25 essential marketing_metrics

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25 essential marketing_metrics

  1. 1. 25 ESSENTIAL MARKETING METRICS to Link Marketing Performance with Financial Goals By Saleem SufiEdition 1 | 2011 METRICS INTEGRATED www.MetricsIntegrated.com
  2. 2. 25 Essential Marketing Metrics Copyright © 2009-2011 By Saleem Sufi & Metrics Integrated All rights reserved. This book may not be producedin whole or in part, by any means, without permission. For information regarding the book, contact: Saleem Sufi (Author) saleem@metricsintergrated.comFor more information on Metrics Integrated, contact: Sandra Jacobs sandra@metricsintergrated.com Created and Printed in United States of America Copyright © 2009-2011
  3. 3. 25 Essential Marketing Metrics Introduction ..................................................................1Chapter 1. Metrics Framework ......................................................5Chapter 2. Revenue Growth Metrics .............................................9 Metrics #1: Sales From New Customers ..................................10 Metrics #2: Sales For New Products.........................................10 Metrics #3: Sales Price Increase .............................................. 11 Metrics #4: Discounts Allowed ..................................................12 Metrics #5: Customer Wallet Share ..........................................13 Metrics #6: Price / Brand Premium ..........................................14 Metrics #7: Market Share ..........................................................16 Metrics #8: Market Penetration .................................................18Chapter 3. Profitability Metrics ....................................................20 Metrics #9: Customer Profitability .............................................21 Metrics #10: Return on Marketing Investment (ROMI) .............22 Metrics #11: Customer Lifetime Value (CLTV) ..........................23 Metrics #12: Return on Customer .............................................28Chapter 4. Sales Productivity Metrics .........................................30 Metrics #13: Average Sale $ per Salesperson ..........................30 Metrics #14: Selling Costs as % of Sales ................................32Chapter 5. Customer Metrics .................................................. 33 Metrics #15: Customer Retention Rate .....................................33
  4. 4. 25 Essential Marketing Metrics Metrics #16: Customer Satisfaction ..........................................37 Metrics #17: Customer Complaints ...........................................39 Metrics #18: Churn Rate ...........................................................40 Metrics #19: Net Referrals ........................................................41 Metrics #20: Customer Engagement ........................................42 Metrics #21: Customer Recency ...............................................43Chapter 6. Brand Metrics ........................................................ 45 Metrics #22: Brand Awareness .................................................46 Metrics #23: Brand Equity .........................................................46 Metrics #24: Response Rate.....................................................48 Metrics #25: Conversion Rate...................................................49Chapter 7. Conclusion ............................................................. 51 About the Author ...............................................................55 About Metrics Integrated ...................................................58
  5. 5. 25 Essential Marketing Metrics “Today you have to run faster to stay in the same place” Philip Kotler The recent global economic crises have forced businesses to change in many ways they operate. Most corporate boards, CEOs and CFOs now believe that the only way to manage a business effectively is through intensive financial management and scrutiny. They expect their executives to provide more justification for the budgets they seek and demonstrate adequate returns on their spending. This has created renewed pressure not only on the Finance executives to install extended systems and procedures for detailed evaluation of various expenditure but also on operating executives to train and groom their staff to develop the necessary financial acumen and capability to handle such requests. During the last decade, since the recession after the 9/11 and the dotcom burst, businesses in general have accomplished significant gains in productivity and operational improvement. Intense business competition and continuous focus on cost reduction forced manufacturing, supply chain and support functions to reach to the new level of efficiency and operational excellence. Marketing, however, in most organizations as a function generally escaped such intense cost pressures on the belief that cutting down marketing costs could be too risky for the future of the company. Long term nature and lack of transparency in cause and effect relationship between marketing costs and financial consequences did not let the corporate executives venture with unknown risks. The result is that marketing expenses as percentage of sales show significant increases for many companies in the last few years. After the recent economic turmoil of 2008-09 however, companies are much more proactive and spending money in any area of their businesses, including marketing, now requires lot more financial scrutiny and justification. This has created pressure on marketing executiveswww.MetricsIntegrated.com 1800 604 4121 1
  6. 6. 25 Essential Marketing Metrics to provide more financial and ROI type analysis on their marketing expenditure. They are now forced to quickly establish necessary analytical tools and capabilities within the marketing function to handle this urgent requirement. Generally, in companies there are detailed procedures and widely accepted practices to thoroughly evaluate even a $10,000 expenditure on an item of fixed assets before it is spent. However, when it comes to financial evaluation of multimillion dollar spending on marketing campaigns and programs, practices widely differ and any detailed financial evaluations are almost non-existent. It has long been accepted that most marketing expenditure particularly on advertising and brand development do not require any detailed advance financial evaluation and the confidence of the marketing executives and the belief of the corporate executives that some value would be realized in the long term is considered sufficient. Additionally, despite the uncertainty about the returns on marketing spending, there is a general belief that spending on marketing is essential for the success of a company. The famous quote from a company head “I am certain that half the money I am spending on advertising is wasted. The problem is, I do not know which half” is still true for many companies. The question is not whether the companies should spend money on marketing, but when and how much. The return on marketing campaigns and programs must be evaluated before the budgets are approved and systematically measured throughout the campaign to ensure efficiency and effectiveness of the spending as well as to correct the course if the results are not coming through as project and planned. In the recent past with the advancement in ERP, CRM and other online automated systems, there is extensive data available to companies on customers, consumer demographics, products and buying patterns that can be effectively utilized to create useful marketing metrics. Corporate boards, CEOs and CFOs are getting impatient with the lack of marketing metrics that can help them understand the linkages between marketing spending and the corporate financial goals. It is the time for the marketing executives to initiate a more robust quantification process of their marketing programs and ensure that these are clearly linked and fully aligned with the corporate financial goals.www.MetricsIntegrated.com 1800 604 4121 2
