Marketing Mix Modeling can best be introduced through John Wanamaker’s famous quote: “Half of my advertising money goes down the drain; unfortunately, I have no way of knowing which half.”
Marketing Mix Modeling MMM offers marketers the critical measurement tool to explore this question of budget allocation and understand which parts performed best and which did not.
MMM employs advanced statistical techniques on historical data to efficiently disentangle sales drivers, assess contributory factors, measure marketing ROI across every individual marketing channel and predict future performance and optimize budget allocations – all using MMM’s methods which have shown up to 20%-30% improvements in marketing spending efficiency thanks to media optimization (Gartner 2016).
Marketing Mix optimization is an essential element of successful marketing strategies, as it offers a scientific method to develop profitable plans using knowledge gained from past performance.
What is Marketing Mix Modeling (MMM)?
Marketing Mix Modeling technique is a method for quantifying the effect of multiple marketing inputs on sales or Market Share. MMM’s purpose is to understand which elements contribute to sales most effectively and to determine an appropriate spending budget across each marketing input.
Marketing Mix Models assist marketers in measuring the return on investment for each marketing input. A marketing input with a higher return is more cost-effective as an advertising medium than one with a lower ROI. The Marketing Mix Modeling technique uses Regression analysis to extract key insights.
How Does a Marketing Mix Model Work?
A Marketing Mix Modeling tool breaks down business metrics to differentiate contributions made from marketing and promotional activities (incremental drivers) against contributions made by other sources (base drivers). Factors which influence the Marketing Mix Modelling could include:
Incremental drivers: Business results generated through marketing activities such as TV/print ads, digital marketing spends, price discounts/promotions/social outreach etc.
Base Drivers: Base outcomes can typically be attained without advertisements, thanks to brand equity established over time. Based outcomes tend to remain static unless any economic or environmental changes take place that influence them.
Other Drivers: As part of baseline factors, other drivers are measured as brand value accumulated over a specific time period due to long-term marketing activities.
How can you create the optimal marketing mix model?
Most marketers remain uncertain about how to create an accurate marketing mix model, yet regression offers a technique which can predict the most cost-effective combination of all marketing variables. Regression breaks data down into two categories – dependent variables (DV) and independent variables (IDV), with analysis focused on how these two can influence outcomes of dependent variables – giving marketers an accurate estimation of the marketing mix’s net profits.
The most frequently employed regression techniques in marketing mix modeling include:
- Linear Regression
- Multiplicative Regression
Linar Regression Model
Linear regression can be applied when the distribution function (DV) is continuous, and its relationship with IDVs appears linear. Regression analysis can also help detect problems within complex systems like financial statements that cannot be predicted using linear models; Causal analysis provides forecasting of the impact and trends, but due to outliers, multicollinearity, and cross-correlation it doesn’t perform well on large volumes of data.
Multiplicative regression models
Additive models assume that each additional unit of explanatory variables has the same absolute impact; this makes them suitable only if businesses operate in more stable environments that do not involve interaction among explanatory variables; for example, when pricing becomes zero, sales volumes will become infinite, and they should therefore not be used.
There are two kinds of multiplicative models:
- Semi-logarithmic models
- Logarithmic models
Building Blocks that Comprise an MMM Process.
A Market Mix Modeling project relies on three key building blocks, all equally crucial to its success:
- Measurement: Measuring involves data collection (historical behavior, marketing activities and KPI), model building and understanding sales figures and ROI from all channels of distribution. The outcome of Measurement is understanding sales performance as well as measuring return on investment from each of them.
- Forecasting: Forecasting is the practice of running different simulation scenarios to predict future sales levels if a business takes certain courses of action.
- Optimization: At this step, the analyst determines the most optimal way of marketing investment allocation based on modeling results.
Steps to Implement Marketing Mix Modeling for data-driven decision making
Before embarking on marketing mix modeling, it is necessary to clearly outline your marketing objectives. This may involve incremental sales, improving brand recognition or optimizing ROI.
- Determine Key Variables: It is essential to identify all of the key variables affecting your marketing efforts and achieving your marketing goals, including advertising spend, pricing, promotional activities, competitor actions, seasonality and customer behavior or demographics.
- Collect Relevant Data: Collect relevant data about the identified variables from various sources, such as sales data, advertising tracking tools, customer surveys and market research reports. Make sure the collected information is accurate, relevant and covers an appropriate time period.
- Build Your Marketing Mix Model: Utilizing statistical analysis techniques, construct a marketing mix model that quantifies relationships among variables and their effects on desired marketing outcomes. This can help you gain insight into the effectiveness of each marketing mix element as well as their interactions with one another.
- Validate Your Marketing Mix Model: Verify that the marketing mix model accurately represents real-world scenarios and can provide reliable guidance for decision-making by comparing its predictions with actual marketing performance data. This step ensures that its predictions accurately match up with real performance data, providing assurance of its accuracy in informed decision-making processes.
- Conduct Scenario Analysis: Utilizing a valid marketing mix model, conduct scenario analysis. This involves simulating hypothetical scenarios by altering one or more variables, then monitoring predicted outcomes to gain an understanding of potential changes to marketing strategies on meeting your marketing objectives.
- Make data-driven decisions: Relying on insights gained from MMM marketing campaigns, make data-driven decisions to optimize your combination of marketing efforts. This could involve making changes to optimal budget allocations or advertising strategies as needed, refining pricing strategies or reallocating resources depending on predicted outcomes and potential improvements.
- Monitor and Iterate: Proactively track the performance of your marketing mix model, compare actual results with predicted ones, make necessary modifications, and refine the decision-making process based on new actionable insights gleaned through analysis.
By employing marketing mix modeling, you can make frequent business planning decisions to increase the effectiveness and efficiency of your marketing initiatives and yield enhanced results with improved returns on investment.
Marketing Mix Modeling combines art and science to accurately forecast consumer behavior and produce actionable recommendations for optimally allocating the marketing budget. MMM is one of the main elements of a marketing strategy, comprising three essential building blocks, which include Measurement, Forecasting, and Optimization.
MMM has seen rapid advancement over recent years by continually adopting cutting-edge no-code AI technologies. Additionally, its rise in the measurement industry for being reliable and compliant with privacy regulations such as GDPR has proven to make MMM a future-ready solution; MMM can reach higher granularity without ever invading people’s privacy.