© 2013 Catalyst The Case for Incrementality How to Measure the Real ROI of Your Marketing Programs By Marc Solomon, Director of Analytics, Catalyst 6/3/2013

Executive Summary 2 In marketing, what matters is not how much your target audience bought, but how much more they bought because of your marketing That’s incremental sales, and it drives your true ROI This white paper will show you how to calculate it

Incremental Sales 3 Revenue gained from a marketing activity that would not have been generated without that marketing activity

Example: Assessing Two Campaigns Let’s compare the results of two hypothetical campaigns: Each required $100,000 of marketing investment Sales from targeted customers: Campaign A: $500,000 Campaign B: $250,000 Campaign A looks like the clear winner: It generated double the sales, didn’t it?

Quick Analyses Can Mislead 5 But what if Campaign A targeted customers who would have spent $500K anyway? The $100,000 marketing spend did nothing for you – no incremental sales And, what if Campaign B targeted prospects who would not have purchased anything if you hadn’t invested your $100K to reach them? Campaign B now looks like a better investment

Focus on Incremental, Not Total Sales 6 B is the clear winner!

How to Measure Incremental Sales 7 Create a baseline to represent the “business- as-usual” results: Ideally, a controlled experiment to isolate the factor you’re trying to measure (e.g., impact of a marketing campaign): Pick a control group: A random portion of your target audience who will not be marketed to Must look just like customer group who will receive marketing to ensure apples-to-apples comparison

How to Measure Incremental Sales 8 Incremental Sales Calculation: Sales from Targeted Audience – Sales from Control Group You can definitively attribute the difference to your marketing campaign

Alternative Baseline Approach 9 Sometimes it’s not feasible to create a control group without exposure to the marketing: Historical trends can be used to estimate the baseline sales you’re expecting without the new marketing However, this isn’t highly reliable and can potentially lead to incorrect conclusions

Incremental Channel Impacts 10 A parallel approach can assess the impact of specific marketing channels on sales: The key is comparing results between groups of customers who are generally similar except for marketing exposure

Practical Considerations 11 Measuring incremental sales works well in direct marketing … but is difficult to do with mass marketing/advertising where it is hard to create an identical random control group It is typically worthwhile when there are large target audiences and there is minimal opportunity cost to holding out a statistically significant control group If you can’t measure incrementality directly, use historical trends and forecasts … you’ll still get a more accurate read of your real ROI

Final Words 12 Incremental, not total, sales should always be used to determine your marketing ROI.

About the Author 13 Marc Solomon, director of analytics at Catalyst, holds an MBA from the Stanford Graduate School of Business. He has leveraged analytics to drive results for Fortune 500 companies for nearly 20 years.

14 Catalyst is a direct and digital marketing agency that knocks big data down to size. We pair insight with analytics to take the guesswork out of marketing decisions. Think of it as Science + Soul. About Catalyst /scienceplussoul