Econometrics in houseGetting to grips with econometrics is a pressing concern for marketers trying to bring some rigour to their decision-making process and make the case for investment in an environment of ever-increasing scrutiny.

For some brands, working with external specialists is the best way to tap into expertise without a significant investment in recruiting talent into the business. For others, the contextual understanding of the company’s vision and wider priorities in-house econometricians bring makes it well worth the investment.

Gambling giant Paddy Power Betfair, for example, has an internal econometrics team led by head of media management, Dermot O’Sullivan. Rather than sitting in marketing, the econometrics team are part of the business intelligence team.

Having worked with various different models, from in-house to external to a hybrid set up, Paddy Power Betfair marketing and brand director Michelle Spillane believes the model in her current business is the best she’s worked with to date.

“The advantages we see in real time is that the BI team can contextualise all of that econometric modelling within our business, within our customer behaviour, our customer activity,” she explained during The Festival of Marketing: The Bottom Line this morning (24 March). “They have everything from the strategy, what we’re trying to achieve, what customers are doing, real-time trends around that.

“One of the limitations of econometric modelling is the time it takes. It’s not a quick body of work, so the advantage we have of having it in-house is we can do supplementary work quickly when we’re looking for additional pieces of information. We can sit down with the team and say ‘I know we’ve just got that study done, but I’m also looking at trying to achieve…’”

No matter how close you are to external teams, they never know in real time your customer and their activity as well as you do from within the business.

Michelle Spillane, Paddy Power Betfair

This approach helps Spillane’s team build out additional pieces of analysis and really get “under the hood” of other concepts that relate to the business objectives. In fact, despite the financial investment required to bring econometrics in-house, she believes it is well worth the money.

“Lots of media agencies provide that service as well. Certainly our media agency MediaCom are phenomenal. They have a phenomenal econometrics team and they support Dermot and feed in loads of data, but no matter how close you are to external teams, they never know in real-time your customer and their activity as well as you do from within the business,” she added.

FMCG company Premier Foods currently works with external partners on its econometric modelling, although CMO Yilmaz Erceyes admitted that working with agencies can be an interesting experience. A lot, he pointed out, depends on the model being used and that can differ from agency to agency.

“We’ve used two of the most respected external suppliers to look at exactly the same time period for a brand’s activation. We were in a transition phase, so we used two different suppliers. The outcome of the ROI figure that came from both was meaningfully different,” Erceyes recalled.

“It’s as if you’re doing your brand P&L with one person using Microsoft Excel and the same person does it using Google Sheets and suddenly your profit is 30% higher or lower. Therefore, it’s important to understand those dynamics, because the modelling figure on its own is not an exact science.”

Head of marketing for general insurance at Aviva, Rhea Fox, reported a similar experience of working with two of the most highly ranked global econometrics providers.

I’ve always welcomed any degree of science, scrutiny and rigour around marketing spend because, candidly, without it we’re all sitting ducks.

Rhea Fox, Aviva

While neither report produced by the agencies was wrong, they presented a “very different” result for the contribution of marketing to the company’s base rate of sale. It is for this reason, Fox argued, brands should choose an econometrics provider and stick with it, as otherwise it could prove “credibility damaging”.

She also noted the cost and work needed to bring the econometrics function in house. Aviva is currently looking at ways to in-house parts of its model, in addition to maintaining a “successful partnership externally”. To do this successfully brands need some “deep nerds”, as well as people who can interpret the data and others with project management skills.

“I think a lot of people think in-housing is the silver bullet, that I’ll hire an econometrician and they’ll sort it all out for me. First, you’ve got to hire econometricians and they are expensive. They are highly in demand and they’ve got to know your data and they’ve got to know your industry, so in-housing is certainly not the silver bullet,” Fox argued.

Actually, the key to success is to know your data and understand how it is applied, working closely with finance and the people responsible for the modelling, she stated. If those relationships aren’t there, the outputs will not be properly contextualised and absorbed by the business, warned Fox.

Grappling with the limitations

Getting econometrics right, be it through a team of in-house econometricians or working with an external partner, is a way of fighting back against the “slot machine mentality” that says you put in £1 to bring in £5 tomorrow, she added.

Fox believes econometrics is one of the key weapons in the marketing arsenal in terms of bringing science and rigour to the decision-making process in a way that finance can understand, and in a manner which helps influence thinking at C-suite level.

“Let’s be frank, no econometric model is absolutely accurate. Anyone looking for £1 of investment versus £8 of return will find ways to knock down that model, or find a better model, or challenge that model. It’s all relative,” Fox pointed out.

“But I’ve always welcomed any degree of science, scrutiny and rigour around marketing spend because, candidly, without it we’re all sitting ducks.”

Premier Foods regards econometrics as one of a suite of tools that can be used to fine-tune brand plans. The marketers use econometric analysis to determine the relative effectiveness of different activities and tactics, as well as to help make decisions around which investments to prioritise. However, caution should be applied.

“It’s just one metric. It usually ignores the strategy you’re trying to achieve and it just gives you a return on investment on an activity that you’ve done,” said Erceyes. “There is a lot more that goes into that pot when we make our final decisions on marketing plans.”

Grace Kite: Ensure your econometrics supplier is not cutting corners

Describing herself as a big fan of econometric modelling, Spillane said having models in place helps her “sleep easier at night” when making big investment decisions. However, she was clear that models are no replacement for judgement or experience.

Nor, she argued, does econometrics necessarily make conversations with finance teams easier, as models fail to take into account the creative or contextual impact of the channel mix.

She recalled planning for the 2018 FIFA World Cup, when the econometric modelling suggested YouTube would be a much more cost-effective channel to invest in as it would reach the same levels of audience for a reduced cost and better ROI. The model did not, however, appreciate the creative impact of live football.

“That’s what I mean by judgement and experience. In that instance, if you were purely looking at it on an econometric, ROI numbers basis you wouldn’t have chosen as we did to be a partner with ITV, because the investment was substantially more expensive,” Spillane explained.

The team at Paddy Power chose to use their experience and plumped for TV, buying spots around coverage of the live games. The decision was smart, with the brand enjoying an “incredibly successful” World Cup. Paddy Power has now committed to be a “significant partner” of ITV for the Euros tournament in June.

“It [econometrics] won’t forecast for innovation. Things you haven’t done, places you haven’t been. It can’t do that for you, so again it’s not risk-free,” Spillane added. “It definitely helps to mitigate risk and helps you make very informed choices around your channel mix and your strategy, but it’s certainly not risk-free. Sadly, there’s nothing that makes our jobs risk-free.”

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