  7. 7. 25 Essential Marketing Metrics One logical question from many marketing executives however is where to start. The software market is crowded with expensive solutions in the form of complex CRM systems and sophisticated marketing dashboards and scorecards with unnecessary bells and whistles. For a mid market company however the best place to start in an effective and economical way is to establish a system of marketing metrics through creating their own measures on a template based on an Excel spreadsheet. Microsoft Excel is probably the simplest but most powerful software that provides sufficient flexibility to experiment and test a metrics model before it stabilizes and proves its worth within the specific culture of a company. Once it reaches to a level of stability it can easily be migrated to a complex CRM or ERP platform. Implementing a new system of metrics is about performance measurement and performance measurement is a sensitive subject that involves people and culture of the organization. No two companies, even in the same industry with same product portfolio, can be the same. The new metrics have to be carefully evaluated and experimented to match the company requirement and evolve within the company culture. It takes at least 6 to 12 months to see if the metrics are properly established and accepted within the organization. In the recent past, marketing experts have suggested metrics to measure the aspects of marketing that were earlier considered difficult to quantify if not impossible. Among these metrics, the most popular ones are Customer Profitability, Customer Life cycle Value (CLTV), Return on Marketing Investment (ROMI), and Brand Equity. These metrics have been built on a common concept however, there are variations in approaches and formulation suggested by different authors and experts. A common challenge that remains is that most of these metrics are non financial and even for the ones that are financial it is difficult to relate to the corporate financial goals. For example, a higher customer retention rate may not always lead to increase in the profitability of the company unless customers are evaluated through CLTV and non profitable customers are removed from the customer base or converted into profitable customers through price increase or cross selling efforts. The role of Marketing over a period of time has shifted from functional and tactical to strategic in most organizations. Marketers must know and understand their companies by understanding their common financial measures. There is a deep and integral link between marketing andwww.MetricsIntegrated.com 1800 604 4121 3
  8. 8. 25 Essential Marketing Metrics financial performance. Financial performance is driven by marketing objectives linked to customer, product, price, place and promotion. Marketers cannot do an effective job unless they deeply understand this link. Marketing is about future and the future is uncertain. Marketing generally requires significant financial investment in future. Ultimate objective of marketing is to realize the corporate financial goal of creating shareholders value. With increasing pressure to demonstrate financial returns from their marketing investment, marketing executives have to take charge of managing the financial returns and risks from their marketing investments. It’s the time for CMOs to establish a deeper and long lasting partnership with their CFOs.www.MetricsIntegrated.com 1800 604 4121 4
  9. 9. 25 Essential Marketing Metrics 1 Chapter Metrics Framework A major issue in linking marketing spending with financial performance is the length of time it takes to realize benefits from such expenditure. The benefit out of other functional spending is generally short term and visible. Operating costs in manufacturing, supply chain, sales, IT, Finance etc. Provide immediate benefit that is visible and tangible in most cases. Money spent on marketing programs, however may take multiple years before the benefit is fully achieved and realized. A second challenge with marketing spending is the lack of cause and effect relationship between the marketing programs and the financial results. For example, the outcome from marketing programs aimed at developing brand loyalty or improving customer relationship is hard to measure directly in financial terms. Thirdly, the nature of the marketing programs is risky. Marketing executives argue that their marketing programs are investment in the future of the company. Accounting rules, however, consider these spending as expenses for the period and require to be charged off on the P&L statement of the current period. Influenced by accounting principles, financial managers in general have not enthusiastically pursued ways and means to measure the ROI on marketing spending. In the table below, a framework has been presented to show the linkages between typical marketing activities and marketing objectives with the corporate and financial goals of a company. This framework is based on balanced scorecard approach, as developed by Robert Kaplan and David Norton. This framework considers the marketing activities as input to reach marketing objectives which lead to realization of corporate and financial goals. Put differently, marketing activities and marketing objectives should be treated as ‘input’ and corporate and financial goals should be considered ‘outcome’.www.MetricsIntegrated.com 1800 604 4121 5
  10. 10. 25 Essential Marketing Metrics Typical marketing activities can be clustered into the following categories: 1. Demand Generation: Mainly consisting of selling and demand generation activities including short term marketing campaigns and promotions aimed to increase sales. 2. Customer Fulfillment: Customer support activities focused on optimizing and delivering on a compelling customer value proposition. 3. Customer Relationship: Comprised of marketing communication, loyalty programs, and customer retention activities. 4. Branding & Image: Public relations, brand promotion and brand/corporate advertisement. 5. Infrastructure & Capability: Mainly IT and HR related structure and support activities. These activities and costs are considered ‘Enablers’ for all other marketing activities. It should be noted that the expected impact of different market activities varies in time frame depending upon the category involved. Demand generation and customer fulfilment activities are short term in nature and their impact is usually noticeable within a year. Customer relationship activities are somewhat mid-term in nature and the impact of such activities is more significant in 1 to 2 year time frame. Branding and Image building activities are long term in nature and their impact usually results in 2 to 4 year time period. In the remainder of this book, the metrics have been proposed for each category listed above. It is to be noted however that the metrics suggested under each category are not mutually exclusive.www.MetricsIntegrated.com 1800 604 4121 6
  11. 11. 25 Essential Marketing Metrics Marketing Activities Marketing Objectives Corporate Goals FInancial Goals Demand Generation: Sales Activities - Demand Generation Revenue GrowthCampaigns / Promotions - Market Share Profitability Sales Productivity Customer Fulfillment: Customer Service - Customer Value Customer Equity Product Management Proposition Price Management Supply ChainCustomer Relationship: - Customer Retention -ShareholdersMarket Communication - Customer Growth Customer Relation- Value Advertising - Customer Satisfac- ship Loyalty Programs tion - Customer Acquisi- Branding / Image: tion Public RelationshipBraniding / AwarenessCorporate Advertising - Brand Loyalty Brand Equity - Company Image Supply Infrastructure: Planning / Strategy Market Research Capabilities Infrastructure - Enablers Linkage from Marketing Activities to Corporate / Financial Goals Different metrics serve multiple purposes and can be used to measure the progress of several marketing objectives. This book should serve as a reference guide for the marketing professionals interested in developing and implementing an initial framework of marketing metrics in their organizations with an objective to create linkage and visibility towards accomplishing financial goals. It is important to reiterate that many marketing programs are long term in nature and it is not possible to see the results and outcome in the same year when the money is spent. Unfortunately, accounting rules require closing the accounting periods on a quarterly or at most yearly basis. This creates challenge for many business managers to understand the linkage between cost and benefit. According to accounting rules, all marketing spending is considered expenses and charged off in the same year when spent. A system and framework of marketing metrics, when regularly maintained and updated, help provide a better, meaningful and more realistic picture www.MetricsIntegrated.com 1800 604 4121 7
  12. 12. 25 Essential Marketing Metrics of the marketing and financial performance of the company. It is highly risky to depend and use only the accounting information for managing strategic part of the business. Accounting information is prepared based on strict GAAP rules and has its uses and benefits for the external shareholder. Marketing executives must ensure that their marketing performance is not being interpreted through accounting information only.www.MetricsIntegrated.com 1800 604 4121 8
