This chapter is from the book
This chapter is from the book
This chapter is from the book
1.5 Mastering Metrics
Being able to "crunch the numbers" is vital to success in marketing. Knowing which numbers to crunch, however, is a skill that develops over time. Toward that end, managers must practice the use of metrics and learn from their mistakes. By working through the examples in this book, we hope our readers will gain both confidence and a firm understanding of the fundamentals of data-based marketing. With time and experience, we trust that you will also develop an intuition about metrics, and learn to dig deeper when calculations appear suspect or puzzling.
Ultimately, with regard to metrics, we believe many of our readers will require not only familiarity but also fluency. That is, managers should be able to perform relevant calculations on the fly—under pressure, in board meetings, and during strategic deliberations and negotiations. Although not all readers will require that level of fluency, we believe it will be increasingly expected of candidates for senior management positions, especially those with significant financial responsibility. We anticipate that a mastery of data-based marketing will become a means for many of our readers to differentiate and position themselves for career advancement in an ever more challenging environment.
Organization of the Text
This book is organized into chapters that correspond to the various roles played by marketing metrics in enterprise management. Individual chapters are dedicated to metrics used in promotional strategy, advertising, and distribution, for example. Each chapter is composed of sections devoted to specific concepts and calculations.
We must present these metrics in a sequence that will appear somewhat arbitrary. In organizing this text, we have sought to strike a balance between two goals: (1) to establish core concepts first and build gradually toward increasing sophistication, and (2) to group related metrics in clusters, helping our readers recognize patterns of mutual reinforcement and interdependence. In Figure 1.1, we offer a graphical presentation of this structure, demonstrating the interlocking nature of all marketing metrics—indeed of all marketing programs—as well as the central role of the customer.
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Figure 1.1 Marketing Metrics: Marketing at the Core of the Organization
The central issues addressed by the metrics in this book are as follows:
- Chapter 2—Share of Hearts, Minds, and Markets: Customer perceptions, market share, and competitive analysis.
- Chapter 3—Margins and Profits: Revenues, cost structures, and profitability.
- Chapter 4—Product and Portfolio Management: The metrics behind product strategy, including measures of trial, growth, cannibalization, and brand equity.
- Chapter 5—Customer Profitability: The value of individual customers and relationships.
- Chapter 6—Sales Force and Channel Management: Sales force organization, performance, and compensation. Distribution coverage and logistics.
- Chapter 7—Pricing Strategy: Price sensitivity and optimization, with an eye toward setting prices to maximize profits.
- Chapter 8—Promotion: Temporary price promotions, coupons, rebates, and trade allowances.
- Chapter 9—Advertising Media and Web Metrics: The central measures of advertising coverage and effectiveness, including reach, frequency, rating points, and impressions. Models for consumer response to advertising. Specialized metrics for Web-based campaigns.
- Chapter 10—Marketing and Finance: Financial evaluation of marketing programs.
- Chapter 11—The Marketing Metrics X-Ray: The use of metrics as leading indicators of opportunities, challenges, and financial performance.
- Chapter 12—System of Metrics: Decomposing marketing metrics into component parts can improve measurement accuracy, add managerial insight into problems, and assist marketing model building.
Components of Each Chapter
As shown in Table 1.1, the chapters are composed of multiple sections, each dedicated to specific marketing concepts or metrics. Within each section, we open with definitions, formulas, and a brief description of the metrics covered. Next, in a passage titled Construction, we explore the issues surrounding these metrics, including their formulation, application, interpretation, and strategic ramifications. We provide examples to illustrate calculations, reinforce concepts, and help readers verify their understanding of key formulas. That done, in a passage titled Data Sources, Complications, and Cautions, we probe the limitations of the metrics under consideration and potential pitfalls in their use. Toward that end, we also examine the assumptions underlying these metrics. Finally, we close each section with a brief survey of Related Metrics and Concepts.
