Marketing mix modeling (MMM) estimates the return on investment (ROI) of the marketing campaigns and optimizes the marketing mix. It is the use of statistical tool to analyze the impact of past marketing activities, understand present trends and predict its impact on future sales. Marketing mix modeling consists of four marketing mix variables (4Ps): Product, Price, Promotion and Place. The entire MMM approach stands on the fact that it helps measure the impact of the 4Ps in driving desired customer action i.e. sales or conversion.
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The marketing mix modeling strategies were initially used in Retail and Consumer Packaged Goods (CPG) industry as it faced high competition with low profit margins and low involvement products. These products have a low level of customer loyalty as customers tend to switch to other brands easily. These issues are not limited to one industry only, but endanger all the other industries. With the rise in demand, there has been an increase in the competition as well, which means the consumers have more options to choose from. This has coerced the manufacturers and retailers to leverage the benefits of marketing analytics in order to understand the consumer behavior and gain consumer insights. These insights have had a strategic impact on the organizations success and has helped them gain a sustainable competitive advantage over the other companies.
The new wave of media channels and mediums, and the easy availability of data has driven the organizations to adopt marketing mix modeling in it performance measurement metrics and thereby promoting a data-driven approach and informed decision making. Marketing mix modeling mirrors past marketing decisions and the return on investment, thereby forecasting the future impact on the marketing variables. However, organizations should understand that MMM isn’t a sure shot ladder to success, it requires time, effort, accurate data, and involvement of every function to drive success. The organizations should also realize the impact marketing mix modeling has on their business as it helps in quantifying the impact of the marketing spend on actual sales or conversion.
Identifies Drivers, Quantify the variables and Optimize Spend
Marketing mix modeling helps to determine the factors that drive the marketing activities, categorizing them into external and internal factors. These factors that impact the performance could be anything right from the 4Ps of marketing mix to economic conditions and trends. MMM further helps in quantifying its impact and comparing its ROI, providing insights for budget planning, budget allocation and spend benchmarking. Also, it enables the marketers to select the optimum marketing mix across different channels by analyzing the impact of every medium on its marketing activities.
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Identifying the Opportunity Cost of Marketing Activities
Marketing mix modeling helps in forecasting the increase in the revenue i.e. the ROI and marketing effectiveness, thereby providing insights for future decisions. It enables marketers to make better decisions based on a data-driven approach and understand the effect of short term marketing activities versus long term marketing activities. Marketers must understand that a short term campaign might give them higher revenue but long term marketing campaigns can have an impact on the consumer’s perception and thereby impacting consumer behavior in their favor.