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GETTING STARTED USING MARKETING METRICS

White Paper
by
Dr. Roger J. Best
Thecockpitofthe757Boeingjetisamazeofinstruments(analytictools)thatproduceflight
performancedata(metrics)thatarecriticaltothesafeandefficientflightofa757.Itwouldbe
impossibletoflya757withoutthesesanalyticinstrumentsandperformancemetrics.Yet,
companiesinvestmillionsorbillionsinmarketingandsalesstrategieswithnoclearmeasureof
theirperformanceimpactorefficiency.

Mostcompaniesrecognizetheneedformarketingmetricsandthepotentialbenefittheyprovide,but
theystrugglewheretogetstarted.A2010surveyof400companiesfoundthat75percentrecognizedthe
needformarketingmetrics,butonly25percenthadimplementedamarketingmetricsprogram(1).We
willaddressthebarrierscompaniesandmanagersmustovercomeinordertosuccessfullyapply
marketingmetricsacrosstheirorganizations.Beforeweaddressthesebarrierstogettingstarted,lets
firstunderstandtheneedformarketingmetricsandhowtheycanbeusedtomeasureandmanage
marketingperformance.

THENEEDANDIMPORTANCEOFMARKETINGMETRICS
Marketinghasaresponsibilitytoaccountfor
investmentsinmarketingandsalesstrategies. FIGURE1:CEOCONCERNSABOUTMARKETING
Wehavefoundapproximately75percentofa
companysSales,General&Administration(SGA)
expenseisinvestedinmarketingandsales.For
manycompaniesthiscanbe15to25percentof
sales.Yet,marketinggenerallylacksthe
performancemetricstodemonstratetheresults
produced.

AsurveyofCEOsconductedbyBoozAllen
Consulting (2)showedthatCEOstopconcern
aboutmarketingwastheirlackofperformance
metrics,asshowninFigure1.Marketingneeds
marketingmetricstodemonstrateitsperformance
aswellastakeamoreresponsiblerolein
managingprofitsandprofitablegrowth.

Marketinganalyticsarethetoolsneededtomeasuremarketingperformanceandmarketing
metricsaremeasuresofperformance.Metricsandanalyticsareabigpartofourlives,asshownin
Figure2.

DrRogerJ.BestistheauthorofMarketBasedManagementandwasamongthefirsttointroduceMarketingPerformance
Tools(www.rogerjbest.com)inthefirsteditionin1996.TodayMBMisinits5theditionandisusedinmanycorporationsand
topMBAprograms.HeisalsotheauthoroftheMarketingMetricsHandbook(www.marketingmetricshandboook.com)which
isanextensionofhisworkintheareaofmetricsbasedmarketingmanagement.

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FIGURE2:WHATMETRICSTELLUSANDWHYTHEYAREIMPORTANT

ANALYTICS METRICS WHATMETRICSTELLUSTHATISIMPORTANT

Health
Thermometer98.6 Normalbodytemperature
BloodPressure120/80 Normaldiastolic/systolicbloodpressure
Pulse 65Pulserateisnormalformyageandhealth

Automobile
GasGauge25%Only25percentofgasleftinthecar
Speedometer63mph8milesperhouroverthepostedspeedlimitof55
PressureGauge40psiTirepressureattherecommendedlevel.

Marketing
MarketDev.Index 40Only40%ofthemarketpotentialhasbeendeveloped
CustomerRetention67%Losing33%ofourcustomerseachyear
MarketingROI150%$1.50marketingprofitper$1marketing&salesexp.

Abodytemperature(analytic)of98.6degrees(metric)tellsusthebodytemperatureisnormal.Weuse
ourspeedometers(analytic)tomanageourspeed(metric)inordertoconformtothepostedspeedlimits
fordifferentdrivingsituations.Likewise,amarketingmetricsuchasMarketingROItellsamanagerand
companythemarketingprofitsproducedperdollarofinvestmentinamarketingandsalesstrategy.Ifa
companyisinvestingbillionsofdollarsinmarketingandsalesstrategies,itiscriticaltounderstandthe
returnonthatinvestment.

