Closing the Gap Between Digital Marketing Spending and Performance

Originally published in HBR by Christine Moorman, Jana Soli, and Dennis Cardoso

Marketers know that digital marketing represents the future of their business. That’s why, according to the February 2022 edition of The CMO Survey, they’re happy to allocate 57% of their budgets to digital marketing activities and are planning to increase spending by another 16% in 2023.

However, the survey also found that this contribution has weakened over the past year. More than 30% of marketers who participated said that they are experiencing average-to-no returns on their investments, which could create funding difficulties in the future if they are not able to overcome this gap.

What’s Driving the Digital Marketing Performance Gap?

So, why are returns softening, and what can marketers do about it? Our research and experience has identified six reasons behind the digital marketing performance gap.

Companies haven’t developed a fully integrated digital marketing organization.

More than 60% of marketing leaders reported in the August 2021 edition of The CMO Survey that their companies were either in the nascent stage (i.e., visualizing and designing their digital transformation) or the emerging stage (i.e., building non-integrated digital elements) of this journey.

Having a digital marketing arm simply isn’t enough. Digital marketing should be fully integrated across the company and used to drive and evaluate marketing decisions to reach its full potential. Unfortunately, that is not currently the case for most companies.

Marketing teams face a steep learning curve when it comes to data analytics…

When asked about digital marketing investments, marketing leaders historically have focused on optimizing their companies’ websites. However, in 2022 those investments shifted dramatically, with a 37% increase in the number of companies investing in data analytics, making this the largest investment reported by marketing leaders.

The challenge is that marketing tech stacks are becoming increasingly complex. While companies are investing in the technologies necessary to keep up with their tech-savvy competitors, there is a learning curve associated with enhanced data analytics, so it will likely take time marketers to realize strong returns for their companies.

… and they have to master the challenge of converting data analytics to actionable metrics.

Marketers are missing out when they are unable to convert the overwhelming amount of raw data into key metrics — and the strategic actions they would then inform. They need new dashboards to help them interpret and visualize what their new data analytics mean for their current business, as well as formulate actionable recommendations to improve their future business.

It will take time for companies to identify the metrics that are the most important to their business. They must test, iterate, and ultimately agree on reasonable thresholds for metrics that can guide subsequent actions.

Mapping the digital customer journey has become increasingly complex.

Today’s companies engage with customers across a growing landscape of apps, social platforms, websites, blogs, third-party sites, and more, meaning the job of mapping the customer journey continues to get more complex.

In fact, only 40% of marketers report having systems in place to track customer engagement in a way that informs their marketing roadmaps. And when asked “how effectively does your company integrate customer information across purchasing, communication, and social media channels” (where 1=not at all and 7=very highly), The CMO Survey has witnessed a flat score of between 3.4 and 3.8 for more than a decade!

While it’s possible that the investment in digital touchpoints is making an increasingly large impact, companies’ inability to track their customers’ end-to-end journeys and accurately attribute sales to touchpoints is negatively affecting their ability to effectively quantify digital-specific contributions.

Changing privacy rules mean the loss of third-party data.

In response to growing demand for consumer privacy and in the wake of phasing out support of third-party cookies, the use of third-party data is changing. In fact, 61% of marketers predict consistent or decreased use of third-party data in the coming year.

Marketers see the challenge and report a 24% increase in investments to manage consumer privacy concerns while also working to increase their understanding of consumers outside of their companies’ own websites and apps. This understanding is important to learning about customers, seeing new opportunities, and effectively segmenting and targeting customers — key steps for creating value and converting digital investments into returns.

Many firms outsource their digital marketing activities.

Thirty-two percent of digital marketing activities are performed by external agencies and partners, with this number reaching as high as 45% for B2C product companies. Companies historically have not created digital teams in house, given the dearth of talent and the costs of doing so.

But it may be time to rethink this. As digital plays a larger role in companies’ marketing strategies, it becomes increasingly challenging to maintain brand consistency and build out a fully integrated brand strategy if an external agency is driving most, if not all, digital activity.

In addition, marketers are feeling the pressure of accelerating results, just like other business functions. In-house staff are typically able to move faster than agency partners, who have multiple clients. So, if marketers are not at the helm of developing strategy and managing their customer data, they may be losing out on an invaluable piece of the puzzle in their customers’ journey, as well as delivering slower gains back to the business.

How Marketers Can Drive Digital Marketing Returns

These are formidable challenges. But there are proven steps marketing leaders can take to close the digital marketing gap. Based on our experience studying companies and working with clients, we outline six strategies that offer a broad view of how leaders can manage strategies, organization, and data to make progress toward that objective.