  13. 13. 25 Essential Marketing Metrics Revenue Growth 2 Chapter Metrics There are several common metrics widely practiced to measure the revenue performance. Unfortunately, only a few go beyond measuring the historical growth. Most measures are adequate for the purpose of standard financial analysis. To understand sales revenue growth from a marketing perspective however, we need a different set of metrics which can help develop deeper insights. This can be accomplished by decomposing sales keeping in mind marketing objectives of maximizing revenue growth through an optimum marketing mix. To develop an insight, it is helpful to look at the figure below. If overall sales number can be split into each quadrant, it can tell us a lot about the productivity of marketing programs than simply looking at the growth of the total sales number. PRODUCT Existing New Existing Product Penetration CUSTOMER Development Customer New Development Diversification [ Growth Strategies ]www.MetricsIntegrated.com 1800 604 4121 9
  14. 14. 25 Essential Marketing MetricsMetrics # 1: Sales from New Customers: One of the objectives of marketing is to acquire new customers and develop and grow them fast enough to drive revenue growth and profitability. A powerful metric to evaluate the performance in this area is to separate the ‘sales from new customers’ and compare it with the target or trend from previous years. Sales $ from New Customers = Total Sales $ -- Sales $ from Existing Customers A further extension of this metric could be ‘Average Sales from New Customers’, and can be measured as: Sales $ from New Customers Average Sales $ from New Customers = Number of New Customers This metric highlights the average progress by a new customer and should be compared with the average acquisition cost for a new customer. Although the size of the first year sale may not be reflective of the potential of a new customer, it does indicate the economic justification of acquisition costs as well the expected potential of new customers based on where they start.Metrics # 2: Sales from New Products: Companies spend substantial amounts of time and money developing new products. While it is easier to sell the existing products already established in the market place with satisfied customers, the company must to go through the pain of introducing new products to survive in the market in the long term. Once introduced and accepted, it is easier to www.MetricsIntegrated.com 1800 604 4121 10
  15. 15. 25 Essential Marketing Metrics command higher margins on new products with a longer life cycle than the matured existing products soon to be phased out. Sales $ from New Product = Total Sales $ -- Sales $ from Existing Products This metric explains the productivity of new product introduction programs as well as the performance of the product itself. The importance of this metric is relative to a company depending on its place on the technology roadmap of the industry involved. For a high tech company with shorter product lifecycle, this metric is very critical. For companies with commodity type products with a longer lifecycle, this may not be much relevant. A clear understanding of the definition of “New Products” is essential. Packaging changes and small variations in the characteristics should not be considered to qualify as New Product.Metrics # 3: Sales Price Increase: Price increases are probably the easiest but the riskiest way to increase the bottom line in the short term. Price management therefore has evolved as more of an art than a science. Despite all the risks involved to lose market share, companies do want to play with prices to optimize their profits. A simple formula to capture the impact of price changes is following. ‘Current Period’ and ‘Previous Period’ can be substituted for ‘Actual’ and ‘Budget’ or ‘Target’. Units sold x (Average Price Current Sales Price Increase $ = Period -- Average Price Previous Period) This metric captures the impact on sales $ of price fluctuation between the two periods and is an indicator of the company’s ability to manage price changes. The formula described above is simplistic. In reality, companies have diverse products with different price levels. The number of SKUs may run in thousands and aggregating quantitative volumes may not be www.MetricsIntegrated.com 1800 604 4121 11
  16. 16. 25 Essential Marketing Metrics meaningful because of diversity of pack sizes and nature of the products. This practical issue can be easily tackled by creating a ‘Price Variance Analysis’ model on an Excel spreadsheet. To capture the overall price variance, the above formula can be repeated for each different product (or SKU) in rows and then adding up the price variance in all those rows to reach an overall price increase or decrease. A more complete analysis would involve extending the above metric to a ‘Price/Volume’ analysis model where volume variance is also captured along the price variance. Sales Volume Average Price Current Period x (Unit Sold = Increase $ Current Period – Units Sold Previous Period) A further extension of the price/volume analysis is price/volume/mix analysis where each component of the variance is measured separately. This analysis is very useful to understand the impact of product mix changes on sales revenue in a multi product environment. Marketing strategies to up-sell products can be very effectively measured through price/volume/mix analysis. For more ambitious analysts, a detailed template to create a model for a complete ‘Price/Volume/Mix’ Analysis is available. If you are interested in getting a free copy of the Excel template, please send your request to Saleem@MetricsIntegrated.com The above three metrics are intended to decompose sales in order to understand the impact of new customers, new products and price increases (a major focus of marketing). The next three metrics are designed to measure the potential of sales that was not realized or lost.Metrics # 4: Discount Allowed: Discounts are common and an average company deals with a variety of discounts. Unfortunately, in most computer systems while recording sales, these discounts are net off and only net selling prices are recorded, resulting in a complete loss of track how much discounts have www.MetricsIntegrated.com 1800 604 4121 12
  17. 17. 25 Essential Marketing Metrics been allowed. This metric requires tracking of discounts. To get access to data, solution is easy. Most computer system do have list prices captured somewhere. It only requires a small tweak to let the system track various kinds of discounts whenever a sale is recorded. Discounts $ Allowed = Units sold x (List Price -- Net Price) An average company passes substantial value to its customers in terms of volume discounts, price discounts and other type of special discounts. By tracking this information, a company can manage and rationalize various types of discounts. This process can lead to substantial recovery in net selling prices. As we all know any increase in prices directly add into the bottom line.Metrics # 5: Customer Wallet Share: Marketing strategies in the recent past have significantly focused on creating value through customer retention. Retaining customers is more economical then acquiring new customers. But the focus of marketing is not only on retention. Marketers want their customers to be more profitable for their lifetime. This has resulted in newer approaches like customer lifecycle profitability management, customer loyalty programs and customer wallet share. Wallet share is a term used to measure the company’s share of a customer’s full buying potential in a specific product category (thus customer’s wallet). Sales to Customer in a category Customer Wallet Share % = Total Spending of that Customer in that category For example, if a customer has $2 million to spend on a particular product or product category and a company’s sales to that customer for the particular product totals $1.2 million, then the company said to have a 60% share of wallet of that customer. This also www.MetricsIntegrated.com 1800 604 4121 13
