Using marketing mix modeling to increase ROI

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Marketing mix modeling analyzes the effectiveness of each marketing campaign in terms of its contribution to sales. Marketers use the results of this analysis to adjust their marketing strategies, optimize their marketing plans, and predict sales when modeling various scenarios. In this article, we look at the analytical part of the marketing mix model.

Contents:

What is marketing mix modeling?

Marketing mix modeling analyzes the development and promotion of a company’s product on the market. It measures the potential value of all marketing resources in terms of sales growth.
The purpose of marketing mix modeling is to develop a strategy that will increase the perceived value of the product and increase the company’s long-term profit.

What elements does the marketing mix model consist of?

Basic 4P model

The marketing mix model consists of four main elements: Product, Price, Place (distribution channels), and Promotion.

4P model

Each of these elements answers a specific question.
Product: What is needed by the market and target audience?
Price: What should the product cost?
Place: What is the optimal distribution model to deliver the product to the customer?
Promotion: How will information about the company’s products be distributed in the market?

Modern model

Since the 4P marketing mix model was first introduced in 1960 by Edmund Jerome McCarthy, marketers have complemented it to fit the modern market.
Of the attempts to modernize it, the addition of a fifth element – People – as well as additional elements including Process and Physical evidence can be considered more or less successful.

Updated marketing mix models:

5P model: 4P + People. Answers the question, How should your employees be perceived by customers?
7P model: 5P + Process + Physical evidence. The Process element answers the question, How can we optimize the process of creating and delivering the product to customers? The Physical evidence element answers the question, How can the appearance of your store influence the buyer’s decision?

7P model

How to do marketing mix analysis using the marketing mix model

We now turn to the analytical part of the article.

The marketing mix model is an analytical approach that uses historical sales data and internal company data to determine the impact of various marketing activities on sales.

Working with the marketing mix model consists of three stages:

  • Pre-planning stage. This stage includes analysis of historical data such as sales, expenses for all past advertising campaigns, and ROI. With OWOX BI Pipeline, you can automatically collect website data, ad campaign data, expense and revenue data, and CRM data.
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  • Planning stage. This stage consists of predicting and evaluating the effectiveness of marketing efforts. At this stage, the marketing mix model helps you predict sales and conversions across advertising campaigns and allows you to properly allocate your budget to optimize ROI.
  • Results tracking stage. This stage involves tracking the effectiveness of all marketing variables, modeling spending scenarios and, if necessary, adjusting marketing activities.

Important to remember: Since the marketing mix model uses historical data to evaluate marketing effectiveness, it’s not an effective tool for analyzing new products. The relatively short history of new products makes the results of the marketing mix uncertain.

The marketing mix model uses a regression method for studying the effect of one or more independent variables on a dependent variable. Independent variables are otherwise called regressors or predictors, and dependent variables are also called criterion variables. The analysis performed using this model is then used to extract key information and new marketing ideas.
So the dependent variable can be sales or market share. The most commonly used independent variables are price, TV costs, outdoor campaign costs, advertising costs, and website visitors.

An equation is formed between dependent variables and predictors (independent variables). The beta generated from regression analysis quantifies the impact of each marketing channel. Essentially, the beta shows that increasing the input value by one unit will increase sales / profits by beta units, assuming that other marketing resources are constant.

equation for MMM

After assigning the variables, several iterations are performed to create a model that accurately explains the volume and cost trends. Further checks are then performed using either validation data or a sequence of business results.

In the marketing mix model, sales are divided into two types:

  • Base sales occur when there’s no advertising for a product. These sales come purely from the brand image that’s been created over the years. Base sales are usually fixed, unless there are some changes in economic or environmental factors.
  • Gradual sales are generated by marketing activities such as television advertising, print advertising, digital spending, and advertising campaigns. The total number of gradual sales will be divided into sales for each resource to calculate the marketing contribution to total sales.

Important to remember: The relationship between marketing and sales can be radically different during startup and stable periods. For example, the initial sales of Coke Zero were very poor, and reports showed ineffective advertising. Despite this, the Coca-Cola company increased their spending on media and has raised the effectiveness of their advertising several times since the launch. A typical marketing mix model would recommend reducing media costs and instead increasing the price of a product. Therefore, you need to take into account all the factors of your current situation.

How to apply the results of analysis

Optimize your budget

The results of the marketing mix model can be used to simulate marketing scenarios using so-called what-if analysis. Marketing managers can use this analysis to reallocate their marketing budgets and see the direct impact on sales/costs. They can also use what-if analysis to optimize the budget, allocating money for those activities that provide the maximum ROI.

Increase advertising effectiveness

The marketing mix model can be used to analyze the influence of marketing campaigns on various aspects. The contribution of each element to the overall plan will be a good indicator of how the effectiveness of various elements varies over time.

If you use TV advertising or promotions, you need to conduct more complex analysis to show the increase in sales if you increase the corresponding marketing element by one unit (as described with beta units). If you have detailed information on expenditures for each marketing activity, then you can calculate ROI. Based on the ROI, you can then determine the most and least effective marketing measures.

Wrapping up

The marketing mix model helps you understand how your marketing affects sales. It also helps you determine the most effective advertising channels, predict the results of your current marketing decisions, and optimize your marketing budget.

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