MARKETINGANALTYICSANDMARKETINGMETRICS
Understandingthedifferencebetweenamarketinganalyticandmarketingmetricisthefirststepin
utilizingmarketingmetrics.Marketinganalyticsarethetoolsanddatathatareusedtoproduce
marketingmetrics.
Acustomerretentionof67percentisamarketingmetric
FIGURE3:MARKETINGMETRICSTRACK
derivedfromthefollowingmarketinganalytic.
MARKETINGPERFORMANCEandPROFITS
Customer =CustomersTotalCustomersx100%
RetentionRetainedattheStartofYear
=67,000/100,000x100%
=67%

Thisbusinessretains67percentofitscustomerbase
eachyear.Tomaintaincustomerbaseof100,000they
neededtoattract33,000newcustomerseachyear.This
isexpensivesincethecostofacquiringanewcustomer
canbe5to10timesmoreexpensethatthecostof
retainingacustomer.Ifthecompanyisabletoimprove
thismetricperformanceto75percent,theywillreduce
thecostofacquiringreplacementcustomersbya
considerableamount.

AsshowninFigure3,marketingmetricsarederived
frommarketinganalyticsandarerelatedtoprofitability.

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BARRIERSTOGETTINGSTARTEDINUSINGMARKETINGMETRICS

Manymanagersandcompaniesrecognizetheimportanceofmarketingmetricsandtheirpotentialto
bettermanageandreportmarketingperformance.However,manymanagersandcompaniescannot
getstartedforsomeofthereasonssitedinFigure4.Foreachbarriertousageweoffera
recommendationonhowtoovercomethatbarrierandbeginyourusageofmarketingperformance
metrics.
BarrierI:Marketingmetricsaretoocomplex FIGURE4:FIVEBARRIERSTOUSINGMARKETING
andaredifficulttoutilize. METRICS

Ifamarketingmetricistoodifficulttouse,itis Theyaretoocomplexanddifficulttouse
notworthusing.Togetstarted,seekmarketing Theydonotsolvemybusinessproblems
metricsthatareintuitiveandmakesensefor Therearetoomany,Idontknowwheretostart
yourspecificbusinessoperations.Some Idonothavethedataorthebudgetrequired
marketingmetricsarecomplexandshouldonly Idonothavethetimeforthistypeofwork
beaddedonceyouhavehadsuccessusingbasic
marketingmetrics.Forexample,onelargechemicalcompanyselectedthefollowingthreemarketing
metricsbecausetheyhadmeaningtotheirbusinessoperationsandtheycouldbecrediblypresentedto
seniormanagement:(1)NetMarketingContribution,(2)MarketingROI,and(3)PercentofSalesthat
wereduetonewproductsintroducedoverthepast3years.

BarrierII:Metricsdonothelpussolveourbusinessandmarketingchallenges.

Whatareyourgreatestbusinessand/ormarketingchallenges?Onceyouhaveidentifiedthecritical
areasforimprovement,thequestionis whichmarketinganalyticsandmarketingmetricswillhelp
managesolutionstothesechallenges?

Forexample,aDowJonescompanyneededastrategytocompeteprofitablyinapricesensitive
segmentthatwaslargerthanthepremiumandvaluesegmentswheretheywerewellpositioned.Five
marketinganalyticswereselectedandappliedtothissegmentchallengeinfivecountrymarkets.While
eachcountrystrategywassomewhatdifferent,thecollectivestrategiesprojecteda59percent
improvementinprofitsfollowingapplicationofthesefivemarketingmetrics.

BarrierIII:IDontKnowWhereToStart ThereareTooManyMarketingMetrics

Startwithmarketingprofitabilitymetrics.Thesebasicmetricsaretheeasiesttoapplyandwilladdthe
criticallinktoexistingfinancialperformancemetrics.

Thereasonformarketingslowlevelofcredibilityislargelybecausemarketinglacksdisciplined
financialreturnmeasurestoassessthevalueofitscontributiontotheenterprise. (2)

Marketingneedscredible,financialmarketingprofitabilitymetricsthatholdupunderthescrutinyof
seniormanagement.Wewillpresentthreemarketingprofitabilitymetricsthatyoucanapplytoyour
businessTODAY!Thesethreemarketingmetricswillenableyoutodemonstratethecontributionyour
marketingandsalesstrategiesmaketothecompanyandtheefficiencyoftheseinvestmentswith
respecttoaMarketingROImetric.

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Onceyourmarketingprofitabilitymetricsareinplaceyoucanbegintoexploreothermarketingmetrics
thatwilladdressmajorbusinessandmarketingchallenges.Thefollowingresourceswillguideyouinthe
searchofmarketingmetricsthatwilladdressthesechallenges.