  18. 18. 25 Essential Marketing Metrics means that the customer is spending $0.8 million (40% of his wallet) with competitors. S 1.2 million Customer Wallet Share = = 60% S 2.0 million Customer wallet share metric provides a focused approach to Marketing in order to influence specific customers to grow their business with the company. Since the company is already selling certain volumes to the customers, it is very attractive for the company to increase the sales volumes to the same customer at marginal costs to serve. Even for manufacturing costs, the company may be able to save substantial costs by not spending additional fixed costs. Customers are usually aware of the economy of scales benefit the company may gain due to increase in their volumes. But they are also to benefit by consolidating their purchases from one supplier. Usually, such deals are aggressively negotiated but ultimately both parties benefit. Customer wallet share metric is also a gauge to measure the effectiveness and influence of sales and account managers towards their customers. A declining ratio may provide warning signs beyond the sales and marketing issues leading to product quality or service issues. In any case, it provides companies with the opportunity to customize strategies towards specific customers to maximize revenue growth. Access to data to measure customer wallet share can be difficult but usually, sale and account managers are quite close to customers and have good insights into overall spending limits of their customers.Metrics # 6: Price Premium (or Brand Premium): “You don’t sell through price. You sell the price.” Philip Kotler Having a higher price premium (or brand premium) is the dream of a marketer. Most of their efforts are focused on communicating the idea to their customers that their product or service is unique and differentiated. This is however only proven when majority of customer started to believe www.MetricsIntegrated.com 1800 604 4121 14
  19. 19. 25 Essential Marketing Metrics into this by paying a higher price for their products than a competitor charge for similar products. Average Retail Price of Own Product Price Premium % = Average Retail Price of all Comparable Products This metric describes the strength of a company’s brand because of the price premium it enjoys. Price premium is the price that can be commanded above the normal market price of similar products. Usually this is possible due to a strong brand name, well known distinctive quality or functionality or any other unique features of the product or service. The formula for price premium metric may result in a negative value if the average price of the company’s product is less than the market average of all competitors’ products. In any case, it either shows the sales premium it enjoys due to higher than market prices or the lost potential of sales due to lower prices that can be recovered by raising prices. This is an excellent indicator of the value of the company’s products or services as perceived by customers. QUALITY Low High Low Economy Penetration PRICE High Skimming Premium Pricing Strategies A price or brand premium is established over a long period. A company may take temporary advantage of the market by imposing higher priceswww.MetricsIntegrated.com 1800 604 4121 15
  20. 20. 25 Essential Marketing Metrics for a short period of time. This skimming strategy does not warrant to be called a brand premium. A brand premium is established in a competitive environment for relatively longer period of time. A few excellent examples of brand premium are Rolls Royce, Rolex, and Maserati. The data gathering for measuring price premium may be challenging but possible. It is important that sufficient market research is carried out to gather sufficient data to justify a declaration of price premium. Besides pricing data, qualitative factors related to the perception of customers about the brand or the product must be considered. Temporary lower level of competitors’ price due to promotion or price cuts should be ignored for calculating the price premium.Metrics # 7: Market Share: “If you don’t have a competitive advantage, don’t compete.” Jack Welch A major focus of marketing is to create opportunities for profitable growth mainly through increase in sales revenue. The measures we have covered so far are internally focused. To measure the competitive growth performance in market place, marketers use Market Share which compares own sales growth with growth in the overall market or market segment. Own Company Sales in Units or Dollars Market Share % = Total Market Sales in Units or Dollars Market share describes a company’s sales as percentage of total sales volumes or dollars in a specific industry, market, or market segment. It clearly shows the competitive strength of the company against all other players in that market or market segment. Market share can be measured for an entity at any level of geographic hierarchy; whether a city, country or at global level. www.MetricsIntegrated.com 1800 604 4121 16
  21. 21. 25 Essential Marketing Metrics Depending upon the nature of the industry it is possible that market share is measured only in dollar terms. This happens when the nature of the products is so heterogeneous that it does not make sense to aggregate quantitative volumes. However, when it is possible to measure the market share in dollar as well as in units, the resulting ratio may not always be the same and may reveal additional interesting information. To illustrate, if a shoe manufacturer has sales of $24 million and the total size of that market segment is $150 million, the market share for that shoe manufacturer is 16%. Similarly, in terms of units, if the same manufacturer sells 0.75 million pairs and the total size of the market is5.0 million pairs, the market share for the shoe manufacturer is 15% based on units sold in the same market. In this case, 1 point higher in dollar based market share reveals that this shoe manufacturer enjoys a 6.7% price premium over the market. Market Share % (Dollar based) 16% Price Premium = = = 6.7% Market Share % (Unit based) 15% Market share brings an external and strategic perspective. Growth in sales when looked internally may create a false sense of satisfaction and complacency. In high growth industries, a company may quickly lose its market standing if it is not growing fast enough to maintain its market share. In contrast, companies in matured industries may still strengthen their market position by achieving meager growth in their sales. The internal sales numbers in dollars and units are usually available from the Accounting or Finance Department. The sales information of the market may come from several outside sources, including industry trade associations, consulting firms, and market research firms etc.www.MetricsIntegrated.com 1800 604 4121 17
  22. 22. 25 Essential Marketing MetricsMetrics # 8: Market Penetration: “Don’t watch the product lifecycle; Watch the market lifecycle.” Philip Kotler Market Penetration is one of the common marketing strategies to grow a business. It’s a measure of popularity for a brand or product category. Number of Customer Who Purchased a Product in the Category Market Penetration % = Total Number of Prospects in that Category Market Penetration helps companies assess remaining growth potential in the existing markets. Compared along the four growth strategies (see below), i.e. Market Penetration, Market Development, Customer Development or Diversification, Market Penetration is the most cost effective and economical way of achieving growth. CUSTOMER Existing New Existing Market Customer Penetration Development MARKETS Market New Development Diversification Growth Strategies www.MetricsIntegrated.com 1800 604 4121 18
  23. 23. 25 Essential Marketing Metrics Let’s assume a market for coffee drinkers in a specific city. Current demographics reveal that out of the total population of 12 million, 40% fit the profile of a coffee drinker. Current demand is generated out of 2.4 million coffee drinkers. The market penetration at this level is 50%. 2.4 Million Market Penetration % = = 50% 4.8 Million (40% of 12 Million) Depending upon the level of penetration, it can be economical or expensive to penetrate further. A lower penetration warrant enough room for existing companies to penetrate further with less effort and costs. A higher penetration signals saturation of the market and the efforts to further increase penetration may be expensive. Market Penetration metric helps the marketers to understand and decide whether to seek further sales growth by acquiring existing product users from their competitors or by expanding the total population of product users. Finding the data for measuring market penetration can be challenging. However, basic market research through small scale surveys can be helpful.www.MetricsIntegrated.com 1800 604 4121 19
