Three questions to check if Econometrics is the right technique for you.
Econometrics, which when applied to marketing is known as Market Mix Modelling or MMM, is a data-driven technique. It uses changes in likely factors (including marketing) to measure their impact on a KPI like sales.
It can seem daunting when considering Econometrics / MMM for the first time. Here are three questions to ask yourself to make sure MMM is right for you.
Question 1: Scope
What questions do I want to answer ?
The first thing to consider is what are my marketing questions and will Econometrics address these? Econometrics / MMM is a powerful tool. It can provide all sorts of answers, including:
- What is my ideal mix of marketing channels: TV, Search, Radio etc… ?
- Should I invest in marketing throughout the year or prioritise certain seasons ?
- Can I increase prices ?
- Which competitors are stealing more from me this year ?
- My budget has been reduced by 10%, where can I cut marketing but minimise the impact on my business ?
- How much do I need to spend on marketing to grow sales by 5% next year ?
As Econometrics / MMM looks at all drivers of a KPI, both marketing and non-marketing, it is great at measuring the big picture. And most brands want this.
But there are a few brands out there that might not need all this answering. If you only invest in one marketing channel – e.g. search or TV – and you only want to optimise the execution of that single marketing channel then techniques like Digital Attribution or TV Spot-Matching might be more appropriate. These procedures go into more detail within their specific marketing channel than Econometrics does.
That said, having such a blinkered approach can be dangerous. Neither Spot-Matching nor Digital Attribution consider the factors impacting your brand outside their channels. You risk mis-measuring your marketing campaigns if outside factors are having a big impact – e.g. Covid, the economy, weather, competitors etc… You could also miss out on potential growth opportunities by being so focused on one marketing channel only.
So even if you only currently invest in one marketing channel you still might want to consider Econometrics / MMM, especially if your brand responds to outside factors like the economy or weather.
Question 2. Size
Is my marketing budget large enough to justify Econometrics ?
The gains from a Marketing Effectiveness project like Econometrics are proportional to your budget. As a conservative rule of thumb, an MMM project will generate 10% of your annual marketing budget either as savings to be banked or to be re-invested in better marketing.
At the time of writing, the costs of a typical MMM project are in the £10,000s. The exact cost will depend on the number of models you require and how much data is needed. For example, an Econometrics project across two countries will cost more than modelling two brands within the same country, as sourcing data across different countries is usually more complicated than sticking to one country.
If your marketing budget is £500,000 or larger ($600,000+), then you should expect gains of £50,000 or more which will more than offset the costs of most Econometrics projects. Your marketing will be large enough to warrant Econometrics / MMM.
If your annual marketing budget is below £250,000 ($300,000) then there are cheaper Marketing Effectiveness options to consider. You could run a Marketing Experiment to show the value of your marketing. And/or you could use Benchmarks from other brands as a guide on what types of marketing will work for you. A reputable Marketing Effectiveness agency will not push Econometrics on you if your budget does not justify it.
If your annual marketing budget sits between £250,000 to £500,000 ($300,000 to $600,000) then you are a borderline case. You can run an Econometrics / MMM project, but make sure you keep the scope tight and limit costs to 10% of your total marketing budget.
Question 3. Data
Do I have the right data for Econometrics ?
Without knowing your brand and circumstances, the answer is probably yes.
When I started in Marketing Effectiveness in the mid-2000s patchy data was an issue. But today, most organisations look after their data and have access to rich datasets.
If you do have issues it will likely be due to switching data suppliers or media agencies and losing access to historic data. A market mix model typically runs over three years of data, although you can build robust models with less data.
If you are concerned about the quality and availability of your data then ask for a feasibility study. Most reputable Marketing Effectiveness agencies will be happy to offer this. They collect and audit your data to see if it can answer the questions in your brief.
They’ll probably charge a fee for this audit – usually around £10,000 ($12,000) – but this can be taken off the cost of an Econometrics project should you go ahead. It’s very rare that the agency will find that no type of Econometrics is suitable, but they may advise that some of the questions on your brief cannot be answered through the currently available data.
Even in the worst case if they were to find that your data is not suitable for Econometric modelling, it’s likely they’ll provide some marketing insights from analysing your data. And the Marketing Effectiveness agency can advise on what data to track and store, so you can be up and running with Econometrics / MMM in the near-future.
Final Thoughts
I hope these three questions help you decide if Econometrics is right for you.
If you think Econometrics can help your brand then the next step is finding the right partner. I’ve also used the phrase ‘reputable Marketing Effectiveness’ agency a few times in this article. A trustworthy agency will not push an option on to you beyond your budget. They’ll also be willing to conduct a feasibility study before undertaking the Market Mix Modelling.
If you’re considering building an in-house Econometrics team or wondering what type of agency to use, then take a look at my article on this topic.