Metrics are a part of our everyday lives-from our heart rate, to our bank balances; from our weight to the gas mileage on our cars and if we don't pay attention to these numbers, we create the risk of a heart attack, being overdrawn, or running out of gas.
The same is true in the business environment. If a company doesn't identify and track important performance measures, its risk is increased.
In his book, Kotler on Marketing (1999), Phil Kotler claimed that, "Marketing has the main responsibility for achieving profitable revenue growth for the company (pg 18)." Kotler suggests that achieving profitable revenue growth is derived from finding, keeping and growing profitable customers. His premise is that finding, keeping and growing profitable customers form the basis of marketing's role: We can easily connect finding a customer to customer acquisition and keeping and growing to customer penetration and growing customer value.
These three components can be squarely aligned with three specific business outcomes: market share, lifetime value and brand equity. What company doesn't want to see market share, customer lifetime value and equity continue to improve over time? Most every company wants to be a dominant player in its market however that market is defined. Most every company wants to retain its customers and increase their lifetime value. And ultimately, most every company - whether private or public - wants to increase its shareholder value. This depends on high brand equity. The higher the brand equity, the greater the shareholder value.
We can use these three roles - market share, lifetime value and brand equity as the gauges by which to monitor marketing. We then deploy the appropriate marketing objectives and strategies needed to move the needle on each gauge. The more effective the strategies and the better they are executed; the more positive impact marketing can have on improving each outcome.Moving the Needle
Let's examine these three business outcomes more closely. Our ultimate objective is to move the needle of each gauge. To do this, we need to know the variables of performance and/or performance indicated we need to affect that will impact each outcome. We will need to be able to measure the change and connect our work to the change. We will need quality data and metrics. For each outcome there is a specific set of variables.Market Share
Market share is generally defined as the company's share of total sales of all the products within the category in which the company's brand/products compete. The share number is derived by dividing your company's product/brand sales volume by the total category sales volume.MS = Brand Sales Volume
Total Category Sales
Indicators that your company is gaining share over the competition include the following variables:
- First, more and more potential customers must be made aware of your offer. You must own a share of voice, which is the relative frequency, weight and quality of your communication compared to the competition and clutter.
- Once potential customers are aware of you, they must put you on the short list of consideration. You must have some share of preference, the second variable to monitor.
- Increasing the extent to which your channel partners recommend and sell your products versus competitive alternatives - this is known as share of distribution - the third variable.
Two other variables are important factors:
- The rate at which you attract and acquire new customers.
- The rate of your growth compared to the growth of the category. The actual number of customers you acquire, as well as the rate of acquisition, are key. While you may be able to have consideration, if the customer doesn't select you, you cannot gain share. You now have five quality measures. Strategies and tactics that positively impact these variables will ultimately affect your market share.
Acquiring a customer is just the start. The next key business outcome is to keep this customer and grow its value. Each customer is worth something, and typically the longer you keep the customer the more that individual customer is worth. Most companies know how long they need to keep the customer to recoup the cost to initially acquire that one customer. Customer lifetime value (LTV) is a powerful metric and a meaningful business outcome.
If your company is merely a revolving door for customers, your profitability will suffer. Lifetime value is the net profit each customer contributes to the business over its entire time as a customer. Research suggests that companies with higher lifetime value customers spend less money on servicing customers can increase their prices more easily and can enjoy more referrals (a lower cost of acquisition).
The simplest LTV calculation (there are several) is total revenue received from the customer while a customer minus the costs of providing that customer with products/services. You will need to include costs of goods sold, selling costs and support costs. Using average costs per unit, while sufficient for calculating overall LTV, can be deceiving if using LTV for customer segmentation purposes, because the selling costs and support costs vary dramatically by customer.
Growing LTV is the ultimate indicator of a good return on marketing. In fact, return on marketing investment (ROMI) can be calculated by subtracting the last year's LTV from the current year LTV and dividing the sum by the current years marketing investment.
ROMI—LTV current year—LTV previous year
Four variables will help move the Lifetime Value gauge.
