Promo Planning Without the Guesswork: ROI Analyses Lead the Way

Imagine that establishing a marketing budget was simply a matter of someone saying, "Here, take as much as you need." No more give and take over the numbers.

As improbable as that scenario may seem, the philosophy behind it is quite rational. Most companies would readily allocate whatever their product managers requested if they were assured of a worthwhile return.

Therein lies the catch. Marketers must be able to show what the expenditure will do for the company-in advance and with a specified level of certainty. But no one can predict the future. Or can they?

Experience indicates that it is possible for marketers to know what they can and should expect from every promotional endeavor before they commit any resources. A nine-year analysis of more than 300 pharmaceutical promotional campaigns and their outcomes has shown it is possible to systematically forecast promotional response with R2 values (coefficient of determination) averaging more than 90 percent. With that kind of foreknowledge, marketers can create plans that optimize results. Companies can treat promotion as an investment, not an expense. And they can allocate budgets across products, as well as promotional modalities, within a given product campaign to maximize return.

Budgeting Continuum

This article presents a new theory of what makes promotion work and describes a mechanism for forecasting the outcome of a particular effort. Although many veteran marketers rely-often successfully-on instinct and experience to gauge how effective a promotional effort will be, there is now a more disciplined way to go about it. The reliability and confidence that comes with that discipline commands the attention of those holding the purse strings in a way that gut feelings do not.

Promo Budget Planning

There are six methods of forming a promotional budget, ranging from making purely arbitrary decisions to making calculated investments based on the return they are forecast to deliver. (See "Budgeting Continuum," page 7.)

On the right side of the continuum, as more thought and effort is given to determining the probable outcome of an expenditure, the degree of accuracy increases. The method on the far right, budgeting based on an ROI analysis, is, therefore, the most effective in helping companies allocate their promotional resources for both campaigns and promotional forms within a campaign to maximize ROI.

Once guesswork is removed from the process and marketers can predict with a high degree of certainty what a given expenditure will yield, the whole notion of promotion is elevated beyond the realm of an expense to that of an investment. When that happens, no amount is too much to spend if it delivers the right return. Pharma companies are maximizing long-term returns, not minimizing short-term expenditures.

If promotion is to be understood, valued, and managed, it must be regarded and analyzed as an investment that delivers a quantifiable return.

Scope of the Challenge

In 2000, the US pharmaceutical industry spent $15.7 billion promoting its products through detailing, professional journal advertising, sampling, and DTC promotion. The numbers belie the fact that most pharma companies, like those in other industries, have had no way to ensure that they are spending their money wisely-the right amount in the right places- to achieve their marketing objectives. Unfortunately, a promotional plan that directs too much spending to the wrong place or not enough to the right place can cost tens of millions of dollars in profit in just a few years. Today, most pharma companies' budgeting practices fall in the middle of the budgeting continuum, often blending several approaches.

Many companies use the "percent of sales" method, reasoning: "That product represents 28 percent of our sales, therefore, it should get 28 percent of the promotional dollars we have to spend, and it will return 28 percent (or more) of our profit-we hope." The problem with that line of thought is that the product that is returning 28 percent or more of sales may be promotionally inelastic. (See "Product Managers' Glossary," page 8.) If that were the case, the product would produce the same profit whether the company spent 15 or 50 percent of its promotional dollars on the product. Planners should not confuse a marginal increase in sales with an increase in profit. It is entirely possible that an increase in promotion will yield an increase in sales, but if the product is promotionally inelastic, the cost of producing that gain will be equal to or more than the gain, and profits will remain unchanged or fall.

Another popular method of budgeting is to seek competitive parity. Under that method, if the competition spends $35 million, a company reasons that it must spend the same. That assumes that the competitor knows what it is doing and that the market situation is identical for both companies. Another version of that approach is to develop product launch budgets to match the expenditure of similar products during their own launch. That method relies on history to form assumptions about what will happen. Unfortunately, history doesn't repeat itself, and environmental conditions are not stagnant. A program that worked three years ago may have little or no impact today.

The point on the continuum where promotion ceases to be viewed as an expense and begins to be treated as an investment is the "objective and task" method of budgeting. That method involves thinking through various scenarios and estimating what can be accomplished at each step with certain resources to determine the total promotional appropriation. It requires a breakdown of all the tasks necessary to achieve the overall objectives and a calculation of the costs involved. It strives for the intersection of minimum cost and maximum revenue, but it is only as good as the reliability of the estimated outcomes.

