Econometrics is the creation and use of mathematical models to represent economic systems in the real world. These can be used for an entire economy, an industry, or a single company. Econometric modelling can help with analysing multifaceted market programmes. It also aids in identifying the factors that drive growth, marketing performance and those that decrease the demand for a product or service.
Econometric models are also used to identify the economic forces which affect cost and supply within an industry. Having a deep understanding of these forces can help in the creation of business planning and strategy.
What are the applications of econometric models?
Econometric models can provide powerful insights to help companies forecast and manage the future.
Marketing mix modelling (MMM)– is a common tool that is used to evaluate marketing Return on Investment (ROI). All marketing investments should be modelled on MMM as it can help achieve optimal marketing budget allocation. For example, MMM can help determine and compare the cost of television advertising compared to radio or the online equivalents. It can also help companies to understand if they should invest more in hiring sales personnel or in advertising.
Marketing mix modelling is a method which can help to measure the impact of different marketing efforts on sales. The main reason that brands should use MMM is to help them understand the extent to which each of their marketing costs can contribute to sales as well as how much a brand should spend on each activity.
Demand forecasting –This is another common use of econometrics which helps in decision making and marketing planning for a business.
For example, using macroeconomic data, an econometric model could help a restaurant brand identify the impact that the growth in the number of working women in the U.S. continues to play in the growth of the restaurant industry.
Demand forecasting reduces risks that are related to different business activities and helps brands to make better decisions. Understanding different variables can help in forecasting an industry’s future.
How can we us benchmarking through marketing econometrics?
Econometric models are often built on benchmark performance statistics. Benchmarks are standard metrics which brands use to compare their results against their competitors or, against the industry as a whole. Benchmarks can help to identify a business’s competitive advantage and highlight areas where the brand is under performing. Some of the typical marketing benchmarks worth factoring into a marketing econometric model are:
- Brand recognition – The percentage of a target market that identifies the brand logo compared to rival brands.
- Brand recall – Percentage of the target market that can remember the brand when prompted with a product category.
- Top of mind – Percentage of the target market who can identify the brand first when prompted with a product category.
- Customer loyalty – The number of customers who buy from the same brand with a frequency that is considered loyal in the industry.
- Customer satisfaction – The percentage of customers who are happy with the brand when compared to the competition.
- Product performance – A measure of product efficacy against the competitor set.
- Ratings – Reviews from customers with ratings.
- Market Share – The percentage of total industry sales in the product category that is captured by the brand.
- Customer perception – How customers perceive the brand within the industry. Example, which hotel is more reliable?
- Share of wallet – The percentage of spend for a product category that customers spend on the brand.
- Customer acquisition cost – Cost of acquiring a customer versus the industry standard.
- Customer retention rate – Percentage of customers that brands do not lose within a certain period.
- Customer lifetime value – An estimated amount that existing customers spend on the brand until the end of the relationship.
- Price – Bench-marking a brand’s price in the market versus the competition. It is used to optimise pricing strategy.
- Costs & Margins – Benchmarks of profitability and efficiency like cost per unit. Within a price competitive market, lower cost per unit is obviously a major competitive advantage.
- Conversion rate – Percentage of visitors to a website who purchase the product.
- Reach – The percentage of a target audience that a brand can reach with marketing messages.
- Engagement – Measurement of customer engagement such as the amount of time they spend on a brand’s website.
When brands are aware of these performance statistics, they will be able to identify opportunities to optimise sales, marketing and operations. Bench-marking allows brands to compare figures and effectively manage costs. Any kind of business can leverage benchmarking. It can provide answers to important questions such as; How is the business likely to perform over the next two years? and, How can processes be improved?.
How can performance statistics help in benchmarking and creating marketing econometrics?
When brands are aware of important statistics, it will help them to gain a better understanding of the industry as a whole. Knowing performance statistics can help brands to measure their progress against the competition.
Benchmarking a brand’s performance can provide a range of benefits including:
- Enabling brands to set performance expectations.
- Giving a better understanding of how brands are performing against competitors.
- Identifying areas that need improvement.
- Allowing brands to track performance and achieve strategy changes.
- Supporting brands in developing standard metrics that can be used to measure performance.
- Building a company culture that embraces continuous development.
- Providing brands with a better understanding of customer needs and expectations.
When brands don’t benchmark, it can mean missing out on crucial opportunities. It can also mean that the brand is measuring the wrong data. This can lead to brands pouring their money into activities that will not provide a return of investment.
Data driven budget allocation using mix-modelling
CMOs can use marketing mix modelling to prepare budget allocation decisions. The insights that can be delivered by mix-modelling allow brands to divide limited resources and use them efficiently. This means savings are made and an accelerated return of investment can be expected. Marketers in every industry have adopted mix modelling approaches due to the fact that it helps in improving business operations and in creating strategic marketing plans.
None of the above is complex, but it it can sometimes feel that way. However, not understanding the concepts can be dangerous. Implementing strategy around econometrics could be one of the actions that can almost immediately boost the growth of a business.