You would think that with the ability to measure everything when you do online marketing, many companies would do so.

Not so say McKinsey consultants – while 91% of the marketing executives who participated in the McKinsey digital-advertising survey (06/08) reported that their companies were advertising online, 80% said that their companies allocate their media budgets by using subjective judgments or by repeating whatever they did the year before.

Heck, only 50% were using click-through rates to measure effectiveness of their online direct response ads. And only 30% considered the offline impact of online marketing.

Surprisingly (not), those who were measuring the impact of online marketing were more satisfied with digital marketing than those who did not, and 55% of them (compared to 43%) were cutting their spending in traditional media in order to increase their spending online.

It is amazing how many marketing departments are still not accountable for results…sigh…

I was invited to attend The Conference Board meeting on Marketing Effectiveness yesterday. The main theme focused on how companies keep their marketing departments accountable.

Surprisingly, but as most research shows, a majority of companies are nowhere near being able to hold their marketing departments accountable. Not only are some companies measuring the wrong things, a majority of them have no ability to measure anything at this stage. Columbia Business School Professor and Conference Chair Don Sexton further noted that the lack of progress in marketing effectiveness is also visible in the budget process. Research shows that 54% of companies set their marketing budgets based on historical data – clearly indicating that they have no clue on the effectiveness – and only 20% of marketing executives report being able to forecast the impact of a 10% budget cut.

Now in some cases it’s no wonder than companies cannot measure their marketing effectiveness. A new study by The Conference Board, which will be released later this summer, found that half of the companies which reported no progress with marketing ROI had nobody assigned to the task. Duh…

According to Kevin Clancy, another keynoter at the conference, most marketing programs have an ROI that is zero or negative, which could of course be another explanation for why no progress in measuring marketing effectiveness has been made in the last 40 years – people in charge don’t want that dirty secret to be exposed.

One Fortune 50 company which had a few representatives at the meeting had a very interesting approach to marketing measurement, although one that was running into cultural and political barriers. They recognized that marketing is indeed a large multi-variable complex system that needs to be measured as such. You cannot measure the impact of a campaign without also keeping pricing, packaging, and competitive changes into the mix, just to name a few variables. So they hired a bunch of PhD’s in systems dynamics and operational research to measure marketing as a complex system. Unfortunately, and because they lack marketing expertise, marketers are resisting cooperation with them at this time.

A few of my friends IM’d, emailed and called me yesterday to talk about the post I wrote on ROI not being a good indicator for how well marketing is doing. That prompted me to elaborate on the subject a bit in this post.

First, lets look at the statement that Marketing is not a set of simple linear processes that can easily be measured – but rather a complex multi-variable and non-linear process.

Assume you have a new product version, for which you develop a special upgrade price and an extra sales incentive. Lets further assume that you have done well and therefore enjoy some positive word of mouth in the marketplace. You now decide to launch this product upgrade with a massive email campaign and by participating in a industry trade show. What does the ROI on the email campaign tell you about the efficacy of email marketing in this case?

Answer: NOTHING!

The email campaign could bomb because you could have the wrong offer for that audience, or a sales incentive that competes with a better one which causes the channel to push an alternative product. You could have had a few of your products explode a few weeks before the whole campaign, resulting in negative word of mouth. Or you could get 30% of the good leads that both read the email and went to your show. How do you then determine ROI? And assuming that you can, what does it tell you?

NOTHING! You can not predict the behavior of the whole system by understanding the individual parts…there are too many variables in the whole system…the system will exhibit some emergent behavior, which cannot easily be measured with standard ROI metrics.

All of this leads to the next statement I made yesterday. Lets assume that you can find a solution to measure ROI which takes into account all the inter-dependencies and variables that rule your market at this particular point in time. What does it tell you about the future performance of marketing programs, incentives and promotional pricing schemes?

NOTHING!

Because ROI is a trailing indicator, not a leading indicator…

So are there leading indicators that marketers could use? The best one I found so far is ROI, but not as in Return on Investment – but as in Return on Information, as defined by John Hagel. You measure ROI both from your company’s point of view as well as from the customer’s point of view. As John says: “From an organizer (company) perspective, the question becomes: How much effort and cost did I invest in acquiring information about individual participant and how much value have I been able to generate in return, both for the participant and for me? From a participant (customer) perspective, the key question is: How much information about myself and my needs have I provided, how much effort did it require and, relative to both of these, how much value have I received in return from the information provided?” You could extend this concept to also measure the amount of information you need to provide a prospective buyer for him/her to make a buying decision.

Looking at it this way is definitely a more holistic systems approach to measuring success. And unlike the traditional ROI, it could help you predict future behavior. If the Return on Information from a customer’s point of view is positive, chances are that all your messages will be amplified by positive word of mouth…

So how could measuring marketing ROI be harmful to your marketing department? As I said yesterday, by insisting on measurability, companies will force marketing execs to break marketing into a collection of simple linear processes, which is not how marketing really works. By doing so you will miss all the opportunities at the intersections, and kill programs that should be leveraged in certain circumstances at at certain times. And for as long as you will have an ROI-driven marketing department, the credibility of your marketing department will continue to diminish, and the frustration of the executive team with the CMO will continue to increase.