Reprint: R0805J
Measuring the effectiveness of marketing investments can be frustrating—especially if a company focuses on a long-term outcome like increasing customer equity. Though there are decision-support models to help marketers allocate their budgets, until recently such models aimed to maximize near-term sales, which aren’t always consistent with long-term brand health. Now, however, Wachovia has created a model that helps it make customer-equity-driven marketing-mix decisions.
The model’s architects—Hanssens, a professor at UCLA; Thorpe, a senior vice president at Wachovia; and Finkbeiner, an executive VP at TNS—began by parsing customer equity, or the lifetime value of customers, into three measurable components: customer acquisition, customer retention, and share of wallet. They then assembled data on past marketing activities and changes in the components—a daunting task, given the decentralized nature of previous investments. Once the database was created, a model of how investments affected outcomes could be built and used to design equations focusing on marketing-mix questions. Wachovia now has, for example, an equation to estimate how an increase in cable TV advertising will affect customer acquisition in a market. Just as important, the model highlights how much factors beyond the control of marketing, such as economic swings, affect outcomes.
After Wachovia began using the model, it found, as suspected, that a marketing mix with maximum short-term impact would not achieve the biggest increase in customer equity. Wachovia learned that it was overinvesting in traditional channels and underinvesting in emerging ones. The introduction of this decision-making tool has also supported a broader cultural shift at the company toward competing on analytics.
