2 levels for measuring marketing effectiveness

Marketing managers have long understood the value, indeed necessity, of measuring the effectiveness of the very large expenditures typicall...

Marketing managers have long understood the value, indeed necessity, of measuring the effectiveness of the very large expenditures typically under their control. There is a sophisticated industry that has grown up supporting the big budget marketing companies. Traditionally, this was exclusively the B2C sector particularly packaged goods (CPG)/fast moving consumer goods (FMCG); Unilever, P&G, L’Oreal, Diageo and car companies. However, big spenders now include technology firms, financial services, holiday firms, government and some of the largest B2B companies too. Nonetheless, we maintain that best practice initially grew in FMCG because of the number of advertised brands the sheer amount of money spent. The major advertisers have developed very sophisticated means of assessing the value of their advertising and promotion spend.

The proliferation of promotional methods and channels, combined with an empowered and more sophisticated consumer, make the problems of measuring promotional effectiveness increasingly complex. Consequently, this remains one of the major challenges facing the marketing community today as part of the discussion around ‘big data’.

But, at this level, accountability can be measured only in terms of the kinds of effects that promotional expenditure can achieve, such as awareness, or attitude change, both of which can be measured quantitatively.

But to assert that such expenditure can be measured directly in terms of sales or profits is highly contested, when there are so many other variables that affect sales, such as product efficacy, packaging, price, the sales force, competitors and countless other variables that, like advertising, have an intermediate impact on sales and profits. Again, however, there clearly is a cause-and-effect link; otherwise such expenditure would be pointless.

So the problem with marketing accountability has never been with how to measure the effectiveness of promotional expenditure, for this we have had for many years. No, the problem occurs because marketing isn’t just a promotional activity.

In world-class organizations where the customer is at the centre of the business model, marketing as a discipline is responsible for defining and understanding markets, for segmenting these markets, for developing value propositions to meet the researched needs of the customers in the segments, for getting buy-in from all those in the organization responsible for delivering this value, for playing their own part in delivering this value, and for monitoring whether the promised value is being delivered.

Indeed, this definition of marketing as a function for strategy development as well as for tactical sales delivery, when represented as a map (see Figure 3.1), can be used to clarify the whole problem of how to measure marketing effectiveness. From this map, it can be seen that there are three levels of measurement, or metrics.

marketing accountability framework

Level 1: shareholder value added

Level 1 is the most vital of all three, because this is what determines whether or not the marketing strategies for the longer term (usually three to five years) destroy or create shareholder value added. It is justified to use the strategic plan for assessing whether shareholder value is being created or destroyed because, as Sean Kelly (2005) agrees: ‘The customer is simply the fulcrum of the business and everything from production to supply chain, to finance, risk management, personnel management and product development, all adapt to and converge on the business value proposition that is projected to the customer.’

Thus, corporate assets and their associated competences are relevant only if customer markets value them sufficiently highly for them to lead to sustainable competitive advantage, or shareholder value added. This is our justification for evaluating the strategic plan for what is to be sold, to whom and with what projected effect on profits as a route to establishing whether shareholder value will be created or destroyed.

A company’s share price, the shareholder value created and the cost of capital are all heavily influenced by one factor: risk. Investors constantly seek to estimate the likelihood of a business plan delivering its promises, while the boards try to demonstrate the strength of their strategy. Research from Cranfield has focused on what we call Marketing Due Diligence and that study provides insight and tools to do both.

How much is a company really worth? There are innumerable tools that try to estimate the true value of intangibles and goodwill. However, these mostly come from a cost-accounting perspective. They try to estimate the cost of re-creating the brand, intellectual property or whatever is the basis of intangible assets. Our research into companies that succeed and fail suggests that approach is flawed, because what matters is not the assets owned but how they are used. We need to get back to the basics of what determines company value.

We should never be too simplistic about business, but some things are fundamentally simple. We believe that a company’s job is to create shareholder value, and the share price reflects how well the investment community thinks that is being done. Whether or not shareholder value is created depends on creating profits greater than investors might get elsewhere at the same level of risk. The business plan makes promises about profits, which investors then discount against their estimate of the chance a company will deliver it. So it all comes down to that. A company says it will achieve $1 billion; investors and analysts think it is more likely to be $0.8 billion.