MarketingMetricsby PaulFarris,NeilBendle,PhillipPfeifer,andDavidReibstein,(WhartonSchool
Publishing,2007)andrelatedwebsitewww.MarketingNPV.com. (3)

MarketingMetricsHandbook(www.marketingmetricshandbook.com)Downloadatraildemoofthis
digitalhandbookandreviewthemarketingmetricsglossary.(4)

MarketingPerformanceTools(www.rogerjbest.com)toreviewover50marketinganalyticsand
marketingmetricsavailableonlineatthiswebsite.(5)

MarketBasedManagement byRogerBest.Thisbookinits5th editionpresentsover100marketing


analyticsandmarketingmetrics.ThismetricsbasemarketingmanagementbookisavailableinEnglish,
Chinese,SpanishandRussian. (6)

BarrierIV:IDoNotHavetheRequisiteDataortheBudgettoAcquireit
FIGURE5:OVERCOMINGTHEFEAROFIMPERFECTDATA
Managerinsightsandbestestimates
arethebestplacetostart(3)and
requirenobudget.

Managementmustremovethefearof
imperfectdata,bybeginningwith
informedestimatesandhonedata
basedondiscovery.Earlyestimatescan
beeasilyrevisedwithteamconsensus
ormarketresearchifneeded.
Marketinganalyticsprovideawayto
capturethecollectivethinkingofa
marketingteam.

BarrierV:IDontHavetheTimefor
ThisTypeofWork

Managingmarketingperformanceandprofitabilitymustbeanimportantpartofthejoband
responsibilityofthemanager.Thefollowingquotewastakenfromaproductmanagerafter
understandinghowtousepricingmetricstobettermanageprofitablegrowthandnotjustsalesgrowth.

Hadwelaunchedatamarketbasedpricewecouldhaveincreasedourgrossmarginby$1.4million. Thisblockof
instructionhasreallyhighlightedtheimportanceofdoingapricevolumeanalysispriortolaunchinganew
product.

Marketingmetricsaretooimportanttobeanaddontothemarketingandproductmanager
responsibilities.Theyshouldbeatthecoreofwhattheyaremeasuringandmanaging.Astheoldsaying
goes,ifyoucantmeasureit,youcantmanageit.Ifyouarebeingpaidtomanagemarketing
performance,itseemsobviousthatamanagershouldmeasureit.

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WHERETOSTARTANDWHY

Manymanagersandcompaniesrecognizetheimportanceofmarketingmetricsbutfindithardtoget
started.Becausecompaniesusefinancialmetricstomanageandevaluateperformance,werecommend
startingwiththreefinanciallygroundedmarketingprofitabilitymetrics.

Therearemanyfinancialmetricsthatbusinessesuseroutinely,asshowninFigure6.Thesearemainly
internalperformancemetrics.Mostmarketingmetricsareexternalperformancemetricsandforward
lookingperformancemetrics.Thethreemarketingprofitabilitymetrics,however,areinternal
performancemetricsderivedfromexistingfinancialdata.Thebeautyofthesethreemarketingmetrics
isthattheycanbemeasuredatanylevelthecompany,region,businesssegment,market,product
line,productorlargecustomer.Becausethesethreemarketingmetricsuseexistingfinancialdatathey
areeasilyunderstoodacrosstheorganizationwithrespecttoaccuracyandmeaning.

NetMarketingContribution

Marketingprofitabilityisbasedonaninvestmentinmarketingandsalesrequiredtoachievecertain
levelsofsalesandgrossmargins.Netmarketingcontributionisafinancialmeasureofmarketing
profitabilityandiscomputedasshownbelow:

NetMarketing=SalesxPercent Marketing&Sales
ContributionRevenuesGrossMarginExpenses

Applesnetmarketingcontributionin2009was$10billion,asshownbelow.

NetMarketing=$36.54billionx 36% $3.12billion


Contribution =$13.15billion $3.12billion
=$10billion

FIGURE6:MARKETINGMETRICSvs.FINANCIALMETRICS

FINANCIALMETRICS Performance MARKETINGMETRICS Performance


ProfitMetrics MarketMetrics
GrossProfit 55.0% MarketGrowthRate 22.5%
ReturnonSales 17.0% MarketShare 8.5%
ReturnonAssets 17.8% MarketDevelopmentIndex 40
ExpensesMetrics CustomerMetrics
Marketing&SalesExpense 21.0% CustomerSatisfaction 64
GeneralAdministration 8.0% CustomerRetention 65.0%
OtherExpenses 12.0% LifetimeCustomerValue $45
AssetManagementMetrics CompetitivenessMetrics
SalestoAssetRatio 1.05 ProductPerformance 11.0
AccountsReceivable 15.0% ServiceQuality 9.0
CapacityUtilization 67.0% CustomerValue 8.0
ShareholderMetrics MarketigProfitabilityMetrics
ReturnonEquity 15.0% NetMarketingContribution $156
ReturnonCapital 13.0% MarketingROI 162%
EarningsperShare $2.00 MarketingROS 34.0%

