Marketing maths and dreaded Dirichlet curves: Why ANZ marketers and agencies must close the gap on doing numbers, fast
An industry-wide survey shows marketers and agencies are struggling with basic marketing and business maths formulae. We might be ok with ROI and NPV, but most of us are more WTF when it comes to AWOP and Negative Binomial Distribution. Brand Traction's Jon Bradshaw and VMLY&R Chief Strategy Officer, Ali Tilling, want to change all that in a bid to keep marketers at the top table, agencies at pace with consultancies and move the needle on growth through the right kind of creative accounting.
“If marketing doesn't understand that maths is its job, we end up as the pretty pictures department. I love creativity, but it's the servant to the master of the bottom right hand corner of the P&L.”
But who's counting?
Know your EBITDA from your ESOV? Au fait with ROI and NPV? How about correlation, regression, R-squared, discounted cashflow and variance. Or zero-based budgeting, diminishing return curves and AWOP. And WTF is a Dirichlet curve?
Actually, they are not that difficult to understand – and for marketers and agencies they could make the difference in being able to hold the board’s attention and land ambitious ideas, or not.
Meanwhile, embedding agency-wide fluency in the basics of business economics could help agencies slow the march of the big four consultancy firms.
Moreover, getting to grips with marketing maths is fundamental to marketing, argues Brand Traction’s Jon Bradshaw. Along with VMLY&R Chief Strategy Officer, Ali Tilling, Bradshaw is building an industry-wide study in a bid to benchmark brands and agencies’ numerical literacy – and ultimately help them harness the laws of marketing to drive more powerful business results.
"People feel like if they have a conversation around maths, that others in that conversation will be somehow trying to catch them out - and that makes us less confident to explore and learn these concepts as we go.”
“We spend a lot of time talking about the 20 per cent of the job that's about unleashing creativity, but a lot less time talking about the 80 per cent that is actually about making money. But that’s kind of the whole purpose of the marketing function,” says Bradshaw. “If we're in the business of making money for our organisations, then there's some counting to be done.”
After more than two decades as a senior marketer with brands including Diageo, Lion Nathan, Mars and Virgin Mobile, Bradshaw firmly believes improving economic numeracy will significantly elevate marketing’s standing.
“In order for marketing to stay in the boardroom, in the real conversations with the CEO, the CFO and the chairman, this is the language of that room. It’s not disruptive creativity and brand health scores. It's the language of the P&L,” he says.
Basic maths, big difference
Earlier this year, Bradshaw and Tilling decided to run the numbers and benchmark where the industry currently stands in business and marketing economics. So far, the data suggests we’re average at best.
But the good news is that with relatively little effort, vast improvements can be made - because most of the rules are based on “really simple maths,” says Bradshaw.
“It's add, subtract, divide and multiply. If you can do those things, there's nothing in our list you couldn't understand, apply or talk confidently about.”
As such, he and Tilling believe the marketing industry can quickly gain the confidence to apply creativity to numbers – creative accounting in a good way.
“You don't need to be able to do multivariate regression analysis,” suggests Bradshaw. “You just need to be more confident with the basics and use them more often.”
So where is Australia at?
The survey separates disciplines into three buckets:
- Firstly, statistics and applied statistics: “So how do I analyse sets of data and try to identify a trend,” explains Bradshaw.
- Second is classic business finance: “Profit and loss, cash flow and balance sheets etc.”
- Third is the marketing bucket: “Things like tracking, penetration, frequency, average weight of purchase, excess share voice and different ways of measuring media.” Plus the classic ‘negative binomial distribution’, which Bradshaw suggests is “probably the most poorly marketed term in marketing”.
Survey respondents are asked how confident they are in understanding these concepts and terms, how often they use them, and whether they think they will become more or less useful in the future.
So how did marketers and agencies rate themselves?
“Put delicately, we limped over the bar of mediocrity,” says Bradshaw. “Putting it mathematically, we’re a six out of ten. Which might be fine if we didn’t also agree that these things are going to be much more important in the future.”
Marketing maths: big gaps
One of the most surprising survey findings is around marketing maths, where the data shows “we are five out of ten across the board,” says Bradshaw. And that is being dragged up by marketers.
“People don’t have a terrible grasp of things like the measurement of penetration, frequency and average weight of purchase - but that's kind of where you'd expect it to be excellent,” says Bradshaw.