The capital markets revolve around perceptions of risk. What boards and investors both need therefore is a strategic management process that gives a rigorous assessment of risk and uses that to assess and improve shareholder value creation. This is the process we call Marketing Due Diligence (McDonald, Smith and Ward, 2013).

Where does risk come from?

Marketing Due Diligence begins by looking for the risk associated with a company’s strategy. Evaluation of thousands of business plans suggests that the many different ways that companies fail to keep their promises can be grouped into three categories:

1 The market wasn’t as big as they thought.

2 They didn’t get the market share they hoped for.

3 They didn’t get the profit they hoped for.

Of course, a business can fail by any of these routes or a combination of them. The risk inherent in a plan is the aggregate of these three categories, which we have called, respectively, market risk, strategy risk and implementation risk. The challenge is to assess accurately these risks and their implications for shareholder value creation.

Our research found that most estimates of business risk were unreliable because they grouped lots of different sources of risk under one heading. Since each source of risk is influenced by many different factors, this high-level approach to assessing business risk is too simplistic and inherently inaccurate. A better approach is to subdivide business risk into as many sources as practically possible, estimate those separately and then recombine them. This has two advantages. Firstly, each risk factor is ‘cleaner’, in that its causes can be assessed more accurately. Secondly, minor errors in each of the estimations cancel each other out. The result is a much better estimate of overall risk.

How risky is a business?

Marketing Due Diligence makes an initial improvement over high-level risk estimates by assessing market, strategy and implementation risk separately. However, even those three categories are not sufficiently detailed. We need to understand the components of each, which have to be teased out by careful comparison of successful and unsuccessful strategies. Our research indicated that each of the three risk sources could be subdivided further into five risk factors, making 15 in all. These are summarized in Table 3.3.

Armed with this understanding of the components and sub-components of business risk, we are now halfway to a genuine assessment of our value creation potential. The next step is to assess accurately our own business against each of the 15 criteria and use them to evaluate the probability that our plan will deliver its promises.

This gradation of risk level is not straightforward. It is too simplistic to reduce risk assessment to a tick-box exercise. However, a comparison of a strategy against a large sample of a company’s other strategies does provide a relative scale. By comparing, for instance, the evidence of market size, or the homogeneity of target markets, or the intended sources of profit, against this scale, a valid, objective assessment of the risk associated with a business plan can be made.

Factors contributing to risk

What use is this knowledge?

Marketing Due Diligence involves the careful assessment of a business plan and the supporting information behind it. In this assessment, it discounts subjective opinions and sidesteps the spin of investor relations. At the end of the process the output is a number, a tangible measure of the risk associated with a chosen strategy. This number is then applied in the tried-and-trusted calculations that are used to work out shareholder value. Now, in place of a subjective guess, we have a research-based and objective answer to the all-important question: does this plan create shareholder value?

Too often, the answer is no. When risk is allowed for, many business plans fail to return that which is necessary to cover their risk adjusted cost of capital. That means that shareholders are receiving insufficient return for the level of systematic risk they take and will, if rationale, remove their funds from that organization, contributing to its shrinking. An accurate assessment of value creation would make a huge difference to the valuation of the company. The result of carrying out Marketing Due Diligence is, therefore, of great interest and value to both sides of the capital market.

For the investment community, Marketing Due Diligence allows a much more informed and substantiated investment decision. Portfolio management is made more rational and more transparent. Marketing Due Diligence provides a standard by which to judge potential investments and a means to see through the vagaries of business plans.

For those seeking to satisfy investors, the value of Marketing Due Diligence lies in two areas. Firstly, it allows a rigorous assessment of the business plan in terms of its potential to create shareholder value. A positive assessment then becomes a substantive piece of evidence in negotiations with investors and other sources of finance. If, on the other hand, a strategy is shown to have weaknesses, the process not only pinpoints them but also indicates what corrective action is needed.

For both sides, the growth potential of a company is made more explicit, easier to measure and harder to disguise. For anyone involved in running a company or investing in one, Marketing Due diligence has three messages. Firstly, business needs a process that assesses shareholder value creation, and hence the value of a company, in terms of risk rather than the cost of replacing intangible assets. Secondly, business risk can be dissected, measured and aggregated in a way that is much more accurate than a high-level judgement. Finally, Marketing Due Diligence is a necessary process for both investors and companies.

