MarketTools Blog

This is a follow-up to a previous post about Measuring the ROI of Market Research.

A recent Greenbook blog post by Edward Appleton, exploring the question “Should Research Agencies be Paid for the Value of Their Insights?”, got me thinking again about the ROI on MR Conference organized by Bob Lederer last summer.  We had extensive discussions about the fact that the hard part of calculating the ROI (Return on Investment) for market research is the “R”, which is usually measured in dollars generated. 

Because market research projects endure a long and complex process from initial definition to final execution, the specific value of the output can be difficult to determine.  That value is also dependent on how companies use their research data to develop actionable plans that directly impact business results.

Pay-for-performance is emerging as a way to reframe the ROI discussion.  This tactic is used a lot in the advertising world – for example, a company might commission an agency to create and run an ad for an agreed-upon cost of $X million, setting specific reach or recall metrics for the ad.  If the ad reaches the target metric, the company will be paid the full amount; if not, they’ll receive a percentage of the dollar amount based on the actual performance of the ad against goals. 

At the ROI on MR conference, Stan Sthanunathan, global head of marketing strategies and insights at Coca-Cola, described his company’s attempt at developing a pay-for-performance system for their market research vendors.  For each of the hundreds of research projects Coke conducts every year, internal stakeholders do an evaluation based on a set of criteria covering a number of dimensions, including a judgement of the insights provided as well as more interpersonal aspects like the ease of working with the supplier on the project.  Points are awarded for each of the criteria to come up with a total numerical “grade” for the project.  At the end of the year Coke adds up the number of points that each vendor has accumulated, and rewards them with a portion from a bonus pool.  Although this is a long way from measuring the dollar return of each project, this pay-for-performance system does a number of important things:

• The system provides a consistent framework for evaluating projects.  This is important because it gives the supplier a clear understanding of what the client values in a research project.
• The system provides incentives for the supplier to provide “more” of the services Coke values instead of “just enough”.   Since better insights on a project will result in larger bonuses at the end of the year,  there is incentive to put the most senior and or insightful people on that client’s business.
• The system works with current practices, so that projects are still competitively bid and repeat business is still at risk if performance is poor. But, because the system provides incentives outside of the specific project in the form of an annual bonus, vendors are motivated to make the extra effort once a project is underway to prove they are better than the competing suppliers at delivering what the client values.

A pay-for-performance system like the one developed by Coca-Cola is a step in the direction of measuring the ROI of market research, although it uses more broadly-defined criteria for success than monetary impact. 

One has to wonder, of course, how a pay-for-performance system is actually different from the current state of affairs.  Suppliers design studies so that the resulting research insights have value for the organization (even though we can’t really know how much actual value there will be since researchers aren’t involved in the execution based on the data).  Because the sales process is long and complex, research suppliers already have the incentive to develop repeat business from clients – and the best way to create repeat business is to deliver valuable insights on every study.  In a way, research suppliers already operate in a pay for performance system – in that poor performance yields poor repeat sales.

Overall, pay-for-performance seems to be a win-win for both suppliers and clients by formalizing the evaluation system and tying incentives to that performance.  It’s still a long way from true ROI, but, in my view, does a better job of achieving transparency and aligning the interests of both the supplier and the client.