  24. 24. 25 Essential Marketing Metrics 3 Chapter Profitability Metrics “Results are gained by exploiting opportunities, not by solving problems.” Peter Drucker It is said that the sole purpose of marketing is to get more people to buy more products, more often, and for more money. So if the marketing is not creating more profits, it is not doing its core purpose. Unfortunately, traditionally there have not been many metrics that are used in marketing to measure the profitability. It is also well known that the ultimate purpose of a business (for profit) organization is to make money and create wealth for its shareholders. While too many companies and their sales and marketing department are too busy aggressively growing their revenues, it is apparently clear that any growth without profits is meaningless and actually harmful. It is therefore, critical that the overall model of marketing metrics is adequately balanced between growth and profitability measure to maintain a good balance. Traditional financial measures are over dominated by metrics that measure profitability. In this text, we do not have to repeat those measures. What we need is the strategic measures within the context of marketing metrics that can ensure that marketing campaigns and programs are profitable and adding value to the bottom line. In addition, we need to ensure that we leverage our focus on customer to generate more profits through Customer Lifetime Value (CLTV) model.www.MetricsIntegrated.com 1800 604 4121 20
  25. 25. 25 Essential Marketing MetricsMetrics # 9: Customer Profitability: Peter Drucker said “the purpose of a business is to create a customer...”. If we combine this logic with more common understanding that the purpose of a business is to make money, it seems obvious that each customer must be profitable. Unfortunately, not all customers are equal and not profitable. It is therefore important that we measure customer profitability on a regular basis. There are many acceptable approaches how to compute customer profitability. Below is a basic model. Customer Revenue from a specific Customer -- Cost of = Profitability Products or Services sold -- Cost to Serve Customer Profitability metric measures the profits earned through a specific customer or a segment of customers. As the focus of marketing has shifted to customer in the recent past, this metric has become a critical measure. Based on this metric, companies are making adjustments in the service level to customers to align with the level of profits earned. Indeed, the customers who provide higher profitability deserve more attention and better service from the company. It is estimated roughly that in most companies 80% of the profit is contributed by 20% of the top customers. Unfortunately, half of this 80% profit is eroded by the 20% of the bottom customers who are unprofitable. The calculation of customer profitability remains a challenge in most companies as the accounting systems are yet not geared up to handle the issue. There obviously seems no problem in ascertaining the sales revenue for individual customers. Most companies have that basic system in place. Additionally, finding the cost of the products or services sold to specific customers also does not pose major issues, provided a standard costing system is in place. Finding the cost to serve (mainly sales and marketing costs) applicable to individual customers, however, is a major challenge. www.MetricsIntegrated.com 1800 604 4121 21
  26. 26. 25 Essential Marketing Metrics In a traditional financial or accounting systems cost to serve is captured along the functional categories and shown as Sales and Marketing expenses on P&L statement. Generally, these costs are not primarily booked on customers’ accounts. The common way for companies to identify these costs by customer is to re-assign these costs by using an activity based costing system. Reasonable accuracy however can be achieved using a simple spreadsheet model for allocation of sales and marketing costs using certain assumptions with a level of consistency. Customer profitability metric is a powerful measure that can help companies to eliminate their unprofitable customers or convert them into profitable ones. It also significantly helps in evaluating and aligning the right service level for specific customers or re-negotiating the prices to continue providing higher level of services. Although the customer profitability metric is intended to measure the profitability of an individual customer, it can easily be applied to a customer segment, or channel. For certain large consumer companies that deal with millions of consumers, there is no need to measure the profitability of individual consumers. It is economically unfeasible and does not serve much purpose. A better approach is to use customer segments with similar profile and characteristics to measure profitability. For companies with several channels, they can treat the distributor or middle channel as the customer and measure what profit is earned through them.Metrics # 10: Return on Marketing Investment (ROMI): Return on Marketing Investment (ROMI) is more of an approach and a model to evaluate various marketing spending rather than a single marketing metric. Its concept is explained in the following formula or equation. Actual application may require elaborate assumptions and calculations. Present Value of (Incremental Revenue from Marketing Investment x Contribution Margin%) -- Marketing Investment ROMI (%) = Marketing Investment ($) www.MetricsIntegrated.com 1800 604 4121 22
  27. 27. 25 Essential Marketing Metrics Return on Marketing Investment is relatively a new metric but rapidly growing in popular mainly due to its obvious promise to measure the ROI, a term favorite to corporate boards, CEOs and CFOs. The measure however, requires quite different approach than a typical ROI calculation carried out for a capital expenditure project. The ROMI metric is a measure of future promise and requires certain assumptions to be made. While the cost of the campaign or the marketing program is more certain, the main challenge lies in developing assumptions related to the incremental revenue growth expected to come out as a result of the specific marketing investment. Once the revenue stream is identified, it is translated into net profit or cash flows by applying a contribution margin percentage. If the revenues are spread beyond the current year, it requires applying Net Present Value (NPV) methodology to convert those future cash flows into present values. Finally, the present value of the future generated cash flow is compared with the cash outflow in the form of marketing investment and a ROI % is calculated. The beauty of ROMI metric is that it can be applied to a variety of marketing campaigns and programs as long as the objective of the investment is to increase sales revenue. The expected revenue increase may generate in the current year or over several years in future. The long term nature of the resulting cash flows, however makes the calculation of ROMI somewhat complicated due to application of NPV approach.Metrics # 11: Customer Lifetime Value (CLTV): “The most important thing is to forecast where customers are moving, and to be in front of them.” Philip Kotler With significant resources being spent on customer retention, growth, loyalty development and relationship building, it is a logical question as to what is their economic worth for the company. One measure that has been developed to answer this question is Customer Lifetime Value (CLTV). CLTV is the sum of present value of company’s future cash flows generated from its customer. It is also called Customer Equity. www.MetricsIntegrated.com 1800 604 4121 23
  28. 28. 25 Essential Marketing Metrics CLTV = Present Value of (Average Profit generated per year x Number of Years) -- Acquisition Costs It is a generally agreed among marketers that bringing a new customers is more expensive than retaining the existing ones. This understanding has provided a renewed focus to companies to retain their existing customers for long term. These companies aggressively pursue ways and means to develop an intimate long term relationship with their customers in order to maximize their economic value. One important component of the CLTV is customer acquisition costs. In today’s highly competitive environment it is difficult and economically expensive to acquire new customers. With major focus of marketing now on retaining customers through significant investment in developing their loyalty and level of satisfaction, no company is willing to lose their profitable customers to their competition. But marketers cannot completely forego acquiring new customers. They need to keep new customers in the pipeline to make up for some inevitable loss of existing customer. Companies before they pursue new customers carefully measure and evaluate cost of acquiring new customers so that they do not overspend and keep these newly recruited customers profitable from the beginning. In its simplest form the customer acquisition costs can be calculatedwww.MetricsIntegrated.com 1800 604 4121 24
