What Is Marketing Mix Modeling? (And How Will It Help Me?)

Kyle Hamer • May 17, 2020

what is marketing mix modeling?

Marketing has an age old saying, “half of every dollar you spend on advertising is wasted.” You just have to figure out which half.  The market is in transition and companies are slashing budgets to pave the way for survival.

It’s not surprising the first place leadership teams look to cut is in marketing  Ofter times marketing departments have the largest budgets.  Take for example, companies in consumer services, they spend around 15% of their budget on marketing, whereas transportation spends about 8%. Some businesses spend as much as 40% of their budget on marketing, which is why it’s essential to ensure your marketing efforts are worth the cost.

When used right marketing will drive revenue for every business.

Even with a superior product or service, you won’t succeed without marketing what you’re selling. So how can you quantify which dollar spent is producing a return?

Marketing mix modeling ensures that your marketing efforts won’t be for nothing. Through marketing metrics and marketing analytics, marketing mix modeling will benefit your company’s marketing outcome and budget.

Keep reading for a guide that breaks it down for you and explains why it’ll benefit your business.

Marketing Mix Modeling Definition

Today, there is a myriad of means through which to market your product or service. The way people view ads and content is continuously changing, which is why it’s essential to think before you advertise.

TV, for example, has seen a significant decrease in viewership over the last decade. With the onset of technology like Apple TV and TiVo, viewers can now skip through commercials and even pay to eliminate them.

What this has done is create a huge demand for businesses to maximize the return they see on their marketing investments. The idea of marketing mix modeling is to optimize the combination of advertising and marketing efforts and investments to maximize profits.

The value of all marketing inputs can be measured through marketing mix modeling. It focuses on long-term revenue growth means of marketing. Marketing mix modeling takes a look at historical relationships between what has been spent on marketing and business performance.

With that information, it’s easier to begin to determine how much you should spend and what your business drivers are.

What Tools Do You Use for Marketing Mix Modeling?

Marketing mix modeling uses many tools to help predict and determine the best combination of marketing variables.

Those tools and methods measure marketing metrics, such as what you should expect to see as a return on investment (ROI) for each type of marketing you spend on. Even the slightest variances in insight can make a huge difference and help you optimize what you spend.

Some of the tools and concepts associated with marketing mix modeling are:

  • Multi-linear regression
  • Non-linear and linear impact of predictors
  • Carry-over effect
  • Diminishing returns
  • Incremental sales
  • Base sales
  • Deep dives
  • Contribution charts
  • Budget optimization
  • First interaction
  • Last interaction

Base Sales vs. Incremental Sales

Marketing mixed modeling breaks up sales into 2 categories: base sales and incremental sales.

Base sales are what you get without any advertising. It constitutes sales due to brand equity and is usually fixed unless there are changes in environmental or economic factors.

Incremental sales are those generated by advertisements, from TV to print, and from digital to email promotions.

Last Interaction and First Interaction

Say you saw a Google ad for a new crockpot. You’re curious and take a peek but forget about it minutes later and don’t make the purchase. The next day, the same crockpot pops up on Instagram, and you buy it.

Technically, your Instagram efforts take credit for the purchase. But had you never seen it the first time via a Google ad, would you have purchased it on Instagram?

Taking a look at consumers’ first and last interactions is essential when looking at marketing metrics to determine what works.

Using the linear attribution model, the credit will get distributed amongst all platforms where you (or another consumer) saw the product advertised.

The Carry-Over Affect

Using analytic partners to take a look at the impact of past advertising is essential, and it’s known as the carry-over effect.

It measures the amount by which previous months’ marketing ads decay over time. How long will they keep working for you?

Deep Dives

Marketing mix modeling can also be used to perform a deep-dive analysis. They can be used to assess each campaign’s effectiveness by understanding which ones work better than others.

In a deep-dive analysis, creatives will be broken down by language, channel, genre, etc.

The money will be shifted from those lower performing channels to higher ones to increase market share and overall sales.

Budget Optimization Plays an Essential Role

Budget optimization plays an essential role in marketing mix modeling because the idea is to generate more sales and save money while doing so.

Marketing mix modeling seeks to provide direct attribution of each dollar’s effectiveness and optimize all future spending. Using marketing mix modeling helps you define which mediums are working better than others so that you can more effectively allocate your budget.

**Don’t forget about regression – return over time.  There are some marketing investments that pay off sooner, while others might take 12-18 months to show how the change in spending is negatively impacting revenue.  All budget optimizations are a trade-off.

If the marketing metrics show that you’re generation most of your sales from Facebook, but Facebook only sees 5% of your marketing budget, then a shift might be necessary.

Shifting your marketing money from low ROI mediums to high ones will inevitably maximize your sales while keeping your budget constant.

Here are some examples that demonstrate the success of marketing mix modeling efforts.

Marketing Mix Modeling Will Benefit Your Budget and Your Business’ Outcome

There’s no point in spending a single dollar towards fruitless marketing efforts. That’s why marketing mix modeling is the best way to accomplish all of your sales generation goals and marketing optimization desires.

Depending on your business, marketing mix modeling uses a specific set of tools to help define what has worked for your company in the past, and where to better allocate money now and in the future.

By taking a critical look at how each marketing effort has contributed to your ROI, you’ll be able to say goodbye to what isn’t working and dedicate more funds and efforts towards what does.

Are you ready to give your business the growth it deserves? Contact us with any questions you have so that we can help grow your business together!