Eventually, we anticipate that a process of Marketing Due Diligence will become as de rigueur for assessing intangible value as financial due diligence is for its tangible counterpart. Until then, early adopters will be able to use it as a source of competitive advantage in the capital market.

This high-level process for marketing accountability, however, still does not resolve the dilemma of finding an approach that is better than the plethora of metrics with which today’s marketing directors are bombarded, so Cranfield’s Research Club took this issue on board in an attempt to answer the following questions:

● What needs to be measured?
● Why does it need to be measured?
● How frequently does it need to be measured?
● To whom should it be reported?
● What is the relative importance of each?

The approach we took to answering these questions was to drive metrics from a company’s strategy, and the model shown as Figure 3.2 was developed. This clearly shows the link between lead indicators and lag indicators.

Overall Marketing Metrics model

Level 2: linking activities and attitudes to outcomes

Few academics or practitioners have addressed this second level to date, which links marketing actions to outcomes in a more holistic way. We shall describe it briefly here, although it must be stressed that it is central to the issue of marketing metrics and marketing effectiveness.

Each of the cells in each box (cells will consist of products for segments) is a planning unit, in the sense that objectives will be set for each for volume, value and profit for the first year of the strategic plan. For each of the product-for-segment cells, having set objectives, the task is then to determine strategies for achieving them. The starting point for these strategies is critical success factors (CSFs), the factors critical to success in each product/service for each segment, which will be weighted according to their relative importance to the customers in the segment. See Figure 3.4. In these terms, a strategy will involve improving one or more CSF scores in one  or more product-for-segment cells. It is unlikely, though, that the marketing function will be directly responsible for what needs to be done to improve a CSF. For example, issues like product/service efficacy, after-sales service, channel management and sometimes even price and the sales force are often controlled by other functions, so marketing needs to get buy-in from these functions to the need to improve the CSF scores.

It is very rare for this information to be perfectly available to the marketer. While models such as price sensitivity, advertising response or even marketing mix or econometric approaches may help to populate the CSF form, there are generally several other factors where information is less easy to gather. Nevertheless, a CSF analysis indicates where metrics are most needed, which can steer the organization towards measuring the right things. Figure 3.5 shows another level of detail, ie the actions that have to be taken, by whom and at what cost.

Ansoff MatrixCritical success factors

Actions And Costs

model based on the Ansoff Matrix

There are other factors, of course, that influence what is sold and to whom. These may be referred to as ‘hygiene factors’ (HFs), ie those standards that must be achieved by any competitor in the market. Other factors may be referred to as ‘productivity factors’ (PFs), ie those issues that may impact on an organization’s performance unless the required productivity is achieved in its relevant activities.

Thus, it can be seen how the expenditure on marketing and other functional actions to improve CSFs can be linked to marketing objectives and, ultimately, to profitability, and it becomes clear exactly what must be measured and why. It also obviates the contestable assumption that every individual marketing action can be linked to profitability directly. It can be linked only to other weighted CSFs, which, if improved, should lead to the achievement of volumes, value and, ultimately, profits.

Figure 3.7, as it summarizes all of this in one flow chart, which clearly spells out the difference between ‘lag indicators’ and ‘lead indicators’. Lead indicators are the actions taken and the associated expenditure that is incurred. These include, of course, promotional expenditure. Lag indicators are the outcomes of these actions and expenditures and need to be carefully monitored and measured. Thus, retention by segment, loss by segment, new customers, new product sales, channel performance and the like are outcomes, but these need to be linked back to the appropriate inputs.

There is one other crucial implication to be drawn from this model. Most operating boards, on scrutinizing profit and loss accounts, typically see only one line for revenue, while costs are covered in considerable detail, and it is around costs that most of the discussion takes place. In the view of the authors, there should be at least two sets of figures – one to detail where the sales revenue has come from, as outlined above, and another to detail costs. A key task of marketers, rarely carried out, is to link the two documents together. Figure 3.7 goes some way towards this. We stress, however, that the corporate revenue and profits shown at the right of Figures 3.2, 3.5, 3.6 and 3.7 are not the same as shareholder value added, which takes account of the risks involved in the strategies, the time value of money and the cost of capital. This brings us to Level 3.

Overall Marketing Value Metrics model



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2 levels for measuring marketing effectiveness
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