“That's our opportunity to stand up in the boardroom going 'let me explain how shoppers shop, how many of them there are, how much they're spending and what they're putting in their basket…’”
And when the names get a little more esoteric, things go quickly downhill.
“Asked about things like excess share of voice, negative binomial distribution, reach and frequency curves… Confidence kind of falls off a cliff,” says Bradshaw. “Yet these are pretty well-established, fundamental ways of looking at numbers from a marketing perspective”.
Time to grasp the banana?
“What an awful thing to call a really important concept. But it's just a map of how often people shop and how many people shop with that frequency. It's a very simple piece of two axis graphing – and of everything we measured, this is what people were least confident about.”
Across the survey, understanding of the Dirichlet curve sits at three out of ten, adds Bradshaw.
“Yet that’s right at the heart of How Brands Grow by Byron Sharp. It’s the absolute essence of the notion that brands grow when they add customers, not get customers to shop more often.”
Some academics refer to Dirichlet as a banana curve. Bradshaw and Tilling think they might be onto something. “It’s a lot easier to understand a curve shaped like a banana if you call it a banana curve,” says Bradshaw.
But he suspect's industry’s collective lack of confidence is not just due to an off-putting name.
“It’s because people haven’t really understood how that thing works yet,” he suggests.
“In the survey, we’re not asking people to write out the formula. We’re asking: ‘Do you know what one of these is, do you know how to use it, and can you talk about it confidently with a client or boss?’ And the answer was a resounding no. As one of the most important concepts of marketing, we thought that was interesting.”
Business economics: Agencies sorely lacking
While marketers claim some proficiency with business economics – such as profit and loss, balance sheets and cash flows - agencies are well behind the curve, per the survey data.
“There was a big step down from agencies in terms of comfort with classic accounting aspects - and we weren't asking difficult stuff or getting into the depths of accounting practice, just ‘are you confident talking about the three key accounting instruments?” says Bradshaw.
Ali Tilling thinks agencies need to get up to speed, pronto.
“Do we need to be across all of it, to the level that our clients are? Potentially not. But I think getting to a foundational level of understanding is key. Firstly, because all agencies are businesses and it does you no harm to understand how they operate, and secondly to better understand how a client’s business works.”
She says grasping the basics will also help agencies better land “stretch ideas” that might involve operational changes.
“You need an appreciation of the ramifications of those sorts of things, but [demonstrating an appreciation of business economics] also helps to ensure that we’re telling the story of the benefits of marketing,” says Tilley. “We’re trying to help brands grow, and if we don’t understand some of the functions of how that happens, we're missing a trick for the future development of industry.”
Meanwhile, operators for whom business economics are culturally ingrained may be less likely to cede further ground to consultancies trading on business acumen – and exploiting a perceived weakness from traditional agencies.
As such, Bradshaw agrees agencies - and marketers - would do well to swiftly improve numerical literacy and explain to businesses how consumer actions and behaviours translate to business outcomes.
“If marketing doesn't understand that is its job, we end up as the pretty pictures department. It's not marketing for marketing sake and it's certainly not creativity for creativity sake,” he says. “I love creativity, but it's the servant to the master of the bottom right hand corner of the P&L.”
From WTF to AWOP all star
VMLY&R’s Ali Tilling believes reluctance to get deeper into the weeds on marketing maths is a confidence issue – where complex nomenclature doesn’t help.
“One of the key comments around the Dirichlet curve was just... WTF?” says Tilling. “I think that speaks to the sense that the terminology putting people off.”
Tilling urges people to get over the fancy names reframe them as tools that help deliver better results – in a world where answers are not necessarily binary.
“I think part of what's at play is that in creative agencies - and often in media agencies - we're used to dealing with uncertainty and helping people take leaps of creativity and understanding insights around that. And I think that makes us almost scared of an area where it feels like we can be right or wrong, and which feels much more black and white,” she suggests.
“Actually it is not. If you use your curiosity in the same way that you use it to explore creativity … You're not necessarily looking for 'a right answer', you're looking for what's of interest, what can help me? How can I understand this better?”
Perhaps agencies and marketing teams could ensure staff feel comfortable in acknowledging knowledge gaps, she suggests.
“From the comments submitted, people feel like if they have a conversation around maths, that others in that conversation will be somehow trying to catch them out - and that makes us less confident to explore and learn these concepts as we go.”
However, survey results to date also show there are “a lot of people that aren’t embarrassed about not being sure” of their marketing maths, says Tilling. “So hopefully we can do something to free up that sense of exploration and curiosity.”
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