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FIGURE7:APPLENETMARKETINGCONTRIBUTIONVS.OPERATINGINCOME

Apple19992009

Applesnetmarketingcontributionhadahighcorrelation(.94)withoperatingincomefrom1999to2009.
Applesnetprofitwasalsoinfluencedbyitsnetmarketingcontribution:

Net=NetMarketing General Other Interest


ProfitContributionExpensesExpenses &Taxes
=$10billion $1.0billion $1.2billion $2.0billion
=$5.7billion

Marketing&SalesExpenses
Marketingandsalesexpensesareaninvestmentinproductmarketstrategiesandincludemanynon
marketingexpensessuchasproductmanagement,customerservice,salesandsalesmanagement.Ifa
businessexitsaproductmarket,theseexpenseswilldisappearsincetheyareexpensesincurredgiventhe
collectiveeffortstoserveaparticularproductmarket.

Onechallengeyouwilllikelyencounterisindeterminingtheactualmarketingandsalesexpenses.Most
companiesdonotreportmarketingandsalesexpensesseparately,astheyarewrappedintoSales,General
&Administration(SGA)expenses.Ifyoudonothavethisdata,75percentofSGAisagoodplacetostart.
Thisestimateisbasedonasampleofcompaniesthatreportmarketingandsalesandgeneral
administrationexpensesseparately.Oneofthemostcompellingbenefitsofthismarketingprofitability
metricisthatitaffordsadditionalvisibilitytothereturnonmarketinginvestmentstothoseinnon
marketingroles.
FIGURE 8:MARKETING&SALESEXPENSES
Company SGA(%Sales) M&SE(%Sales) M&SE(%SGA) Marketing&Salesexpensesshouldincludeall
marketing,advertising,sales,serviceand
AdobeSystems 39.9% 31.1% 78% support,aswellasproductmanagement
Campbell'sSoup 22.1% 14.5% 66% expensesassociatedwiththemarketingand
salesofcompanyproducts.
CiscoSystems 27.3% 21.2% 78%
Microsoft 29.5% 22.5% 76% Itshouldnotincludegeneraladministration
expenses,R&Dexpensesorotherexpenses
Oracle 23.0% 19.0% 83% unrelatedtothemarketing&salesofcompany
Average 28.4% 21.7% 76.0% products.

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FIGURE9:MARKETINGPROFITABILITY
MarketingReturnonSales(ROS) PORTFOLIO
Ratiometricsallowbusinessestocomparetheir
performancetoothercompanies,aswellasother
businesssegmentswithintheorganization.

MarketingROSisasimplemarketingprofitability
metricthatallowsabusinesstocompare
performanceacrosstheirorganizationaswellas
otherpubliclytradedcompanies.Shownbelowis
Apples2009MarketingROS.Thisratioindicates
thattheir2009netmarketingcontributionwas27.5
percentofsales.

MarketingROS=NetMarketingCont./Sales
=$10.03billion/$36.54billion
=27.5%

MarketingReturnonInvestment(ROI)
MarketingROIisanotherimportantmarketingprofitabilitymetric.Itissimplythenetmarketing
contributiondividedbymarketingandsalesexpenses.WhenApples2009NMCof$10billionisdivided
bytheir$3.12billioninvestmentinmarketingandsales(M&SE),aMarketingROIof325percentis
produced.ThismeansthatApplestrategiescollectivelyproduced$3.25innetmarketingcontribution
foreverydollarinvestedinmarketingandsales.

MarketingROI=NetMarketingContribution/Marketing&SalesExpenses
=$10.03billion/$3.12billion
=325%

WecancreateaMarketingProfitabilityPortfoliousingMarketingROSandMarketingROI,asshownin
Figure9.Thissampleportfolioisforabusinessunitwithinalargemedicaldevicescompany.Thebusiness
unitaveragesforMarketingROSandMarketingROIarehigherthanthecompanyaverage.Thisisuseful
informationatthecompanylevel.TheMarketingROSandMarketingROIforthetenmajorproductlines
helpmanagersunderstandtherelativeprofitabilitywhencomparingproductlinesacrossthebusinessunit.