Table 1.1. Major Metrics List
|
Section |
Metric |
|
Share of Hearts, Minds, and Markets |
|
|
2.1 |
Revenue Market Share |
|
2.1 |
Unit Market Share |
|
2.2 |
Relative Market Share |
|
2.3 |
Brand Development Index |
|
2.3 |
Category Development Index |
|
2.4–2.6 |
Decomposition of Market Share |
|
2.4 |
Market Penetration |
|
2.4 |
Brand Penetration |
|
2.4 |
Penetration Share |
|
2.5 |
Share of Requirements |
|
2.6 |
Heavy Usage Index |
|
2.7 |
Hierarchy of Effects |
|
2.7 |
Awareness |
|
2.7 |
Top of Mind |
|
2.7 |
Ad Awareness |
|
2.7 |
Knowledge |
|
2.7 |
Consumer Beliefs |
|
2.7 |
Purchase Intentions |
|
2.7 |
Purchase Habits |
|
2.7 |
Loyalty |
|
2.7 |
Likeability |
|
2.8 |
Willingness to Recommend |
|
2.8 |
Customer Satisfaction |
|
2.9 |
Net Promoter |
|
2.10 |
Willingness to Search |
|
Margins and Profits |
|
|
3.1 |
Unit Margin |
|
3.1 |
Margin (%) |
|
3.2 |
Channel Margins |
|
3.3 |
Average Price per Unit |
|
3.3 |
Price Per Statistical Unit |
|
3.4 |
Variable and Fixed Costs |
|
3.5 |
Marketing Spending |
|
3.6 |
Contribution per Unit |
|
3.6 |
Contribution Margin (%) |
|
3.6 |
Break-Even Sales |
|
3.7 |
Target Volume |
|
3.7 |
Target Revenues |
|
Product and Portfolio Management |
|
|
4.1 |
Trial |
|
4.1 |
Repeat Volume |
|
4.1 |
Penetration |
|
4.1 |
Volume Projections |
|
4.2 |
Year-on-Year Growth |
|
4.2 |
Compound Annual Growth Rate (CAGR) |
|
4.3 |
Cannibalization Rate |
|
4.3 |
Fair Share Draw Rate |
|
4.4 |
Brand Equity Metrics |
|
4.5 |
Conjoint Utilities |
|
4.6 |
Segment Utilities |
|
4.7 |
Conjoint Utilities and Volume Projections |
|
Customer Profitability |
|
|
5.1 |
Customers |
|
5.1 |
Recency |
|
5.1 |
Retention Rate |
|
5.2 |
Customer Profit |
|
5.3 |
Customer Lifetime Value |
|
5.4 |
Prospect Lifetime Value |
|
5.5 |
Average Acquisition Cost |
|
5.5 |
Average Retention Cost |
|
Sales Force and Channel Management |
|
|
6.1 |
Workload |
|
6.1 |
Sales Potential Forecast |
|
6.2 |
Sales Goal |
|
6.3 |
Sales Force Effectiveness |
|
6.4 |
Compensation |
|
6.4 |
Break-Even Number of Employees |
|
6.5 |
Sales Funnel, Sales Pipeline |
|
6.6 |
Numeric Distribution |
|
6.6 |
All Commodity Volume (ACV) |
|
6.6 |
Product Category Volume (PCV) |
|
6.6 |
Total Distribution |
|
6.6 |
Category Performance Ratio |
|
6.7 |
Out of Stock |
|
6.7 |
Inventories |
|
6.8 |
Markdowns |
|
6.8 |
Direct Product Profitability (DPP) |
|
6.8 |
Gross Margin Return on Inventory Investment (GMROII) |
|
Pricing Strategy |
|
|
7.1 |
Price Premium |
|
7.2 |
Reservation Price |
|
7.2 |
Percent Good Value |
|
7.3 |
Price Elasticity of Demand |
|
7.4 |
Optimal Price |
|
7.5 |
Residual Elasticity |
|
Promotion |
|
|
8.1 |
Baseline Sales |
|
8.1 |
Incremental Sales/Promotion Lift |
|
8.2 |
Redemption Rates |
|
8.2 |
Costs for Coupons and Rebates |
|
8.2 |
Percentage Sales with Coupon |
|
8.3 |
Percent Sales on Deal |
|
8.3 |
Pass-Through |
|
8.4 |
Price Waterfall |
|
Advertising Media and Web Metrics |
|
|
9.1 |
Impressions |
|
9.1 |
Gross Rating Points (GRPs) |
|
9.2 |
Cost per Thousand Impressions (CPM) |
|
9.3 |
Net Reach |
|
9.3 |
Average Frequency |
|
9.4 |
Frequency Response Functions |
|
9.5 |
Effective Reach |
|
9.5 |
Effective Frequency |
|
9.6 |
Share of Voice |
|
9.7 |
Pageviews |
|
9.8 |
Rich Media Display Time |
|
9.9 |
Rich Media Interaction Rate |
|
9.10 |
Clickthrough Rate |
|
9.11 |
Cost per Click |
|
9.11 |
Cost per Order |
|
9.11 |
Cost per Customer Acquired |
|
9.12 |
Visits |
|
9.12 |
Visitors |
|
9.12 |
Abandonment Rate |
|
9.13 |
Bounce Rate |
|
9.14 |
Friends/Followers/Supporters |
|
9.15 |
Downloads |
|
