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Return On Investment (ROI) 42. How should we interpret these ROIs? First, it should be understood that the ROI calculations are not on total dollars spent, but on the incremental dollars spent from month to month. Companies vary their marketing spending from month to month, and, as they do so, their revenues change accordingly. The ROI measures we calculate reflect the average increase in revenues per incremental dollar spent in any given month. So if in any given month a company increased spending on detailing by $1.00, that would generate (on average) an additional $1.72 in revenues. Also, note that the ROI numbers should be interpreted "within the range of the data." This means that it would be incorrect to extrapolate the ROI numbers beyond what a brand typically experiences on a month-to-month basis. So if a brand has been using detailing pretty steadily at an average of about $1 million per month (or $12 million per year), it would not be safe to say that if we eliminated detailing, sales would decrease by $12 million x $1.72 = $20.64 million, or that if we doubled the budget to $24 million, we would gain $20.64 million in revenues. That great a change in detailing expenditure is beyond the range of the particular product's experience. The regression uses the changes in spending it typically sees to derive the ROI. It does not typically see the complete elimination of the detailing budget! Putting it another way, the margins of error we report would be much larger if we were considering drastic changes in the marketing budget. 43. For a drug launched in 1994-1996, what can you say about its ROI in 1997, 1998, and 1999? The ROI numbers are based on all available data for each brand. So for the brands launched in 1994-1996, the data analyzed cover 1995 through 1999, and so the ROIs shown represent the average effectiveness of marketing over the entire time period. 44. How do these ROIs compare to other industries? They correspond fairly well. However, in other industries, they typically do not calculate an ROI measure, but rather look at "elasticity." Elasticity is similar to ROI, but it's expressed in percentages (percentage change in sales per percentage change in marketing expenditure). In fact, an exercise was done early in the process by looking at what has been learned about advertising from previous studies, and how that compares to the current study. First, we looked at a major review of empirical advertising studies (Assmus, Farley, and Lehmann, Journal of Marketing Research, February 1984). This review spanned 22 separate studies encompassing 128 different analyses, and included industries such as frequently purchased products, food, durables, and even a small number of "pharmaceuticals and toiletries." The average short-term elasticity was .22. To be conservative, we used as a benchmark a long-term elasticity of .1. This means that a 1% increase in advertising resulted in a .1% increase in sales. This elasticity was then extrapolated to our study expenditures and sales. So consider a $209 million brand that spends $221,000 monthly on journal advertising. It receives 229,000 scripts monthly at a price of $76 per script. A 1% increase in monthly advertising is thus $2,210, and a .1% increase in scripts (the assumed elasticity) would translate to 229 additional scripts. Multiplied by $76, that means an incremental $17,404 in sales. So, an investment of $2,210 in journal advertising generates $17,404 in sales, for an ROI of approximately $8. This is obviously just a rough calculation because the elasticity, as well as current expenditure levels, can differ for many brands. But the results suggest that ROIs of $5-$10 are certainly not incompatible with previous research on advertising effectiveness. 45. Point of clarification: The ROI study results are for incremental sales, not profits? Therefore, to truly calculate the return, shouldn't one subtract $1.00 from each measure to show net ROI? Yes. You might want to subtract even a little more than that if you want to include variable product costs or other cost allocations. 46. Have you looked at ROI for the four promotional vehicles by drug category? No, that wasn't done for this analysis. It is, however, planned for in the next phase. 47. Can you model brand ROI by physician specialty? We cannot conduct a separate analysis by physician specialty because not all data are organized in this manner. |
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