  29. 29. 25 Essential Marketing Metrics as the total acquisition spending divided by the number of new customers acquired during a period. Acquisition Spending ($) Average Acquisition Cost ($) = Number of Customers Acquired The average Acquisition Cost metric helps the companies to track profitability of their new customers. It also helps to optimize their strategy of balancing between acquiring new customers and retaining existing ones. Customer acquisition costs are all the costs spent in acquiring new customers. These usually include prospecting costs comprised of cold calling, visiting, demos, samples, marketing materials and time of sales and marketing people spent in pursuing new customers. In a B2C environment, for companies dealing with large number of customer e.g. telecommunication, banks, insurance, and healthcare it makes sense to measure this metric for segments of customers with similar characteristics. For these companies, this is a critical measure as these industries lack customer loyalty and migration to competitors is frequent. While highly attractive promotional offers motivate the customers to switch carriers, it becomes extremely difficult for the company to make money on these new customers in the short term.www.MetricsIntegrated.com 1800 604 4121 25
  30. 30. 25 Essential Marketing Metrics One of the challenges with acquisition cost metric is how to segregate marketing costs between acquisition costs and other marketing costs. Many marketing programs overlap and mutually benefit to their objectives. For example, the money spent on a program to create brand awareness may also lead to acquiring new customers. While Customer Profitability metric clearly depicts the level of current profitability of a customer, the CLTV model provides a long term perspective and approach. It provides the opportunity and confidence for companies to manage and grow their existing customers as their most valuable asset. A strong and positive customer lifetime value justifies keeping a low profit or even a negative profit customer in anticipation of getting higher returns in future. But CLTV measurement has its own challenges. Like ROMI, its calculation requires assumptions about future. Converting future cash flows in present value using the NPV approach may be challenging for many managers. Despite these difficulties, however, CLTV has its own advantages which may justify its practice. The reward for the marketing efforts to retain customers and build their loyalty is not only limited to customers’ current level of profitability. An effective retention program is focused on opportunities to further increase the customer value through cross-selling (selling other complementary products) and up-selling (selling more expensive version of similar products). Onwww.MetricsIntegrated.com 1800 604 4121 26
  31. 31. 25 Essential Marketing Metrics top of it, a highly satisfied and loyal customer is also expected to provide referrals. These referrals create additional revenue and profit opportunities for the company. In data gathering for CLTV computation, the major challenge is predicting the buying behavior of customers. In addition, estimating the profit from projected purchase transaction is quite challenging. Costs at the transaction level are usually not available except the gross margin in most cases. It would therefore be necessary to develop assumptions not only for contribution margin or gross margin but for the assignment of the sales, marketing and service department costs as well. The accuracy of estimates is enhanced if the model is developed for aggregate profile of customers based on historical data available in computer systems. This is applicable to large retailers who have detailed information available in their computer files about the buying patterns of their millions of customers. Despite uncertainties associated with predicting the assumption for future, there is substantial value in developing, and maintaining a CLTV metrics model. It provides the framework to develop and operate a marketing strategy to acquire, retain, and grow customers for long term shareholder value creation.www.MetricsIntegrated.com 1800 604 4121 27
  32. 32. 25 Essential Marketing MetricsMetrics # 12: Return on Customer: Return on Customer is a powerful measure that combines the CLTV and ROMI (Return on Marketing Investment) metrics. It is calculated as follows: Current Cash Flow from Customer + Change in CLTV Return on Customer = CLTV at the beginning of period The marketing strategy to retain customers is far beyond just maintaining retention rates. It basically leads towards managing customer lifetime value (CLTV). Every marketing program aimed at customers must carefully evaluate the impact of any short term gain on the long term lifetime value of the customer. Many marketers may be tempted to create short term gains in revenue and profitability without any regard to a negative impact it may create on customer’s long term lifetime value. To illustrate, if a marketing campaign promises to return a cash flow of $250k from a customer and the CLTV is maintained at $3.0 million, the return on customer is 8.3%. www.MetricsIntegrated.com 1800 604 4121 28
  33. 33. 25 Essential Marketing Metrics $250,000 + 0 Return on Customer = = 8.3% $3,000,000 It is possible that high frequency of promotions and campaigns targeted at customers may displease them and they may decide not to respond for future promotional offers. If this happens this will erode the loyalty of the customer resulting in lower response in future campaigns, ultimately negatively impacting their CLTV. Assuming a lower CLTV of $2,400,000, the ROC will be a negative 11.7%. $250,000 + ($ --600,000) Return on Customer = = --11.7% $3,000,000www.MetricsIntegrated.com 1800 604 4121 29
  34. 34. 25 Essential Marketing Metrics Sales Productivity 4 Chapter Metrics Sales productivity metrics measure the productivity of sales people and efficiency of sales function as a whole.Metrics # 13: Average Sales $ per Salesperson: Companies desperately looking for sales growth may be tempted to hire more sales people. On the other hand, the companies that are looking for significant cost reduction may consider cutting down sales force. In both situations it may be challenging to identify the right balance. One way to answer this question is measuring the average sales $ per sales person and benchmark with the competitors or industry average. Total Sales $ Average Sales $ per Salesperson = Number of Salespersons Average sales $ per salesperson is a simple but powerful metric to describe overall productivity www.MetricsIntegrated.com 1800 604 4121 30
  35. 35. 25 Essential Marketing Metrics of the sales function. When compared with the actual sales $ achieved by individual salespersons it shows the gaps or strengths of individual performance. A comparative evaluation of this metric with an external benchmark provides the competitive strength of the overall sales and marketing function and also provides justification for setting higher sales targets. Average sales $ per salesperson metric should be used with caution for any management decisions. An advantage with the abundantly available sales related data is that extensive slice and dice analysis can be made quickly and effectively. While making a comparative evaluation of individual results, the nature of products, size and characteristics of the territories, and nature and complexity of the customers assigned should be taken into account before reaching any conclusions on individual performance. The metric should rather be used as a trigger to carry out additional analysis. Management should also be cautious to use individual results as a benchmark for other individuals without sufficient analysis. The sales results from a sales person assigned to a couple of large customers should not become a benchmark for another salesperson who may have been assigned two dozen accounts that may still aggregate to the same sales level. The two groups of customers may require quite different level of effort and altogether a different focus and approach.www.MetricsIntegrated.com 1800 604 4121 31
  36. 36. 25 Essential Marketing MetricsMetrics # 14: Selling Costs as % of Sales Another way to measure the sales productivity is to consider all the costs of sales function and compute as a percentage of total sales $. Since the main purpose of the sales department is to generate sales in the short term, this metric makes a lot of sense. All Costs of Sales function Sales Costs as % of Sales = Total Sales This ratio may significantly vary from industry to industry and between companies with B2B and B2C business models. In retail chain industry for example, most sales are driven through mass marketing activities. In such situations the sales costs as % of sales could be significantly lower as most demand is generated through marketing costs. In a direct sales or B2B business model, sales people could be the main driving force for generating sales dollars. www.MetricsIntegrated.com 1800 604 4121 32
