Not because marketing needs another way to pay agencies, but because it may offer a better way to manage — and share — marketing risk.
Consider two risks.
Opportunity risk.
A company sees a growth opportunity, but uncertainty makes it difficult to secure enough capital to pursue it.
The opportunity remains underfunded.
For some businesses that means slower growth. For a challenger trying to establish scale — or a company facing rapid market change — repeatedly failing to fund the right opportunities can become a strategic, even existential, risk.
Then there is execution risk.
Capital gets approved, but the marketing system is suboptimized. Channels, audiences, markets and timing don’t work together as effectively as they could.
Results disappoint.
Capital gets burned. And a visible failure can damage Marketing’s credibility and the organization’s confidence in the next investment.
Which raises a different question:
Could advertisers and their marketing partners manage some of these risks together?
Agencies bring strategy, creativity, media expertise and increasingly sophisticated technology.
Specialist partners, like us, can add predictive analytics, optimization, incrementality measurement — and, in some cases, capital.
Put those capabilities together and a different commercial model becomes possible.
If we can identify an opportunity, predict its incremental value, optimize how it is pursued and independently verify the result, compensation can increasingly be tied to the business outcome.
And where the evidence is strong enough, partners may even choose to share some of the investment risk.
Now outcome-based pricing becomes more than a compensation model.
It becomes a risk-sharing mechanism.
That could help address both sides of marketing risk:
Fund more of the opportunities worth taking. Reduce the risks.
Now, advertiser, agency and specialist partners can all have more of their economics connected to the same objective:
Creating incremental business value.
Perhaps that is the bigger opportunity in outcome-based pricing.
Not replacing the agency model.
Giving agencies and advertisers another way to grow together — with greater alignment around both risk and reward.
Understand the risk. Manage the risk. Share the risk.
We’ve spent years getting better at measuring return. I’m not sure we’ve become nearly as good at measuring risk.
And that matters.
When a marketing investment goes badly, the obvious loss is money. But poor risk management can burn much more than capital.
Capital gets burned when investment fails to produce sufficient incremental return.
Credibility gets burned when a major miss leaves Marketing struggling to explain what happened — or why the risk was worth taking.
Confidence gets burned when the CFO, CEO or Board becomes less willing to back the next marketing investment.
And opportunity gets burned when potentially profitable growth goes unfunded because Marketing cannot quantify the risk well enough to justify the capital.
That last one may be the least visible — and potentially the most expensive.
Importantly, a bad outcome doesn’t necessarily mean the risk was badly managed. A well-considered investment can fail, and a poorly considered one can get lucky.
The better question is what we knew before we committed the capital.
What was the range of possible outcomes?
How likely were they?
What was the downside?
How much capital should we put at risk?
And what was the risk of not investing?
Marketing has made enormous progress proving what happened after the money was spent.
Perhaps the next challenge is getting much better at deciding what risks are worth taking before we spend it.
We can think of risk by using fire as an analogy.
Uncontrolled, it can burn value. Understood and managed, it can forge it.
When we first wrote about the Six Foundations, we approached them largely as requirements for building a model properly. But if you lead a brand, the more important question is: why does this matter to me?
Each foundation exists for a business reason. In developing the Six Foundations, if we could not explain what better decision a foundation enabled and how that decision could improve a business outcome, we dropped it from consideration.
Seen this way, the Six Foundations aren’t simply characteristics of a good model. They are requirements for turning better understanding into better business performance.
We start with what the business is trying to accomplish, rather than with the data we happen to have or the marketing metrics we traditionally measure.
What does management want to change? Revenue? Profit? Customer growth? And what decisions could change that outcome?
This puts marketing into a more useful capital-allocation conversation. Instead of asking how much budget marketing should be allowed, we can ask:
How much should we invest given the incremental returns available?
That’s a question the CMO, CFO and CEO can answer together.
2. Holistic Design: Find All the Levers
Advertising doesn’t operate in isolation. Sales also move because of price, distribution, competitors, economic conditions, customer behaviour, geography and many other factors.
Accounting for these improves attribution. But the larger benefit is that we learn more about what actually moves the business.
One example is baseline dynamics. We can examine the underlying trajectory of the business and how it varies across markets and over time. We have seen advertising perform better in times and places where the baseline is strengthening than where it is weakening.
That gives us another lever for growth.
The objective isn’t simply better attribution. It is better understanding of the business and more ways to improve it.