Product Managers' Glossary

The ideal approach is to plan, organize, and execute promotion as an investment. That requires focusing on what can be done, what it will cost, and then adding restrictions that must be met to maximize market share, sales, or profit over the next "X" years-rather than to satisfy the budget for the quarter, half-year, or year. Treating promotion as an investment requires taking a long-term view, because returns are not contained within a certain financial period as expenses are but typically extend over several years. Promotional resource allocation must take into consideration elasticity, the environment, and momentum. (See "Product Managers' Glossary.") Which products are promotionally elastic? What are the environmental conditions, and how do they hinder or enhance the promotion's effectiveness? What does it take to create momentum rather than to simply maintain it?

Intellectually, pharma marketers may already acknowledge that an ROI approach to budget allocation is the best method, but they may be prevented from practicing it because of the complex statistical and analytic modeling involved. Until now it has been a practical impossibility. But, with the research and analytic structure discussed next, the ROI approach can work.

ROI Forecasting

The path to understanding promotional impact is neither simple nor one-dimensional, because it is composed of multiple, parallel, and sequential steps. Nevertheless, the process is understandable and highly susceptible to analytic modeling. (See "Steps in ROI Promotional Analysis.")

The first step in the analysis methodology is to examine the key environments into which a campaign will be introduced: market, promotional, product, and disease. The goal is to understand and quantify all aspects of the environments that sustain or impede a promotion's effectiveness.

That groundwork involves collecting 60 months of data and applying several investment and economic concepts-concentration, elasticity, instability, acceleration, velocity, momentum, and consistency-to gain insights into the current market conditions.

Market environment. For the full set of competitive products, marketers must determine:

• the size of the market as measured by the number of new prescriptions each month

• how uniformly the market share is distributed across the competing products (concentration)

• the rate of growth (velocity)

• whether that growth is constant, or changing (acceleration)

• how variable the new prescription volume and market share are from one month to the next (instability)

• the market's momentum and whether it is being maintained.

Promotional environment. Initial analysis mirrors that of the market environment:

• How much promotion is taking place and what is the full promotional level and mix of each competitive product?

• How concentrated is the promotion? That is, is everyone promoting-and at what levels?

• How well balanced are the various promotional campaigns across media?

• Is the level of promotion growing or declining, and at what velocity and acceleration?

• To what extent did past promotional campaigns succeed in creating instability in new prescriptions and market share?

• How consistent are the promotions of each product and the aggregate of all products?

Market researchers must also ask:

• Is the competitive set promotionally responsive (elasticity)? How much impact do various campaigns have, and how do the level and mix within the campaign influence the success?

• How do the promotional forms interact with each other over time?

• How does the concentration of market share affect promotion and its ability to work?

Product environment. PMs must understand and quantify the following variables:

• the number of products in the competitive class

• the number of therapies that the product competes against

• the ages of competing products and therapies

• whether the product is a first-line therapy

• the product's entry position in the market-first to market, second, and so on

• the objective measures of quality that exist for the product under study and each of its competitors.

Disease environment. An analysis of the disease environment involves knowing:

• the severity of the disease being treated, and whether it is chronic or acute

• the number of competing therapies

• how prevalent the disease is and the demo- graphics of those afflicted

• how easy the disease is to diagnose

• the disease's differential diagnoses.

The next step is to feed the data into a series of interlocking and cascaded models that will isolate and forecast the impact of the promotional effort being studied. No one-dimensional diagram can adequately illustrate the analytical flow at that stage because the work takes place on multiple levels, some in parallel and some in sequence. The schematic is highly simplified. In all, six models are required at the market level and ten at the product level. Those 16 models must fit together in a way that explains various measures and creates as good a model as possible of new prescriptions and market share. That analytic process has two goals: to provide good strategic and tactical understanding of the marketing and promotional environments and to provide a good forecast of new prescriptions and market share.

Steps in ROI Promotional Analysis

The first series of models are built at the therapeutic class level to determine the promotional elasticity of the class and to understand the role of each promotional mode in the mix and how it interacts with all the others. That insight is used to forecast the size of the market overall. The output up to that point is then fed into analytical models at the product level to predict how a campaign would account for new prescription volume and market share for the individual product.

A Case in Point

A good way to appreciate the power of a promotional ROI analysis and projection is through an example drawn from real life.