  37. 37. 25 Essential Marketing Metrics 5 Chapter Customer Metrics “Consumers are statistics. Customers are people.” Stanley Marcus In the recent past customer has taken a prominent place in the marketing mix; a different focus than the famous four P’s model where customer was even not mentioned. Companies are busy optimizing their customer acquisition and retention strategies to create best value for their shareholders.Metrics # 15: Customer Retention Rate: To consistently achieve the goal of earning profits, a company not only needs to acquire new customers but retain them long enough in the business to ensure desired shareholders’ value and profits are created. The Retention rate is a metric that measures in percentage the ability of a company to retain its customers over a period www.MetricsIntegrated.com 1800 604 4121 33
  38. 38. 25 Essential Marketing Metrics of time. In other words this metric measures the loyalty of customers. Number of Customer at the End of Current Period Retention Rate % = Number of Customers at the End of Previous Period Losing a profitable customer has financial consequences for a company. It’s not only lost revenues but the additional cost of bringing in the new customer to replace as well as the cost of educating and building up the relationship with the new customer. If the new customer is not brought in to replace, the company may have even more losses in the form of unabsorbed fixed costs due to unutilized capacities that was created for lost customers. Another important point to note is that the retention in itself is not sufficient unless customers are profitable. The loyalty alone cannot lead to accomplishment of financial goals. Therefore retention should be considered a means towards an end. One caveat about the retention rate is that it is a historical measure and any future projection based on this historical trend is only an estimate. Additionally, competitors may always aggressively pursue new tactics to lure customers to defect in their favor.www.MetricsIntegrated.com 1800 604 4121 34
  39. 39. 25 Essential Marketing Metrics A variation of this measure can be ‘average retention time’ for a customer to be with the company. This is a broader metric that can be measured over a longer period of time and strongly reflects the overall customer satisfaction, loyalty and commitment. Data sources to measure retention rates are readily accessible. Usually, accounting or finance department keeps a track of customers’ engagements and terminations in their computer systems. One of the challenges for companies to maintain higher retention rates is in managing the retention costs for existing customers. The companies however have realized that it is easier and economical to continue to serve their existing customer rather than acquiring new customers. This has shifted the focus of companies and more and more marketing programs are now centered on customer retention strategies through developing customer satisfaction, loyalty programs and long term relationship. To manage retention costs, one effective metric is to measure ‘Average Retention Cost’. Total Retention Spending ($) Average Retention Cost ($) = Number of Customers Retained The Average Retention cost metric not only helps companies to understand the costs they spend onwww.MetricsIntegrated.com 1800 604 4121 35
  40. 40. 25 Essential Marketing Metrics retaining their existing customers, when combined with the metric of Average Acquisition Cost it provide insights that help optimize the strategy for balancing between acquiring new customers and retaining the existing ones. The compilation of retention costs should be carried out with caution to avoid overlap. The customers who are acquired in the same year should not be counted in measuring the average retention costs. Retention costs should be clearly defined. The ideal criterion is to test if customers defect had these costs were not incurred. This brings another interesting dimension to the measurement issue. The customers who are higher on the satisfaction level and loyalty scale are not vulnerable to leave anyway. Should they really be counted in the denominator of ‘Average Retention Costs’ measure? The purpose of the retention costs is to retain customers who are vulnerable to leave. Of course, such retention costs and programs when implemented also benefit the customers who are not that vulnerable and such costs strengthen their loyalty. The purpose of retention costs however remain to retain vulnerable customers and only such risky customers should be counted to measure the ‘Average Retention Costs’.www.MetricsIntegrated.com 1800 604 4121 36
  41. 41. 25 Essential Marketing MetricsMetrics # 16: Customer Satisfaction: “It is no longer enough to satisfy customers. You must delight them.” Philip Kotler The increasingly competitive landscape for marketers has fostered new thinking on customer satisfaction. Complete customer satisfaction is now considered a minimum requirement for a successful sale of a product or service. If customer is not satisfied for any reason a full refund is usually offered, no questions asked. Based on this newer thinking, some marketing experts have suggested measuring ‘Customer Delight’ instead of Customer Satisfaction. A customer is considered delighted when he gets more than what he expected. Customer satisfaction however remains a basic and common measure for many companies. As a matter of fact, for many companies it still remains a challenge how to reach the level of full satisfaction with all of their customers. Customer satisfaction is usually measured as a rating compiled through customer surveys. Customers are asked structured questions like the following: www.MetricsIntegrated.com 1800 604 4121 37
  42. 42. 25 Essential Marketing Metrics How satisfied are you with the product, service, experience or the company? The answers are measured on a scale of 1 to 5 showing the level of customer satisfaction: 1 2 3 4 5 Very Somewhat Neither Somewhat Very Satisfied Dissatisfied Dissatisfied Satisfied nor Satisfied Dissatisfied The survey may have several questions related to specific area of product, service or the company and the weights may be assigned to each category. Once compiled, this would result in an overall customer satisfaction rating. Some companies keep the rating for individual category and still ask a concluding question about the overall satisfaction. Some marketing experts consider the willingness to recommend the service or the product as a real criterion for measuring the level of satisfaction. Therefore, an extension of the customer satisfaction metric could be a question to measure the willingness to recommend, like the following: How likely are you to recommend the product or service to your families and friends? 1 2 3 4 5 Very Unlikely Somewhat Not Sure Somewhat Very Likely Unlikely Likelywww.MetricsIntegrated.com 1800 604 4121 38
  43. 43. 25 Essential Marketing MetricsMetrics # 17: Customer Complaints: The companies that have a culture of Six Sigma and zero tolerance prefer to measure defects in order to completely eliminate them. These companies do not want to see any customer complaints and closely monitor the number of complaints in order to completely eliminate them. Customer Complaints = Number of Customer Complaints during a Period Customer behavior studies have revealed that a satisfied customer may not talk much about his positive experiences to others but a dissatisfied customer bad-mouths often and may harm the reputation and goodwill of the company or products. It is therefore important to monitor customer complaints closely and resolve them as fast as possible. An extension of this metric therefore can be measured in terms of the number of days it takes to resolve a customer complaint. If the customer base is very large, some level of complaints is inevitable. The company should develop the structure and capability to resolve these complaints fast enough. www.MetricsIntegrated.com 1800 604 4121 39
  44. 44. 25 Essential Marketing MetricsMetrics # 18: Churn Rate: Despite the best efforts of a company to acquire and retain customers, some will defect in favor of competitors. Churn Rate is used to measure customer attrition. Number of customers lost during the period Churn Rate (%) = Number of customer at beginning of the period Higher churn rates are more common in industries where the product or services are considered commodities. Rental cars, hotels, auto insurance, telecommunication and internet service providers fall into this category. Churn rates provides insight to marketers why customers leave when the causes are studied in detail. Unfortunately, in many industries higher churn rates only leads to price wars among the competitors and no one wins. An effective strategy to improve churn rates is to improve on branding and differentiation strategy. Apple did it very successfully with iPod which was primarily an MP3 player i.e. a commodity. If you are already using Retention rate as a metric, Churn Rate may look surplus. It is not. Churn Rate is focused on the analysis of reasons why a customer left while Retention is used to measure www.MetricsIntegrated.com 1800 604 4121 40