Marketing and Finance |
|
|
10.1 |
Net Profit |
|
10.1 |
Return on Sales (ROS) |
|
10.1 |
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) |
|
10.2 |
Return on Investment (ROI) |
|
10.3 |
Economic Profit (aka EVA®) |
|
10.4 |
Payback |
|
10.4 |
Net Present Value (NPV) |
|
10.4 |
Internal Rate of Return (IRR) |
|
10.5 |
Return on Marketing Investment (ROMI); Revenue |
In organizing the text in this way, our goal is straightforward: Most of the metrics in this book have broad implications and multiple layers of interpretation. Doctoral theses could be devoted to many of them, and have been written about some. In this book, however, we want to offer an accessible, practical reference. If the devil is in the details, we want to identify, locate, and warn readers against him, but not to elaborate his entire demonology. Consequently, we discuss each metric in stages, working progressively toward increasing levels of sophistication. We invite our readers to sample this information as they see fit, exploring each metric to the depth that they find most useful and rewarding.
With an eye toward accessibility, we have also avoided advanced mathematical notation. Most of the calculations in this book can be performed by hand, on the back of the proverbial envelope. More complex or intensive computations may require a spreadsheet. Nothing further should be needed.
Reference Materials
Throughout this text, we have highlighted formulas and definitions for easy reference. We have also included outlines of key terms at the beginning of each chapter and section. Within each formula, we have followed this notation to define all inputs and outputs.
- $—(Dollar Terms):A monetary value. We have used the dollar sign and "dollar terms" for brevity, but any other currency, including the euro, yen, dinar, or yuan, would be equally appropriate.
- %(Percentage):Used as the equivalent of fractions or decimals. For readability, we have intentionally omitted the step of multiplying decimals by 100 to obtain percentages.
- #—(Count):Used for such measures as unit sales or number of competitors.
- R—(Rating):Expressed on a scale that translates qualitative judgments or preferences into numeric ratings. Example: A survey in which customers are asked to assign a rating of "1" to items that they find least satisfactory and "5" to those that are most satisfactory. Ratings have no intrinsic meaning without reference to their scale and context.
- I—(Index):A comparative figure, often linked to or expressive of a market average. Example: the consumer price index. Indexes are often interpreted as a percentage.
References and Suggested Further Reading
Abela, Andrew, Bruce H. Clark, and Tim Ambler. "Marketing Performance Measurement, Performance, and Learning," working paper, September 1, 2004.
Ambler, Tim, and Chris Styles. (1995). "Brand Equity: Toward Measures That Matter," working paper No. 95-902, London Business School, Centre for Marketing.
Barwise, Patrick, and John U. Farley. (2003). "Which Marketing Metrics Are Used and Where?" Marketing Science Institute, (03-111), working paper, Series issues two 03-002.
Clark, Bruce H., Andrew V. Abela, and Tim Ambler. "Return on Measurement: Relating Marketing Metrics Practices to Strategic Performance," working paper, January 12, 2004.
Hauser, John, and Gerald Katz. (1998). "Metrics: You Are What You Measure," European Management Journal, Vo. 16, No. 5, pp. 517–528.
Kaplan, R. S., and D. P. Norton. (1996). The Balanced Scorecard: Translating Strategy into Action, Boston, MA: Harvard Business School Press.