The product under study was mature and marketed primarily to primary care physicians and one specialty patient group. The therapy had a new indication that was being promoted through professional detailing, sampling, meetings and events, professional print advertising, and DTC print. The marketers wondered about the profitability of adding a DTC television campaign to the overall promotional program. Because that effort would involve tens of millions of dollars, the company wanted a solid understanding of the likelihood of getting a substantial return on that investment.

At the outset, the situation was as follows:

• The competitive set included more than 35 products.

• The product had been around for five years.

• It had been promoted with its new claim for 18 months, through professional modalities and DTC print.

• The company wanted to target a specific subgroup of the consumer population.

• The company's sales force had been cut several years earlier.

The bottom-line questions were:

• Should the company undertake the DTC television effort?

• Could it start the effort next year?

• What was the ROI likely to be?

• How could the company maximize ROI?

• What should the professional side of the campaign look like?

Assessment

Several key facts came out of the environmental analysis segment of that research. A look at the market environment revealed:

• rapidly declining market growth rate

• negative growth acceleration, implying that thegrowth rate would continue to decline at an increasing rate

• declining market concentration, indicating that the key products were losing control of the market

• diminished instability patterns, showing no sign of returning

• promotionally elastic market/therapeutic class whose instability levels could be increased and converted.

Within the product level models, key findings suggested that the product under study was promotionally very elastic, that the proposed DTC campaign could destabilize the entire market, and the current professional campaign was grossly underfunded and considerably "out of balance." That is, the professional campaign was spending too much money on some modalities and not enough on others. In addition, the level of effort on the professional side was considerably out of balance with the proposed DTC effort; the marketers needed to either decrease the proposed DTC spend or increase the professional spend.

Forecasts and Actual Results

Recommendation

The research recommended that the professional campaign could and would convert a substantial amount of that instability into growth for the studied product and produce an enormous return on investment-more than 700 percent.

The researchers' recommendations emerged from a thorough analysis of three key environments: market, promotional, and product (the disease environment was constant over the research period). The analysis and creation of the 16 models had as their principal goal the prediction of new prescriptions and market share but offered strong strategic and tactical insights. That came about by simply understanding what impact the campaign would have and how it would affect each measure.

The analysis showed that the DTC television campaign, in combination with the rest of the campaign, would create strong market instability and very good market growth. Under those conditions, it is mandatory to have a solid, well conceived, and balanced professional effort to convert that instability and market growth into growth for the product being studied.

The analytic structure strongly suggested that the current professional effort was grossly insufficient to handle the instability and consumer activity that the proposed DTC television and print effort would create. If the professional effort were not increased, there would be substantial opportunity losses. Note the term "opportunity." The DTC campaign as originally proposed could have made money and would have delivered a nice return on investment-but by no means would it match what it could and should produce.

The basic recommendations, therefore, boiled down to the following: Yes, the company should launch the DTC campaign. But it should delay it six months and, during that time, the company should hire at least 170 sales reps, increase the size of its professional print budget by $1,400,000, keep the amount of sampling in step with the detailing effort, and increase all aspects of primary care promotion.

Marketers adopted those recommendations as proposed and achieved results that were ahead of forecast-732 percent net ROI. (See "Forecast and Actual Results.")

Leave No Stone Unturned

When companies are profitable, they are rarely aware of opportunities they have lost along the way. But by conducting ROI analyses as part of their promotional planning, they can uncover all the possibilities open to them and know which ones are the best options. It is a matter of selecting the best, because theoretically, all forms of promotion can work if they are done correctly, under the proper circumstances, and budgeted properly. The key to analyzing promotion as an investment lies in projecting it over several years, not just for one or two quarters. The life cycle of a product does not exist as a series of independent, discrete time periods; it is a seamless continuum that builds and holds momentum over time. The evolution of a product and its promotion cannot be planned and managed as distinct, independent events.

As in any case, there is great value in analyzing both successes and failures. Understanding why something fails is important, but it does not necessarily teach what to do. Analyzing success can create much more insight into what should be done. In truth, however, a balance of the two creates the broadest insight.

To perform an ROI promotional analysis, PMs must evaluate the company's various investment strategies and tactics for spending its promotional dollars-before laying out a dime-and select the ones that are the most profitable. The concept has always made sense. Now it is a vital step in the promotion planning process. The promotional ROI process outlined here creates solid strategic and tactical input for both allocating promotional dollars across products within a company's portfolio and for allocating a given product's budget across promotional modalities.

The thought process generated by a promotional ROI study, as well as the insight gained concerning promotional impact, can dramatically change the way marketers fund and conduct all promotions.