1. Tenure. The longer a customer is a customer the more likely they will continue to be a customer.
2. Frequency. The more frequently they purchase the greater the likelihood their lifetime value will grow.
3. Advocacy. Advocacy measures the degree your customers are loyal, serve as a referral and actively endorse your company and your products.
4. Share of wallet. This is your share of the customer's budget allocated for your types of products/services that you secure. It is a valuable way to measure your ability to compete. Your goal is to have your customers spending more of their allocated budget on products and services from your company as opposed to spending it with competitors.
Perhaps a few examples will help illustrate this concept. It is one thing for a customer to consistently buy the same brand of dishwashing soap, printer paper, medical device, or test equipment again and again. This is purchase frequency. But let's say your company has several products, that is, you make and sell dishwashing soap, paper towels, toilet paper, shampoo, toothpaste, and so on.
Most households buy a variety of these products. The company captures a greater share of this customer's wallet the more of these products the buyer purchases from the same company. The concept applies to any company whether they make medical devices, provide financial services or sell software and services.
The last variable is loyalty. It's one thing to have a satisfied customer, but it is another to have a loyal customer--a customer who is very unlikely to switch and is highly likely to refer. Again, when marketing focuses on strategies and tactics that improve these measures they will ultimately move the lifetime value needle.Brand/Customer Equity
We can now discuss the last marketing metric and business outcome, brand equity. At this point, we are successfully acquiring customers and keeping them. There are numerous and complicated ways to measure brand equity. We'd like to suggest something simpler that drives home the contribution marketing makes. Brand equity is the sum of the value of your customer franchise times your price premium.
Therefore, the greater the value of your customer franchise--which is the aggregate value of purchases from all of your customers who repeatedly buy your brand and the more you can command for your product/service relative to competing offers within your category, the higher your company's brand equity.Brand Equity = Customer Franchise Value * Price Premium
In addition to these two quality measures, three other variables impact brand equity. The rate at which new products are accepted, your product's profit margin compared to the profit margin in the category, and your overall net advocacy score. The advantage of a strong loyal customer base is that these customers are often the first to adopt your newest products and services thereby improving the rate of new product adoption which impacts the time to revenue for a new product. Existing customers give your new offer reference-ability and momentum. Existing customers are more likely to adopt a new product quicker and will help pave the way to entering adjacent markets.
With these quality measures, every marketing professional and executive, can be both accountable and at the same time impact the company's strategic direction. By measuring and monitoring these factors and keeping an eye on the gauges, marketing can begin to understand whether strategies are having an impact and how well tactics are being executed. And more importantly, we can take a seat at the executive table and participate in a meaningful discussion about the business rather than a tactical discussion about trade show logistics, ad placements and e-mail conversion rates.
While these activities are important and still need to be monitored, they won't get us a seat at the executive table. And while focusing on these quality measures and key metrics won't stop the CFO from asking questions about ROI and costs, it will help change the dialogue to one that is about the impact of the marketing programs as a whole on the business.Measure What Matters
We began this discussion about the need for marketing to be more accountable and to develop quality metrics. Hopefully as a result of this article, you have some new ideas on how to focus marketing metrics around business outcomes and how to develop quality metrics that will help you provide insight into how marketing is making a contribution to the company and how to demonstrate that contribution to senior management.
So in closing, we leave you with these three final thoughts:
- Stop talking about improving marketing performance and accountability and start taking action.
- Even if you don't have all the data, start with what you have, define your data gaps and develop a plan to close these gaps.
- Stop reporting on activities. Using activities as a dashboard doesn't give your leadership team the information they need to make important strategic decisions.
Use the measures we've posited to develop your dashboard. Measures that matter are those that help your company make decisions and take action. When used this way, marketing metrics enable a firm to seize a competitive advantage.References
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- CMO Reality Check, June 2005, CMO Magazine, www.cmomagazine.com
- Kotler, Phil. Kotler on Marketing: How to Create, Win, and DominateMarkets. The Free Press, 1999.
- Moving Along the Marketing Accountability Curve, Forrester Research, Marketing Management Analytics, and the ANA, July 2005.
- Patterson, Laura. Measure What Matters: Reconnecting Marketing to Business Goals. VisionEdge Marketing, 2004.