3. Predictive Accuracy: Know Before You Go
Explaining what happened is useful. Predicting what will happen is much more valuable.
If management is considering another large investment, we want to predict the incremental outcome, where that investment should go, and whether another course of action would produce more.
We want to know before we go.
The more accurately we can predict the consequences of alternative actions, the less uncertainty surrounds the investment decision.
Accuracy creates confidence. Confidence moves money. Outcomes provide proof.
This is especially important when the problem is underinvestment. If management doesn’t know what another dollar will produce, being conservative is rational. Better prediction can change that calculation.
4. Actionability: Capture the Opportunity
Finding an opportunity isn’t the same as capturing it.
A model needs to operate where decisions can actually be changed — by geography, audience, channel, timing, investment level or other controllable variables.
It also needs to recognize that decisions interact. A media opportunity doesn’t have a fixed value. Its value depends partly on what else the advertiser is doing.
This means we can have individually optimized search, television and CRM programs and still have a suboptimal overall plan.
The objective isn’t to optimize every component independently. It is to find the combination of decisions that produces the best business outcome.
This also has implications for model design. We need to understand how each channel is actually planned and bought, and build the model at a level that allows the best combination of actions we identify to actually be executed.
5. Independent Testing: Earn Confidence
We shouldn’t trust a model simply because it explains historical data well.
Confidence needs to be earned.
That means testing against data the model wasn’t built on, testing predictions forward and, ultimately, comparing predicted incremental outcomes with what happens when the recommended action is actually taken.
Predict. Act. Observe. Test. Learn.
That also creates continuous improvement. Every action produces new evidence. Where prediction and outcome differ, we learn and improve.
For management, this creates a sensible path to scale: start, test, learn and put more capital behind the system as the evidence earns greater confidence.
6. Leverage: How Much Better Can We Make the Business?
This may be the most important question of the six.
Imagine an extremely accurate model that passes every test but discovers the business is already operating close to its potential.
It is a good model. But it hasn’t uncovered a particularly valuable opportunity.
Now imagine another model that identifies a substantial difference between what the organization is doing and what it could be doing.
Perhaps money is allocated to the wrong places. Geographic variation isn’t being exploited. Activities that work particularly well together aren’t coordinated. Timing could be improved.
Or perhaps the biggest opportunity is that the business should simply invest more.
That difference between the expected outcome from continuing as we are and what could be achieved through better decisions is leverage.
Marketing analytics has traditionally emphasized efficiency: How can we make the existing budget work harder?
That’s important, but it isn’t necessarily the most valuable question.
Suppose a business spends $50 million and we find a way to make that $50 million produce more. We have created value.
But suppose the evidence shows it should spend $70 million because the next $20 million can produce an attractive incremental return.
Not investing that money also leaves value on the table.
The constraint shouldn’t automatically be today’s budget.
The objective should be the best business outcome.
The Question That Ultimately Matters
The Six Foundations can therefore be reduced to six questions:
Are we solving something important?
Do we understand what is really driving the business?
Can we accurately predict what will happen?
Can we act on what we learn?
Have we independently tested our predictions?
And finally:
How much better can we make the business?
The first five establish our ability to answer the sixth.
Because the objective isn’t to build the most sophisticated model, or even simply to measure marketing more accurately.
It is to use better understanding, prediction and decision-making to find, value, prove and capture opportunities to improve the business.
That is what a Six Foundations model is designed to do.
The “Advertising:Who Cares” movement seeks to improve the practice of advertising, reversing recent trends that have led to distrust, dissatisfaction, diminishing pride in creativity, and a decline in the appeal of the industry to new graduates.
One dimension of improvement is with the measurement of advertising’s effect on sales (or other KPIs of fundamental importance to the health of the brand and business)
Deficiencies in these methods has blinded advertisers to the consequences of their decisions leading to abuses such as digital ad fraud. Advertising is too often viewed with suspicion or even outright hostility in some C-suites in part because the evidence of contribution is either non-existent or couched in terms that are meaningless to CFO’s or CEO’s. Short-termism leads some brands to under-invest and miss market opportunities.
Measurement and accountability go hand in hand. For advertisers to earn the trust of their C suite colleagues they must be able to both measure their contribution and employ methods that help them reliably and consistently improve that contribution. Stronger measurement methods will set a solid foundation from which marketers can better contribute to the development of business strategy.
We seek to set a high standard for the conduct of practitioners and help business decision makers recognize and reward the value created as a result.
For companies seeking better business performance, one sure path goes through excellence in the practice of measurement.
