QN#14 On the importance of effectiveness
Economic models are useful for understanding reality. It's important to remember that we cannot fully explain reality with models, but we can get closer to the truth by using these frameworks. They simplify the world, allowing us to understand it better. In economic theory, the neoclassical school often provides a useful simplification of reality, particularly when applied to the context of companies competing for market share.
Furthermore, Economic theory offers valuable insights into how we make decisions. Marginalism is a great example of these. Ultimately, you want your marketing budget to be spent where it will generate the most revenue, correct? Therefore, you should aim to spend on every channel and strategy up to the point of equal marginal ROI. Before you rush to enroll in a microeconomics course, read on!
How to get abnormally good results?
The simplest economic models of a company tells us that in the short term, a given company will produce as many products as long as the marginal cost is lower than the marginal revenue, to the point where they equate each other.
That situation would generate “economic profit” (details here) which is a desired but unattainable situation in the long run, in perfectly competitive markets.
Prompted by those amazing profits, more companies enter the market, the price goes down and our initial company will produce a quantity to sell at a price that enables to earn a “normal profit”.
This simple model works under the following circumstances:
Homogenous product
Great quantity of buyers and sellers
Absence of barriers of entry and exit
Companies aim to maximize benefits
How to get abnormally good results? It’s almost impossible
One way to approach this, is to look at deviations from the preconditions of the model that leads to normal profits. Let’s take 2, 3 and 4 for granted, they talk about external factors often out of our control.
Instead, lets’s focus our attention to 1, with the broad lens of the 4Ps: product, price, promotion, place. If our company is able to justify a meaningful difference in one of those 4Ps, we are in a better shape to sustainably get abnormally strong results.
However, how likely is it? For the very vast majority of companies, not that much.
Product: Most often the products are fundamentally equal to each other: a shampoo or a detergent will get the job done, in a similar way, for the vast majority of consumers. Of course the brand and the performance of the product would be different in the degree of how well they perform the job, but not in a fundamental way. That’s why products compete with each other, because people consider them valuable alternatives.
Price: again there are differences, but most often the competitors operate under the same principles. Selling at 3€ vs. 2€ does not really make you fundamentally different. What would be different? The Nespresso model of machine+capsules was different for many years, the Spotify music subscription model was also different… Having just a slightly different price point, is not really a difference.
Promotion: most companies have similar marketing channels and media strategies to each other. Of course some do better than others, but that’s not sufficient to generate relevant “economic profit”
Place: the healthiest strategy here is to be in all places where shoppers are, which leads to no differentiation. Can you be creative? Of course, like all those D2C companies that tried but ultimately resorted to selling wherever shoppers are.
So, for the vast majority of companies, “economic profit” is a quimera in the long term, because we operate in competitive markets and we are not fundamentally different from our competitors.
So, what’s left? Doing a little better, everyday
It’s all about doing the best we can with the resources we have, trying to improve a little bit everyday. Will your a better MMM process and methodology give you a competitive advantage? It may do in the short term, but not in the long term. Nevertheless, you have to do it because that’s what best-in-class companies are doing, and it’s just needed to stay in the race.
That’s the game we are in. The game of endless optimization. The race can’t be “won”, but that’s not the point. We just need to keep moving.
Industry updates
The hidden 50% of your ROI
Google has published an article with solid datapoints on long term ROI multipliers and brand vs. performance budget allocations. These are based on MMM projects across different research vendors, it's a great starting point for strategic 2025 marketing budget discussions.
The Python version of Project Robyn is open for beta testers
Up until today, using Robyn was almost equal to using R. This has changed! As Meta has announced a a Python version of Robyn. This was possible thanks to AI, as they state in the page:
The R-to-Python porting was completed leveraging the latest Large Language Models (like Llama) and open source AI frameworks, demonstrating both the power of AI and our ongoing commitment to equip entrepreneurs and advertisers with cutting-edge, best-in-class measurement tools.
A new library for calculating LTV
The Meta Marketing Science team has released a new library for calculating LTV which will be useful to feed bidding algorithms with metrics beyond revenue. These initiatives are key to ensure optimization towards the long term profitability of a business.
The problem on LTV vs. effectiveness is rooted in the inability that we have to accurately and reliably measure the long-term impact of marketing campaigns on revenue, not to say in customer lifetime value. Smart marketing and branding efforts play a crucial role in boosting LTV by building strong customer relationships, increasing brand loyalty, and ultimately driving repeating customers and higher value over time.
Aren’t you a Mark Ritson follower?
Some Mark Ritson best moments in YouTube, when he discussed about the moment he commented a post on LinkedIn telling the author that the model “sucks ass, basically, right? please go and read more and stop doing this”. This interview for the Marketing Architects podcast is a great introduction to Mark Ritson in case you do not know him.
And of course the Mark Ritson's Top 10 Marketing Moments of 2024:
Two great videos to upgrade your marketing skills!
Chart of the week
Con mi burrito sabanero voy camino de Belén 🎵 🎶… Tuqui, tuqui, tuqui… tuqui, tuqui, ta… 🎵 🎶 Depending on where in the world you live, this has been part of your Christmas soundtrack. Google Trends certifies it, highest ever interest!
As a musical closure, here the latest version by David Bisbal, it is never too late to close Christmas. (Did we say happy new year?)