The best kept secret to reduce marketing risk: Marketing econometrics

You may ask yourself, what is the importance of econometrics in business? Econometrics is the creation and use of mathematical models to represent economic systems in the real world. These can be used for an entire economy, an industry, or a single company. Marketing econometric modelling can help with analysing a variety of market programmes. It also aids in identifying the factors that drive growth, marketing performance and those that decrease the demand for a product or service. 

Econometric models are also used to identify the economic forces which affect cost and supply within an industry. Having a deep understanding of these forces can help in creating business planning and strategy. However, smaller brands often overlook econometrics in marketing, which is an enormous risk and can lead to lower return on investment.

What are the benefits from applying econometric models?

Econometrics modelling marketing also enables marketers to use econometric models to provide powerful insights to help companies forecast and manage the future. 

Marketing mix modelling (MMM)–is a common tool that is used to evaluate marketing Return on Investment (ROI). All marketing investments should be modelled on MMM as it can help achieve optimal marketing budget allocation. For example, MMM can help determine and compare the cost of television advertising compared to radio or the online equivalents. It can also help companies to understand if they should invest more in hiring sales personnel or in advertising. 

Marketing mix modelling is a method which can help to measure the impact of different marketing efforts on sales. The main reason that brands should use MMM is to help them understand the extent to which each of their marketing costs can contribute to sales, as well as how much a brand should spend on each activity.

Source: Nielsen

Demand forecasting –This is another common use of econometrics in marketing which helps in decision making and planning for a business.

Using econometric marketing models helps marketers track marketing effectiveness. For example, using macroeconomic data, an econometric model could help a restaurant brand identify the impact that the growth in the number of working women in the U.S. continues to play in the growth of the restaurant industry.

Marketing econometrics and demand forecasting allows businesses to create strategic decisions whether for short-term or long-term business.
Demand forecasting allows businesses to create strategic decisions whether for short-term or long-term business.
Source: TheInvestorsBook

Demand forecasting reduces risks that are related to different business activities and helps brands to make better decisions. Understanding different variables can help in forecasting an industry’s future. 

How can marketing econometrics help you benchmark?

Econometric models are often built on benchmark performance statistics. Benchmarks are standard metrics which brands use to compare their results against their competitors or against the industry. Benchmarks can help to identify a business’s competitive advantage and highlight areas where the brand is under performing. Some of the typical marketing benchmarks worth factoring into a marketing econometric model are:

  • Brand recognition – The percentage of a target market that identifies the brand logo compared to rival brands. 
  • Brand recall – Percentage of the target market can remember the brand when prompted with a product category. 
  • Top of mind – Percentage of the target market who can identify the brand first when prompted with a product category. 
  • Customer loyalty – The number of customers who buy from the same brand with a frequency that is loyal in the industry. 
  • Customer satisfaction – The percentage of customers who are happy with the brand when compared to the competition. 
  • Product performance – A measure of product efficacy against the competitor set. 
  • Ratings – Reviews from customers with ratings. 
  • Market Share – The percentage of total industry sales in the product category that is captured by the brand. 
  • Customer perception – How customers perceive the brand within the industry. For example, which hotel is more reliable?
  • Share of wallet – The percentage of spend for a product category that customers spend on the brand. 
  • Customer acquisition costCost of acquiring a customer versus the industry standard. 
  • Customer retention rate – Percentage of customers that brands do not lose within a certain period. 
  • Customer lifetime value – An estimated amount that existing customers spend on the brand until the end of the relationship
  • Price – Bench-marking a brand’s price in the market versus the competition. It is used to optimise pricing strategy. 
  • Costs & Margins – Benchmarks of profitability and efficiency like cost per unit. Within a price competitive market, lower cost per unit is obviously a major competitive advantage. 
  • Conversion rate – Percentage of visitors to a website who purchases the product.
  • Reach – The percentage of a target audience that a brand can reach with marketing messages. 
  • Engagement – Measurement of customer engagement, such as the time they spend on a brand’s website.

Consider using tools for benchmarking. Some tools allow monitoring of several metrics in one app. For example, amoCRM, Livechat Software, and Freshdesk.

The discipline of marketing econometrics is important to digital advertisers because when brands are aware of these performance statistics, they will identify opportunities to optimise sales, marketing and operations. Bench-marking allows brands to compare figures and effectively manage costs. Any kind of business can leverage benchmarking. It can provide answers to important questions such as; How is the business likely to perform over the next two years? And, how can processes be improved?. 

How to use performance statistics in marketing econometrics

Successful econometric marketing requires that brands are aware of important statistics. It will help them gain a better understanding of the industry. Knowing performance statistics can help brands to measure their progress against the competition. 

Putting the financials first with econometrics modelling marketing can save the budget by understanding benchmarking. Benchmarking a brand’s performance can provide a range of benefits, including:

  • Enabling brands to set performance expectations.
  • Giving a better understanding of how brands are performing against competitors.
  • Identifying areas that need improvement.
  • Allowing brands to track performance and achieve strategy changes.
  • Supporting brands in developing standard metrics that can measure performance.
  • Building a company culture that embraces continuous development.
  • Providing brands with a better understanding of customer needs and expectations.

When brands don’t benchmark, it can mean missing out on crucial opportunities. It can also mean that the brand is measuring the wrong data. This can lead to brands pouring their money into activities that will not provide a return on investment.

Data driven budget allocation using mix-modelling 

mix modelling within econometric model that can help businesses improve
Source: Nielsen

Econometrics in marketing is more data driven than traditional marketing. CMOs can use marketing mix modelling to prepare budget allocation decisions. The insights that can be delivered by mix-modelling allow brands to divide limited resources and use them efficiently. This means savings are made, and a sped up return of investment can be expected. Marketers in every industry have adopted mix modelling approaches because it helps in improving business operations and in creating strategic marketing plans.

None of the above is complex, but it can sometimes feel that way. However, not understanding the concepts can be dangerous. The importance of econometrics in business cannot be understated. Therefore, implementing a strategy around econometrics could be one action that can almost immediately boost the growth of a business.

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About James

James is the founder of Customer Devoted and was previously the managing director of customer engagement agency Ogilvy One and the strategy director for customer loyalty consultancy The Collinson Group.

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