Research and Return on Investment
Roger Parker
Over the last decade globally a new trend has been to looking at marketing return on investment. How much do different marketing activities contribute to a company’s revenue compared with their cost?
Researchers are often involved in doing this with new research approaches that try and quantify returns on investments in marketing or strategy. One rather interesting question however is how much return on investment does a company get from their research?
Just like advertising and marketing companies, research should be able to justify its position in the budget by pointing to how it returns revenues compared to its costs. While the marketing question is often asked the light is not often shone on research activities.
Last year I went through an exercise to try and answer that question. My rationale, as a researcher, is that if I can pinpoint the types of projects that return most for clients, it becomes a win-win. If clients get higher returns, then they’re more likely to invest in research.
However, there is a paucity of information on the subject even if you look internationally. I did find one conference held in America with the snappy title “ROI on MR” (i.e. ‘return on investment on ‘market research’). See their write up in the link below.
http://www.markettools.com/blog/measuring-roi-market-research
The main outcomes of this conference suggest ROI is highest when:
- Large investments are at stake
- Long time horizons are involved (strategy development)
- Uncertainty of business success is high
Having been a researcher for a long time, and previously worked in finance, I can easily see their findings look mathematically correct. If there is a large investment, any change in the return has to generate a higher ROI for a given research cost than the change on return in a smaller investment.
Likewise if multiple years returns, long time horizon, are compared to a research cost the return on investment for the research will calculate as higher. Similarly lowering higher risk will mathematically draw out a higher return on investment than lowering lower risk.
While this is useful to bear in mind, this doesn’t however give much practical guidance. It simply gives the mathematics of investment returns and risk compared to any type of research investment. That is, it assumes all types of research return the same way, and it is the profile of the size and risk of investment the client is looking at that drives the ROI.
I would argue that there’s a basic flaw in this idea. If you ask any research expert they will be able to tell you that some of their projects work much better than others [for a given size of planned client spending]. To shed some more light and answer the question better, I approached the question from another angle.
I went back through all my companies’ research projects for a decade, one by one, and looked at how each project made returns on investments for clients. Specifically, how has it contributed to client revenue?
The first problem you encounter when you do this is that almost every research project does not make a direct return on investment. Unlike say advertising, when an ad runs you can see a direct uplift in sales as a result or measure a direct movement in brand awareness, attachment and the like – with research there’s no direct linkage to revenue.
Research returns are always derived returns, from management action on the research. It’s this action which directly generates changes in revenue. Across the board, the more gifted managers generate higher returns from research.
Calculations of return on investment are a sort of ‘after the fact exercise’ following this. When you can look to see what actions the research recommended, whether a client implemented the actions, and the client’s revenue results coming from their actions.
Looking at clients and research projects in this way, I was able to grade projects into four grades: no impact, little impact, good impact and massive impact. These grades were all based on revenue growth. No impact was where there was no discernable revenue growth, through to massive impact where the clients got extremely high revenue growth.
When you look at it this different way, you see quite different reasons why different types of research projects have major differences in the revenue impacts on clients. The main reasons in each grade for the different levels of impact are:
Main reasons for different client revenue impact of research
High upside in research questions
This means that the nature of some research problems explored, if answered, could generate higher returns for the client. Some examples:
One client with local revenues in the hundreds of millions looked at internationalization. They were only operating in New Zealand. The revenue upside was that international markets are many multiples bigger than their local one. If they could successfully enter the revenue potential was huge. They did successfully enter and their first major international contract doubled their entire revenue.
Another example was a client that had small market penetration, a small percentage (e.g. 10%) of its potential market using their product. The high upside was any changes in the penetration (e.g. to 20%) could double the clients revenues. Over a period of years they kept doing this, and their growth was phenomenal from the initial start point.
There’s a fundamentally different point here from ROI on MR findings. For them it was the size of the client investment coming up, which dictated eventual ROI. Looking at client results project by project, it is the size of the client’s potential returns (not the cost or risk of its investment) – it is because of the type of project initiated – which drives the highest returns from research.
The math is pretty simply. If the internationalization client had only looked at a small new market, say another region of New Zealand, their return could only ever have been incremental. However their investment cost wouldn’t have been a great amount less than the internationalization to win a contract.
Likewise if the market penetration client had looked at this problem when existing penetration was already over 90%, investments could be higher to make only small gains, as they would been having to convert laggards.
The very important practical lesson here is to ask what types of direction for our business would return the most – then look at how you can make them successful or de-risk them by using research. Your research return on investment, when projects succeed, will be higher. More importantly, with this way of thinking, you will be using research to drive higher performance for your business.
Medium upside in research questions
This is very similar to the points above. Clients investigated issues which could have a medium impact on their revenues, found answers and successfully implemented them.
Some examples:
One large client company wanted to start a new venture to enter a regional market they had no presence in previously. They had to develop a new service offering, marketing strategy and local presence. The project succeeded and this new venture quickly took around a fifth of market shares from the regional competitors. The impact on revenues of the large client is good, but nothing spectacular compared with its existing services.
Another was a client that was already a market leader and wanted to secure its market share and add to it by improving the performance of its sales force with customers. The company has continued to do this and kept growing its market share. Because it started from a high base however, the revenue returns are not as great as other clients.
The paradox here is that often the biggest companies have the biggest research budgets. However companies that are already very successful are harder to massively jump revenues higher than smaller ones. The upside is mathematically smaller in comparison to new opportunities in the market. Often half of the motivation for research is to protect or lock-in the existing revenue base and incrementally grow revenues.
The practical point here is that this is where the ROI on MR math comes into play. Where revenue returns are more incremental across the board, the size of and risk of the type of investment can be the more important issue as opposed to the eventual new revenue returned from any research projects.
Research findings part or not implemented
The new issue that comes in here, apart from less upside potential, is implementation. There are some research projects where the results don’t get implemented. The key practical issue here is when research is started the path to implementation should be both known and clear.
If a project is going to involve other people in the organisation in implementing research results, then they should be involved at the start so they have ownership of the project. Then when results do come in, they are wanted, and implementing them is the natural follow on. If people are left out, then asked to implement often resistance ensues.
The other key issue is to do research where the findings are most likely to produce implementable outcomes. Some research questions, and methodologies, produce abstract or obtuse results, where there’s no obvious way to implement findings. Again this comes back to how you design at the start. Ensure a path to implementation is there and doable.
In summary, what are the returns on research? The answer is it varies. Some companies get a massive revenue impact, others a good impact, and others little or no impact. How can you drive higher return on research investment?
- Ensure research findings are well-implemented
- Research business issues with a high potential revenue upside
- In larger firms, research projects with larger investment or risk profiles
- Good management internally, bring people in early that need to be involved
- Use research designs that produce concrete results that are able to be implemented
Roger Parker is a Director of research firm, New River Ltd