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Better marketing requires better measurement

1st Mar 2006
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Every business wants to improve its marketing performance. But to improve "Marketing", a business needs to be able to measure its performance, in order to understand how it may be improved. Despite its frequent over misuse, the word "Marketing" is not another name for advertising or selling, but comprises all those activities which anticipate and satisfy customer demand profitably. It is within this definition that there is scope for understanding and measuring its performance.

Every business large or small consists of three main areas of activity; finance, business doing, and business getting. The Finance area controls the business money supply, so that cash flow and financial assets are used efficiently to meet liabilities and future investment. The "Business Doing" area, generally known as "Production", "Services" or "Operations", comprises all those activities which produce the product or service, such as purchase of materials, product production, or work servicing teams etc. The "Business Getting" area, generally known as Marketing, or sometimes "Business Development", comprises all those activities which anticipate and satisfy customer demand profitably.

Defining performance in finance and Business Doing is done in terms of management and financial ratios e.g. Net Profit/Equity Capital; Current Assets/ Current Liabilities; Production Contribution/Production assets. However, it has frequently been held by Marketers, that because Marketing is more an art than a science, it could not be measured in any meaningful way, but this assertion is patently wrong. As all marketing is investment, why would companies not want to measure the returns on their money? Many Chief Marketing Officers (CMOs) are now seeking to find ways of justifying their activities and budgets through measuring marketing performance.

A survey in the spring of 2004 of over 320 of America’s leading technology Chief Marketing Officers reveals that less than 20% of the companies surveyed, had developed meaningful measures for their marketing organizations. Over 80% of the companies surveyed expressed dissatisfaction with their ability to benchmark their marketing programs’ business impact and value. Yet those companies which had established a formal, comprehensive measurement system achieved superior financial returns, and had higher CEO confidence in their marketing function. A survey of 160 European companies in the summer of 2005 showed similar results. Less than 20% of the companies had developed meaningful measures of marketing activities, and over 80% were dissatisfied with their ability to measure marketing value.

The prime measurement in any business is one of output. The purpose of "Marketing" or business Getting Activities must be to maximize the generation of profitable revenue. Measuring "Sales Revenue" is therefore insufficient to measure marketing performance, as it does not relate to profit. "Profitable revenue" which is the measure of Marketing output, is known as the "Marketing Contribution" and is defined as:

Sales revenue less the total direct and indirect marketing costs, incurred by Marketing’s activities.

While measuring Sales revenue is relatively easy, establishing the total direct and indirect costs of marketing requires a detailed understanding of the full extent of marketing activities, which many businesses find difficult to define, and from which they habitually fail to collect the relevant data.

Establishing the Return on Marketing Investment (ROMI) across the whole marketing function requires the understanding of the various marketing activities that drive sales and generate revenue. The accepted standard formula to calculate the Return On Marketing Investment (ROMI) is based on –

'Increase in sales attributable to the activity' less 'Cost of the activity' (i.e. the investment)
'Cost of the activity'.

The formula is generally limited to a specific marketing investment such as an exhibition or advertisement, but as it is difficult to identify which sales are attributable to which activity, it does not readily apply to the marketing function as a whole. Increasingly Marketers believe that measurement of all elements of the marketing mix is critical to their personal success and credibility, as well as that of the business. What is required, often called "dashboard reporting", includes the use of key indicators which collectively provide performance information. Many Marketers use data on sales, market share, customer satisfaction, customer retention and customer profitability as their performance indicators, but this information is of limited value when considering the return on Marketing investment as a whole, or for comparison with the performance of other business activities.

The prime interest of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), is to ensure that all business assets and investment are used efficiently to maximize profits and minimize expenditure.

For the Chief Marketing Officer, the objective of efficient marketing management is to maximize profitable sales revenue, while minimizing marketing costs and the marketing assets used. To have equal importance with other management performance indicators, marketing requires a single indicator which encompasses the overall performance of the marketing function. Such a single indicator enables fluctuations in performance to be easily seen, and allows comparison with other business indicators such as Return on Assets, Stock turn, productivity etc. The Optimum Marketing Performance (OMP), is the particular indicator which encompasses the overall marketing performance by directly relating revenue with Marketing investment. Thus the efficiency of the Marketing function in managing its costs and resources in the generation of profitable revenue, can thus be expressed as a single figure as the OMP.

Establishing the OMP for any business requires the detailed understanding of the marketing budget, and the way that marketing generates business and money. For many businesses, the marketing budget covers little more than advertising and sales expenditure. However, since Marketing, includes all those functions which anticipate and satisfy customer demand profitably, most activities which are neither purely financial nor production, tend to be marketing related. Calculating the OMP requires careful analysis of quantified performance data from all of the activities involved in the wider perception of Marketing. While the principle of establishing the OMP is the same for every business engaged in profit generation, the detail and method may vary in different types of business, e.g., consumer, industrial, business to business, long term contracts, consultancies, and financial.

Using the ratios of OMP and Marketing Contribution together defines the performance of the Marketing Function in a way that can be directly related and compared to the performances of both the Finance and Business Doing areas and to the business as a whole.

When used on a frequent and regular basis, the OMP and Marketing Contribution ratios allow continual assessment of the Management of the marketing function’s use of resources and return on investment. Fluctuations and trends can be easily identified in the overall performance, which prompts enquiry and analysis for the causes of change whether positive or negative.

The efficiency of Marketing Performance is based on quantified marketing data, but the effectiveness of marketing decision making is firmly based in the depth of the Marketing Function’s knowledge of its market, competition, and its own procedures. There is no substitute for factual marketing knowledge. Every business should regularly undertake a detailed "Marketing Audit" to establish the depth of knowledge that it has and to highlight those areas where its knowledge is limited or nonexistent, so that decisions may based on confirmed information rather than assumptions, or guesswork.

Marketing Audits should include questions on Marketing Strategy and the Planning process, the Product/Service Range, Company Performance (strengths and weaknesses), the Market Size and Structure, the Buying Process, and the Competitive Climate, as well as many other areas where knowledge is essential or desirable for informed decision making. All questions should be framed to require clear, concise and verifiable answers.

To effectively demonstrate the relationship of marketing performance with profits, marketing performance must be reported in a manner which is both intelligible to CEOs and CFOs, and comparable to measurements of other business areas. Chief executives, accountants and managers responsible for marketing, must know continuously how all their business activities are performing, including Marketing. Those who are responsible for Marketing must be able to identify the factors that drive the marketing function, with quantified indicators of marketing performance, providing a clear guide to management performance across the whole organization. Continuously measuring marketing performance will help to satisfy the management need of Chief Executives and Accountants, while enabling Marketers to demonstrate in the boardroom, the contribution of Marketing to the business.

By Nicholas C. Watkis AE DipM CMC MCIM MIMC

© N.C.Watkis, Contract Marketing Service 02 Feb. 06
Contract Marketing Service, Established 1981, Management Consultants specializing in measuring Marketing Performance.

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