The Financial Metrics

  • 122 views
Uploaded on

Calculating marketing value

Calculating marketing value

More in: Marketing
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads

Views

Total Views
122
On Slideshare
0
From Embeds
0
Number of Embeds
1

Actions

Shares
Downloads
9
Comments
0
Likes
0

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The Financial Metrics – Part I Numbers, Numbers and More Numbers
  • 2. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled A Marketing Balanced Scorecard
  • 3. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled When you drive, there are a number of information pieces available to you in your car
  • 4. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Looking through the windshield lets you see the hazards ahead of you
  • 5. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The dashboard with the speed and tachometer are metrics that complement what you see and help you to determine whether you are driving too fast or too slowly
  • 6. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The rearview mirror provides feedback on what is behind and the side mirrors give a backward looking input
  • 7. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The temperature and oil gauges are operational metrics that measure how well the engine is running and the fuel gauge provides information so you don’t run out of gas
  • 8. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled In marketing, measuring only sales revenue is like driving a car by only looking in the rearview mirror, because sales measures what has happened in the past
  • 9. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Just like driving, you need a balanced set of metrics, or a scorecard, as a marketer
  • 10. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled
  • 11. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled
  • 12. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled What Is The Takeaway?
  • 13. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Since demand generation, new product launch, and loyalty marketing drive measurable sales revenues, you can use financial return on marketing investment calculations more than 50% of the time
  • 14. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled But financial ROMI is not the answer for all marketing measurement and you have to have a balanced approach with multiple metrics
  • 15. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Finance Hello Darkness My Old Friend!
  • 16. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Finance is the language of business and the sooner we learn to speak this language, we gain respect in the boardroom.
  • 17. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The one question that most of you have asked me over and over is “How do we get top management to accept this method of marketing?”
  • 18. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Show them the money!
  • 19. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled I once told a CEO that if they did a specific marketing initiative, it would increase their share price by 40 cents a share – it was funded almost immediately.
  • 20. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Now as you might remember from the early lectures, I explained that financial ROMI is applicable to more than 50% of marketing activities.
  • 21. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled These include trial and demand generation marketing, and new product launch marketing.
  • 22. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Now, we will look at these metrics and insights that are achieved through quantifying marketing using financial metrics.
  • 23. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled 55% of CMOs report that their staff does not understand financial metrics
  • 24. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Whether you understand math and finance or not, you need to understand these relationships otherwise your career in marketing will be over very quickly.
  • 25. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Metric - Profit
  • 26. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Revenues - Cost Profit
  • 27. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled There is nothing special about this metric, since we all know the math behind it
  • 28. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled But there are some insights that you need to keep in mind when working the math….
  • 29. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled First The marketing divide exists because some firms choose to invest more in demand generation marketing, running sales and promotions, which drive sales revenues, but kill profits.
  • 30. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Top brands invest more in brand and customer equity, and as a result are able to charge a premium price, which means higher profits.
  • 31. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Competing on price is a losing game since it kills profitability.
  • 32. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled A few firms, such as Wal-Mart and Dell, have been effective with this strategy because they have exceptional supply-chain management capabilities that drive cost down to a minimum.
  • 33. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled So if operational efficiency is your core strategy, then by all means consider competing on price – but for everyone else, using marketing to drive profits is a better strategy.
  • 34. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Profit vs. Market Share
  • 35. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled When you talk to brands, they are most interested in “grabbing” share in the market.
  • 36. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Market share is important, but if you consistently lose profits to gain share, the over time – this is a losing strategy.
  • 37. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled There is a conflict between marketing and sales, since sales is incentivized on volume, not profits.
  • 38. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled If you analyze your sales forces, you will see the the top performers, those who get regular rewards, are often the least profitable and may even by negative in profitability.
  • 39. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled How do you change this?
  • 40. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled When Mark Hurd became CEO of HP, he changed the incentive packages for all the HP Enterprise Sales team.
  • 41. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled He incentivized the sales people based on the profits of the products they sell, not the volume.
  • 42. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Result?
  • 43. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled HP’s overall revenues grew by 20% between 2005 and 2007, but the net income grew from $2.3 billion to $7.3 billion – increasing the stock price by 243%!
  • 44. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Solving for the “right” price point to maximize profits and sales revenue is a pricing exercise and, if you are interested, there are many books to teach you how to do that
  • 45. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled But at the end of the day, price is set by what the market is willing to pay for the value of the products/services you provide.
  • 46. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled One approach is to use a brute force method and increase prices by 5 - 10% a month and see where sales start to drop off – this is what we call the optimal price maximizing sales and profits.
  • 47. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled But I don’t teach pricing methodology!
  • 48. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The intelligence behind the whole discussion is that facing difficult times and competitive pressures, the first thought is to compete by cutting price, at the cost of profitability.
