ROI of MR
Posted by Jeffrey Henning on Sat, May 01, 2010
In my recap of "Presenting Results: How to Speak Marketing Research with a Management Accent", a presentation by Richard Chay at the AMA's 2010 Applied Research Methods conference, I glossed over one of the most talked-about points: converting research outcomes into financial metrics.
How important are finances? More important than ever to CEOs. Those who run public companies live in a world saturated with 24/7 access to financial data. Richard used to maintain an illustrative list of CEOs fired for financial performance, but the list grew so long he stopped keeping it updated. He quoted Jack Stafford, the former chairman of Pillsbury, who kept a sign on his desk saying "bad numbers will kill you every time." Bad numbers are career limiting and career threatening to C-level executives. Given the paramount importance of finance, it is important for market research to pitch itself to C-level executives in financial terms.
Think about research as an investment rather than a cost, and think about the revenue that has to be earned to pay for the research. For instance, if the business makes a 5% profit, then $5,000 in research expenses is carried by $100,000 in revenue. "Every dollar you spend has a 20 to 1 ratio to it. The way to think about that is for me to get the privilege to spend this money, the company has to earn 20 times that to pay for it." If you want to perform five focus groups for $35,000, what revenue do you have to earn to pay for that given your company's profit margins?
For consumer packaged goods and groceries, it can take millions of dollars to get new products to market. How can your research reduce the risk of a product launch? What does this translate into financial terms? How does the research department put a number on it? If there were a 1% to 5% reduction in risk, what would that mean? You often have to estimate the ROI of VOC work--the actual number isn't available.
When Richard was running the research department at a major CPG company, he asked the CFO, "If we were to eliminate the entire research department and all its salaries and related spending, what would that be worth in sales to the company?" The budget of the research department at the time was around $5 million. The CFO said that eliminating research would be like introducing a new $100 million brand to the company. Richard found this humbling: a $100M brand is a big brand. The exercise forced him to think hard about the value of the research he delivered.
"Why are we doing this research?" he began asking. Sometimes people were doing research "to cover their rear ends because they had already made a decision." He worked to eliminate such spending; the finance department loved to see the costs reduced as a result.
One attendee asked, "My challenge with metrics is how to justify. I am often doing researching around messaging, coming up with a new message for an old product. Maybe it will increase sales 5%, but more likely it is just that the existing messaging is outdated because of competitor activity. Some research is just to keep the status quo, to avoid loss." In which case, Richard argued, you justify the expenditure by making assumptions about the potential loss from not doing the research.
Another attendee, for a real-estate firm, talked about justifying advertising research by saying if the research helped result in the sale of one apartment it would more than pay for the research. To this, Richard added that sometimes you have to carve research spending out of someone else's budget. "If you are spending $1 million to produce and air a commercial, spend a little bit of money to make sure it is the right commercial and air it one less time to pay for the research."
Clearly there are no easy ROI answers for MR.