process and analytics as a restriction on their creativity.

Marketers need to collaborate with their agencies. Historically, agencies have resisted the involvement of third-party modelers. They often view the recommendations on advertising budget levels, media mix, and media scheduling as unwelcome encroachment on their turf. Worse, they reject the romi findings if they aren't favorable to their work, or if they suggest lower budget levels for advertising. Some agencies have responded by launching their own marketing econometric capabilities, but for the most part, marketers continue to favor an objective third party assessment of their activities.

In order to maintain their seat at the table, agencies will have to accept and embrace the work of their client's modeling partner. They need to understand the models, and how they can be used to enhance their own processes. They must understand how the models are being used to drive their client's decisions and embrace the romi measurement and use it to justify their own value. Finally, they must view the models as a basis from which to experiment with new approaches. In short, in the increasingly complex landscape marketers face, the smart agency will view the third-party modeler as its new best friend.

John Nardone is executive vice president, product development and marketing, for Marketing Management Analytics. (john.nardone@mma.com)