  • 49. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled This will lead you to a death spiral of losing money in the majority of marketing activities.
  • 50. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled A better strategy is to build brand and customer equity so that you compete on value, instead of price. This is what we call Value-Based Marketing.
  • 51. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Value Based Marketing Marketing Based on the Value of the Customer
  • 52. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Value-Based Marketing drives significant performance gains and firms that bridge the marketing divide focus on customer value in all marketing activities.
  • 53. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled
  • 54. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled An Example of Direct Mail Offers Low to Medium CLTV + Low to Medium Response Rates are not sent a mailing From a ROMI point of view, these customers are slow on the take rate, so why waste marketing dollars here?
  • 55. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled An Example of Direct Mail Offers High CLTV + Low Response Rates are also not sent a mailing The cost of the mailing is not justified Our focus, as marketers, must be on the medium to high CLTV + Medium to High Response Rate customers
  • 56. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled An Example of Direct Mail Offers Notice Highest Expected Response Rate + the Highest CLTV get the 2nd most expensive offer Highest Expected Response Rate + Medium CLTV get the 3rd most expensive offer While the Lowest CLTV don’t get an offer at all
  • 57. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Why do you think that is?
  • 58. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Those that have the lowest CLTV are coming anyway so they get the lowest, most cost effective offer. They are coming because they value your product but don’t respond to the “offers”; so it would be a waste targeting them.
  • 59. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled By focusing this single strategy on a value-basis, we cut our marketing costs in half – since we now focus on less than 50% of the potential customer base, but the impact is significantly higher because we are focusing on profitability.
  • 60. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Golf, Marketing & Finance
  • 61. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Ask someone with a golf handicap if they keep score and they will laugh…
  • 62. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled “Of course, how else do I know if I am improving or not?”
  • 63. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled A golf handicap is calculated by taking the average golf score over the last 10 rounds of golf played. The handicap is the average number of shots over par.
  • 64. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled For those who have never been on a golf course, there are 18 holes – some with a par of 3, some with a par of 4 and some with a par of 5. Par is the number of strokes (shots) expected for the “expert” golfer.
  • 65. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Adding up the 18 holes, par for playing a golf course is typically 72 strokes.
  • 66. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Understand that golf is an incredibly difficult sport where you have to account for wind speeds, water hazards, and trees.
  • 67. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Why am I talking about golf scores?
  • 68. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Golf and marketing are very similar and it’s very easy to demonstrate finance’s role in a simple story.
  • 69. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Let’s assume that you have a golf handicap of 10. This means that you routinely keep score and on average shoot 82 – or 10 strokes over par.
  • 70. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled But today, you get the opportunity to play at Pebble Beach, one of the world’s top golf courses. Will you shoot exactly 82 again?
  • 71. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Doubtful. Most likely, you will shoot more – let’s say 90. Exactly 90?
  • 72. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Well, no – let’s say there is a range from 82 to 100.
  • 73. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled What does this mean?
  • 74. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled First Good golfers keep score so that they know how well they played
  • 75. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Second They keep score multiple times to had a handicap.
  • 76. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled The handicap is trend data that helps them predict the future, but when playing a new course for the first time, there is a risk..
  • 77. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Third Because of risk, it is not possible to predict the future exactly – there is a range of possible outcomes.
  • 78. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled For financial ROMI, these are the three major takeaways that you must remember.
  • 79. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Every year in February, there is a pro-am tournament at Pebble Beach that bring great golfers and celebrities together. Let’s assume that you enter this tournament and win!
  • 80. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Very excited, you get the large trophy and a check from $ 1 million, but there is fine print on the bottom of the check -
  • 81. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled You must chose $100,000/year for 20 years or $520,000 today. You have to decide – which would you chose?
  • 82. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Being a financial decision, it would be helpful to know how much the $100,000 per year is actually worth today.
  • 83. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled Basic education tells us that a dollar today is not worth a dollar a year from now, but how much is it worth?
  • 84. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled If I invested $1 today, what would it be worth next year – $1 x (1 + r) r = rate of return we expect to get
  • 85. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled So the $1 today should grow to (1 + r) dollars with interest next year
  • 86. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled To make this easier, you can divide both sides by (1 + r) meaning that: $1/(1 + r) = today’s dollar
  • 87. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled
  • 88. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled So if r = 10%, then a dollar received a year from now would be worth 91 cents today. $1/(1 + 10%) = $1/1.1 = .909
  • 89. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled So let’s go back to Pebble Beach
  • 90. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled If we had $ 100,000/year for 10 years, with payments at the end of each year, the value today is:
  • 91. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled PV = $100K/(1+r) + $100K/(1+r)2 + $100K/(1+r)3 + …… + $100K/(1+r)10
  • 92. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled
  • 93. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled So, the value of $100K per year for 10 years in today’s dollars, assuming a discount rate of 10%. You would have $614,000 instead of the $520,000 today.
  • 94. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled This example highlights that calculating the metric is only the first step in management decision making.
  • 95. http://emagine-group.com Brand Focused, Socially Active, Digitally Enabled In management, one can argue that there are no wrong answers. But with metrics, there are “better” answers.