Double down on strategic experimentation.

Some 67% of marketers report that they use digital platforms to test, iterate, and efficiently determine what is or isn’t working in their marketing materials. At the same time, only 47% report increasing investments in online experimentation and A/B testing.

We recommend companies increase these investments with an eye toward more strategic-level experimentation that can offer opportunities for breakthrough growth. Too often marketers get bogged down in tactical experiments, such as whether customers like green or yellow, instead of testing the relevance of new offerings, innovations, or customer segments.

Understanding new challenges and opportunities is business critical, especially in unpredictable times. This makes testing an ongoing, necessary process that requires sufficient budget guided by three key principles. First, budget with current data, not historical projections, by leveraging forecasting tools that take dynamic market changes into account. Second, establish that marketing experiments are an investment, not an expense, by testing to identifiable business-wide goals or outcomes. Third, allow flexibility in any test-and-learn budget. Market trends and consumer behaviors can change, and experiments allow companies to understand and respond to any new challenges or opportunities.

Deepen cross-functional collaborations.

Marketers report reasonable success in working with leaders and groups important to the success of digital marketing. Forty-three percent of senior marketing leaders report that their CTO/CIO (or equivalent technology leader) is aware of and aligned with their objectives and path to activate key performance indicators (KPIs) in digital marketing, and 40% report that the same can be said of the CFO (or equivalent financial leader).

These figures are reassuring. However, it still follows that roughly 60% of marketing leaders are flying solo — meaning they are not yet collaborating with these important leaders and groups. Cross-functional collaboration and alignment is essential to not only gain approval/support for marketing investments, but also to accurately understand their impact/contribution. In addition, working directly with the C-suite elevates the marketing function, ensuring that it is a strategic contributor to the business strategy and ideally, protecting it from future cost-cutting initiatives.

Embrace a culture of innovation.

Marketing leaders can further digital transformation by helping build several organizational characteristics: a culture of rapid learning, strategic partnerships, specialist skills, and agile structures. We find that collective strength, rather than individual talent, is how organizations should reframe their thinking.

What does this mean in practice? Companies that align their C-suite leaders across the business and focus on shared goals are better positioned for digital transformation. More specifically, organizations execute three key priorities to realize digital marketing transformation. First, they establish a common set of KPIs that ideally are aligned to business objectives, such as revenue, profit, or sales. Second, these organizations prioritize the customer first. And third, marketers truly understand how their customer makes decisions, and they upskill and reskill their teams to ensure that they can accomplish ever-more complex work.

Focus on driving growth.

When asked how they evaluate digital marketing’s contribution to their companies, marketing leaders prioritized driving business outcomes (e.g., increased revenue, sales, volume, profits), followed by shaping marketing communications, helping deliver interactive customer experiences, and improving internal efficiencies.

We urge marketers to keep their sights on how digital marketing delivers growth because this objective gets to the core of what they are hired to accomplish and is the strongest statement marketers can make to validate their worth. In other words, all other objectives (e.g., customer experience, internal efficiencies, and marketing communications) should ladder up to increasing sales/revenue/volume, decreasing costs, and ultimately driving the business forward.

Leverage first-party data.

Effective first-party data use in marketing delivers more relevant experiences for customers and can generate 2x incremental revenue from a single engagement and 1.5x improvement in efficiency.

Growth comes from incorporating customer data, because only then can marketers truly understand their customer base, including types of customers, their needs, and how their behavior is changing. This understanding allows marketers to find more users like the ones they already have; personalize based on the needs of their customers; and optimize their marketing when looking to find the most profitable customers.

Invest in AI and machine learning.

Companies currently use artificial intelligence (AI) or machine learning (ML) only 12% of the time, according to The CMO Survey. Respondents predict that AI/ML use will triple to 38% over the next three years, with 28% of companies investing in this space in the past 12 months.

We think this use and investment level should increase if companies are going to make the most of their data analytics investments to build personalized connections with their customers. Marketers who integrate their first-party data with ML-driven marketing tech can optimize interactions with their most valued customers, rather than all customers, to drive the most valuable outcomes at the most efficient cost.

. . .

Marketers have used digital marketing to navigate through incredibly difficult business conditions, connecting with customers stuck at home during the pandemic, digitizing products and services, and driving revenues. Now, it’s time to build on those gains by redoubling their commitment to deepening data and digital mastery, building a culture of continuous learning and experimentation, and using insights to deliver personalized services to customers for higher ROI. Those willing to do so will outpace competitors, notching greater revenues and working more closely with the C-suite to drive business expansion.