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The Momentum Effect

Any assessment of the effectiveness of marketing actions has to start with an analysis of the intrinsic value of the offer

Strategic Research is a member of The Momentum Effect network.

This concept, devised by Jean-Claude Larréché, professor at Insead and the Wharton School of Business, is enlightening, and we wholly share its vision of the effectiveness of marketing activities.
Let’s briefly review the concept’s central ideas: Jean-Claude Larréché and his team analyzed the performance of 119 American companies between 1985 and 2004. Their objective was to identify factors that could explain the exceptional growth of certain companies.

The disproportionately higher growth that these firms delivered hinted at some hidden energy driving their growth. The insight came when they realized that if momentum was powering a firm’s success, then its relative marketing spend should be decreasing. Contrary to conventional wisdom, firms with momentum achieved superior growth while spending a relatively smaller percentage of their revenue on marketing than those pursuing the traditional “push hard” methods.

The study shows that the momentum-powered firms actually increased their total marketing expenditures in real terms. In fact, a straight cut in advertising would almost certainly result in a drop of growth. But even though their marketing budgets were increasing, expenditures as a proportion of their revenue growth – their advertising-to-sales ratios – were coming down: they were more effective. The reason for this effectiveness was their capacity to create “power offers”: offers that are so resonant, so compelling, that customers are drawn magnetically toward them.

In short: if you have an exceptional offer (Apple, the Wii etc.), it is easier to be effective at revenue-constant expenditure levels.

Our point here is that every discussion of the effectiveness of marketing actions has to start with an analysis of the intrinsic value of the offer so as to avoid compensatory marketing, meaning trying to compensate for an offer’s weaknesses through marketing expenditures. Formulated more positively:  the priority should be to direct expenditures to strong, compelling offers.

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