Wednesday, December 06, 2006

AHP to do Mix Modelling?

Analytical Hierarchy Process (AHP) is a group decisionmaking tool / process that has traditionally been used to allocate scarce resources between multiple projects, to find hard-to-reach answers to complex solutions, and the like. At MPlanet last week, McKinsey pitched mix optimization using something that looked an awful lot like AHP. The claim is that "most of the time" AHP or something like it will get you awfully close to the "right" answer. The alternative to AHP, obviously, is something like quantitative or traditional mix modeling.

They also admitted that most of the time, the reason they do hardcore quantitative optimization is for organizational buy-in reasons, rather than true quantitative rigour. I'd concur--I've seen similar things come up in my clients over the years. However, using AHP to optimize mix does not mean that all the good ROMI work can get tossed--far from it. In fact, it's critical to understand the outputs of each marketing tactic quantitatively. What AHP does is function as a team-based tradeoff / optimization model--but the individuals involved still need good information on how different tactics are likely to pay off.

This is why building out the marketing metrics and the response curves is still critical. So, don't get excited, you still have to measure marketing. Before you start AHP, it's helpful to have a robust list of metrics on a per tactic or per segment basis, such as:
  • Rough ROI on a gross margin basis
  • Diminishing returns levels--where does the curve get steep?
  • Non-financial impacts due to different types of marketing
  • Segment-specific "sweet spots"
  • Current attitudinal levels by segment, country
  • Etc.
One really good thing about a more forward-looking process like AHP or Delphi is that it allows non-quantitative variables to come into play. The example given by McKinsey is of course "new marketing." Looking solely in the rear view mirror, no one ever would have invested in search marketing, guerilla marketing, etc.

There are some good software providers out there for AHP--one of my favorites is a DC-based company called DecisionLens.

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