What do you get out of marketing?

Marketers must be able to demonstrate to the chief executive and senior management, not only what they contribute to the business in terms of profitable revenue, but justify how they used the assets and investment efficiently to achieve it.

By Nicholas Watkis, Contract Marketing Service

When it comes to measuring marketing performance, most marketers seem to have only a limited perception of what is measurable, relevant and significant. The problem starts with the definitions of measurement, metrics and benchmarks. While no two marketers are likely to agree on definitions, the best are probably those of Laura Paterson of VisionEdge Marketing Inc. She defines “metrics” as "the standards for measurement, providing target values that a company must achieve to reach a certain level of success;" “measurements” as "the raw outcome of a quantification process, such as a company’s numbers, ratios and percentages;" and “benchmarks” as "the standards against which all others values are judged."

Marketers tend to measure performance according to their specialisations rather than of the marketing function as a whole. However, there are about 75 management ratios that apply specifically to marketing management, and in excess of 150 other measurements that relate to specific marketing activities, irrespective of the type of business organisation. The problem for those in charge of advertising, promotion, customer relationship management, product and market management, is to decide what is relevant.

Marketing is defined as all those activities that anticipate and satisfy customer demand profitably. Unfortunately, many marketers often take a narrow view of marketing, by excluding the sales function. In so doing, they create a problem in that while they measure inputs in terms of cost and investment, without a reference to sales, there are very few outputs in terms of revenue gained.

The purpose of measurements, metrics and ratios, is to establish quantified achievement, and to provoke questions on knowledge, performance and decision-making. Therefore, key measurements of inputs and outputs should be in the same measurement units to allow direct comparison with each other. Unfortunately, what many marketers seek to measure often have inputs and outputs with different measurement units, that prevent direct comparison with each other.

For example, when measuring the return on investment in the advertising budget, the input investment is quantifiable in monetary terms, but the output, with the exception of response advertising, is in non-monetary units, being concerned with the number of adverting exposures, the estimated number of viewings and the size of the potential audience. This begs the question - what should be measured, in what units, to what purpose and how will such measurements be used?

During the 1970s, the the Polish government sought to make its furniture industry more productive in world markets. To achieve this, furniture factories were rewarded by the government for their productivity, which was measured in the tonnage of furniture manufactured. As a result, according to an article in The New York Times (March 1999) homes in Poland contain the world’s heaviest furniture. Marketing performance measurements cannot produce their intended outcomes if they do not measure those factors that actually affect the business.

The question for marketers is how to select the right measurements, metrics and benchmarks? The answer stems from the responsibilities of the marketer and the objectives of the business plan.

Cash flow drivers

For the executive in charge of the overall marketing function, the objective is the maximising of profitable revenue, while minimising the costs and the use of assets. Assessing achievement will therefore involve measurements of costs and revenue in financial terms. For executives responsible for other marketing disciplines, advertising, research, brand and market management, the measurements will be different, because they are supportive constituents of the marketing function and do not in themselves generate revenue.

The chief executive of the company looks to the marketing function to generate the sustainable revenue essential for the business In seeking to select the right measurements metrics and benchmarks, marketers first need to identify the company activities which drive the cash flow.

These cash flow drivers will originate from the company business plan, and may be based on high profit margins, and the rapid turnover of inventory. Cash flow drivers also result from the sources of cash such as customer acquisition and retention.

Marketers then need to identify those marketing activities that ultimately affect the company cash flow drivers. Although the marketing function comprises a wide range of disciplines, only some of their activities ultimately affect the company’s cash flow drivers. These activities may include consumer promotions, trade exhibitions, product web-sites, and advertising programmes.

Each marketing activity identified as affecting a cash flow driver requires an outcome metric or measurement to enable the evaluation of how well the intended results were achieved. In most cases, these measurements will represent intermediate results of particular activities, such as coupon redemption, or sales leads generated, because they do not necessarily represent cash flow.

It is important to show how successful performance on each outcome measurement or metric affects one or more of the business cash flow drivers. For example, the relationship between customer loyalty programs and customer retention, or sales enquires, quotations and conversions.

Marketers have a large number of potential measurements and metrics available to them including brand awareness, customer satisfaction and website statistics. However, chief executives and finance directors are generally more interested in financial data such as revenue and costs, which are comparable with other areas of the business.

Marketers must be able to demonstrate to the chief executive and senior management, not only what they contribute to the business in terms of profitable revenue, but justify how they used the assets and investment efficiently to achieve it. Choosing the relevant measurements metrics and benchmarks will enable them to do so.

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