Setting a high standard for the measurement of advertising effect.
C Suite Goals
Begin by aligning the measurement methods with the goals pursued by the C suite; sales, profit margins, new customers acquired or other metrics considered vital to brand and business health.
Use optimization and simulation technology to connect models of these KPIs to prescriptive analytics.
Measure both the opportunity and risk of plans being considered; use these measures to build C suite consensus around strategic choices.
Hold a Holistic view of cause and effect; develop models and source data accordingly.
Recognize that once a goal is chosen, we need to explain what drives cause and effect for that goal measure.
Include all forms of advertising and marketing communications efforts including PR, DM, Social (including consumer-generated media), Direct, Digital, Promotions, Sponsorships. Owned and earned as well as paid media.
Models should use audience measurement data of high quality. Reference the Who Cares Measurement and Accountability manifesto covering this topic in depth. (link)
The measurement of business lift due to the creative used should be quantified. At the same time, it may be that creative executions used in market do not show sufficient variation to be measured in these kinds of models; in which case other techniques designed specifically for the evaluation of creative need to be used in parallel.
Consider both short and long term effects of advertising; avoid over-focusing on the short term. Recognize the asset value media spend and creative together generate.
Enable balance points to be weighed through prescriptive analytics:
Short vs long term; varying planning windows
Offline vs online
Brand vs promotion
Channel mix design
Certainly, advertising will contribute, but so will factors that are not under the control of the advertisers but that can affect outcomes.
All, or at least the most consequential, of these factors should be taken into account. These could include, beyond advertising itself:
The economy; local, national and international
Category dynamics such as technology developments
Competitor moves e.g., new product launches, pricing dynamics
Distribution decisions; including the type and quality of sales outlets
Operations decisions such as credit, manufacturing capacity and supply chain management
Weather, where the category is sensitive to variation
Other, as relevant to each brand
Build models to a high standard of accuracy
To measure business effect, models should be built to a high standard of accuracy.
Aim to explain at least 90% of the variation in outcomes over the calibration period
Test the model against hold-out periods and again when implemented, to predict outcomes over a time period relevant to decision making while maintaining high levels of accuracy
Models should be designed to be as actionable as possible
grade proposed solutions by the ability and ease of translation into buying
avoid overly-theoretical models that are impossible or at least difficult to translate into buying guidance
if required, link a multi-channel model to channel-specific models to improve predictive accuracy, prescriptive relevance and buying support
Ensure a measurement solution can be tested independently of the developer.
while testing should involve the developer, the results should be transparent to all
build testing over time to prove the model can be trusted and prescriptions derived from the model achieve effects along the order of those predicted
Models should be judged on the basis of the leverage they bring to decision-making that effects business outcomes. What lift in incremental business can the model help us create? At what risk levels? Think of the model as an asset, and its use as analogous to that of a lever being used to increase the force applied to an object. As Archimedes famously said “give me a place to stand and a lever long enough and I will move the world”. Properly applied through simulation and optimization, models can be the lever that can move business dynamics in the right direction and at scale.
Moving from Advertising to Marketing
Our group endorses an ambitious role for the measurement of effect, evolving from a focus on advertising/marketing communications alone to the broader topic of the management of marketing.
Measurements and then prescriptive analytics can support:
pricing decisions
distribution dynamics
creative evolution
product development
customer experience design
Advanced solutions should allow the expression of a conceptual model of ad or marketing effectiveness to be translated into intermediate KPIs and then linked to the C suite outcome KPIs discussed above. Avoid solutions that end with intermediate KPI action plans only.
As with advertising solutions, we recommend vendors and developers be graded for accuracy, actionability and support of sound decision-making that in turn delivers consistent positive outcomes.
Many companies have no systematic capture of their external environment and activities (economy, category, competition, distribution, operations) and marketing investments (resources including but beyond paid media). Marketing should partner with Financial Accounting standards to develop processes. Companies could then organize their internal systems to feed the modeling and reporting data in near real-time.
The industry could exert its wits and collective intelligence to build a standardized non-profit tracker of consumer brand perceptions available to all. Brand metrics can be tied to financial valuation, another outcome of marketing/accounting collaboration. An ambition we hold is to see the development of an ISO standard for ad effectiveness measurement, similar to ISO 10668 standard for brand valuation.
Marketing and advertising effectiveness should in 2020’s be measured by their contribution to the triple bottom line of ‘people’ and ‘planet’ as well as ‘profit’.