  45. 45. 25 Essential Marketing Metrics loyalty and commitment from customers. The data for churn rates can be accessed easily. Most companies keep actual data in their computer systems for any customer terminations. A better approach would however be to monitor the churn rates proactively for customers at the risk to depart. This can be achieved by closely monitoring the patterns of customer who have departed in the past. For example, in wireless telecommunication it is common for customers to switch to another carrier soon after their contracts expire. This is an opportunity for the marketer to make a compelling offer proactively to such customer before they actually depart. Once they have decided to leave, it is difficult and expensive to bring them back.Metrics # 19: Net Referrals: One of the objectives of customer loyalty programs is to improve the Customer lifetime value beyond the customer’s own potential. This is achieved by raising the level of customer loyalty and commitment so high that customer assumes ownership of the product or service of the company and starts making referrals. These referrals bring new customers and add to the overall profitability of the company. www.MetricsIntegrated.com 1800 604 4121 41
  46. 46. 25 Essential Marketing Metrics Net Referrals is a concept to measure net impact of customers who are willing to make referrals and those who are not. Percentage of Customer Willing to Refer Net Referrals (%) = -- Percentage of Customer Not Willing Net Referrals % is based on a scoring compiled through customer surveys. Customers are asked question if they are willing to recommend the company to others on a scale of 1 to 10. The customers who respond 6 and above are considered “willing” and the customers who respond 5 and below are considered “not willing”. Net Referrals is a strong measure to assess customer loyalty.Metrics # 20: Customer Engagement: Good companies want to keep their customers engaged in positive communication. The customer engagement ratio measures the overall tone of customer engagement. Number of Customer Suggestions Customer Engagement = Number of Customers Complaints www.MetricsIntegrated.com 1800 604 4121 42
  47. 47. 25 Essential Marketing Metrics It is believed that the customers who are loyal and highly committed to the company usually make suggestions for general improvement in company’s business. This is considered a positive sign as compared to those customers who only make complaints. By taking a ratio of customer suggestions over customer complaints the tone of customer engagement can be determined. This metric can be measured for individual customers or a group or segment of the customers. Customer complaints and customer suggestions should be carefully segregated. A complaint is generally related to a specific transaction and requires rectification. A suggestion mostly relate to process improvement.Metrics # 21: Customer Recency: Good and profitable customers buy product and services consistently and regularly. Good supplying companies keep track of purchase frequency of their customers. Customer Recency is a measure to assess how active and current customers are with their purchases. Customer Recency = Number of Days since Last Purchase This metric measures the length of time since a customer’s lat purchase. Usually this metric is useful for individual customers, particularly the www.MetricsIntegrated.com 1800 604 4121 43
  48. 48. 25 Essential Marketing Metrics ones who are important, large or considered strategic for the company. It is believed that longer the time period a customer is out of touch, higher the risk of losing that customer. This metric provides an opportunity to the company to proactively monitor and retain customers before they decide to switch to their competitors.www.MetricsIntegrated.com 1800 604 4121 44
  49. 49. 25 Essential Marketing Metrics 6 Chapter Brand Metrics “The most effective way to cope with change is to help create it.” I.W. Lynett Brand is probably the most valuable marketing asset that has unique marketing power for many well known large consumer product companies. Companies spend years and millions of dollars to build and develop brands. Unfortunately, when it comes to measuring the power and effectiveness of a brand, there are no easy answers. Marketing experts have suggested various approaches to measure the value of a brand, most of which are based on quantifying the perception of customers through market surveys. A few of more common and well accepted metrics are as follows:www.MetricsIntegrated.com 1800 604 4121 45
  50. 50. 25 Essential Marketing MetricsMetrics # 22: Brand Awareness: Brand awareness is a simple metric used to quantify the popularity of a brand among the prospective customers. It measures the effectiveness of brand campaigns. The measurement is based on a scoring system developed through customer surveys. The questionnaire asks customers typical questions like: Survey Questions: • For the product or service, what is the first company or product brand name that comes to your mind? • For the product or service, what other companies or product brand names that you can think of? Based on the statistics obtained through surveys, a comparative brand awareness chart can be developed for own brand and that of closest competitors. The surveys provide meaningful results to measure the effectiveness of a brand campaign if carried out before and after the campaign.Metrics # 23: Brand Equity: There are various approaches suggested by various marketing experts how to measure brand equity. One approach suggested by Roger J. Best, Emeritus Professor of Marketing from the www.MetricsIntegrated.com 1800 604 4121 46
  51. 51. 25 Essential Marketing Metrics University of Oregon, is to consider the brand equity like owner’s equity on a balance sheet. He suggests the following formula: Brand Equity = Brand Assets -- Brand Liabilities Best sees brand as comprising of five primary assets: Brand Awareness, Market Leadership, Quality Reputation, Brand Relevance and Brand Loyalty. He suggests companies to compare own brand to that of an average brand in their market and score each of the five brand assets on a scale of 1 to 20. This should give a maximum possible score of 100. He suggests a similar framework for Brand Liabilities which he identifies as: Customer Dissatisfaction, Environmental Problems, Product or Service Failures, Lawsuits and Boycotts, and Questionable Business Practices. Similar to brand assets, these liabilities have to be scored against the benchmark brand or company. To compute an index for Brand Equity, the brand liabilities have to be subtracted from brand assets. Other simpler approaches suggested by other experts include taking the market value of a company and subtract the book value of assets as shown on the balance sheet. The residual reflects several important intangible assets like intellectual property, human capital, profit potential etc. but a large portion of that value can be ascribed to the brand or reputation of the company.www.MetricsIntegrated.com 1800 604 4121 47
  52. 52. 25 Essential Marketing Metrics An even more financially focused valuation model suggests subtracting all the marketing costs from the total revenue to result in a value that is considered a fair representation of the magnitude of brand value. This valuation model may cater to the needs of those who want to see a financial value for this most critical and important marketing asset.Metrics # 24: Response Rate: With increasing pressure on companies to improve the productivity and efficiency of the overall operations, marketers are under pressure to improve the productivity of their campaigns wherever possible. One of the metrics to measure the effectiveness of short term direct marketing activities is to measure the response rate. Response rate is also considered a barometer of the long term popularity of a brand. Number of People who Responded to the Offer Response Rate (%) = Number of People Exposed to the Offer For example, an email campaign may be sent to 10,000 prospects and if 300 respond, the response rate would be 3%. 300 Response Rate (%) = = 3% 10,000 www.MetricsIntegrated.com 1800 604 4121 48

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