FIGURE10:MARKETINGROIvs.PRETAXROA
WecanbenchmarkAppleagainstpeer
companiesbasedonMarketingROIandPreTax
ReturnonAssets(ROA),asshowninFigure10.
ApplehadthehighestMarketingROIandsecond
highestPreTaxROA.Wecanalsoseethat
companieswithahigherMarketingROIgenerally
produceahigherPreTaxROA.

Figure11presentsabroaderviewofthis
relationshipforalargesampleofFortune500
companies.TheaverageMarketingROIforthis
sampleis152percentandaveragePreTaxROA
is9.5percent.

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FIGURE11:MARKETINGROIVS.PRETAXRETRURNONASSETS

Appleisconsiderablyhigherinboth.WhilesomecompanieswithlowMarketingROIproduceabove
averagePreTaxROA,companieswithaboveaverageMarketingROIweremorelikelytoproduce
aboveaveragePreTaxROA.
FIGURE12:PROBLEMFOCUSEDMARKETING
COMPANYCASESTUDY METRICSAPPILCATION COUNTRYEXAMPLE

BusinessChallenge Amultibilliondollarcompany
struggledtofindaprofitablestrategyforservinga
pricesensitivemarketsegmentinLatinAmericafor
oneofitsmajorproductlines.

MarketingMetrics Sixmarketingmetricswere
selectedfromtheMarketingMetricsHandbook to
addressthisbusinesschallenge.

Program Countrymanagerswerecoached
inSpanishwithtwowebbasedsessionsandindividual
coachinginapplyingthesemarketingmetricstotheir
countrymarkets.

ProfitImpact Countrypricingstrategiesalongwith
projectedprofitimpactwereindividuallypresentedto
regionalmanagement.Theaverageprojectedcountry
increaseinnetmarketingcontributionwas59percent.

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FIGURE13:TEAMPROFITIMPACTWHENAPPLYINGMARKETINGMETRICS

AverageTeamPerformance
>30%ImprovementinProfitPotential
38%

28%
26%

BESTPRACTICE TEAMBASEDACTIONABLELEARNING

Wehavefoundthatteambasedactionablelearningproducesthebestresultswhenapplyingmarketing
metricstoabusiness.Thisallowsforgrouplearninganddiscussionwithrespecttoestimatesand
assumptionsaroundrealbusinesschallenges.Theyellowbarsinthechartabovearetheaverageteam
estimatesofnetmarketingcontributionbeforeapplyingamarketingmetricsstrategytotheirbusiness
application.Thebluebarsarethenetmarketingcontributiontheaverageteamcouldpotentiallyachievein
threedifferentcompanieswhenusingmarketingmetrics.Across55teamsrepresentedabove,theaverage
increaseinprojectedimprovementinnetmarketingcontributionwasover30percent.

SUMMARY

Whilemostcompaniesandmanagersrecognizetheneedtousemarketingmetricsandthepotential
benefittheycanprovide,manyhavefounditdifficulttogetstarted.Wehaveaddressedfivecommon
barrierstogettingstartedandrecommendstartingwiththreemarketingprofitabilitymetrics.Oncethese
basicmarketingmetricsarefullymastered,abusinessshouldseektoaddonlythemarketingmetricsthat
willhelpsolverealbusinesschallenges.Itisimportanttorememberthatitisnotthenumberofmarketing
metricsthatyouuse,buttheeffectivenesswithwhichthosethatyouselectareappliedacrossyour
business.

REFERENCES

1.TheMarketingPerformanceAdvantage(www.marketingperformanceadvantage.com),RichSchreuer,SVP,
ChadwickMartinBailey,Inc.;CMGPartners
2. MakingthePerfectMarketer,P.Hyde,E.Landry,A.Tipping,Strategy+Business,Winter2004.
3.WhyManagingbyFactsWorks,Strategy+Business (Spring2006).JeffreyPfeffer,andRobertSutton
4.MarketingMetricsby PaulFarris,NeilBendle,PhillipPfeifer,andDavidReibstein,(WhartonSchoolPublishing,
2007)andrelatedwebsitewww.NPVMarketing.com.
5.MarketingMetricsHandbook,RogerBest,(www.marketingmetricshandbook.com)
6.MarketingPerformanceTools,RogerBest(www.rogerjbest.com)
7.MarketBasedManagement byRogerBest,5th edition,(PearsonPublishing,2008).

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