This chapter is from the book
This chapter is from the book
This chapter is from the book
1.9 What’s New in the Third Edition?
We have used the space gained in removing the survey to go deeper into areas that have risen in importance in the years since the second edition. The biggest change is our new chapter on online metrics, which seeks to clarify an area where there is no shortage of data and a profusion of measures. Unfortunately it remains an area in which it can be extremely difficult for a manager to understand what is happening often due to lack of standardization of definitions. We have also added a new section on neuro-marketing to allow managers to gain some familiarity with exciting developments in this field. Other significant changes include adding more detail on brand valuation, advertising elasticity, and clarifying the concept of double jeopardy.
New metrics are particularly in need of a careful appraisal with respect to their reliability and validity as metrics to inform management decisions. This edition expands our discussion of these concepts as well.
A closely related concept is “the value of information”—e.g., is it worth doing more market research or testing?—which is a critical input to many managerial decisions. As such we have also added more detail on the value of information and how managers can use estimates of its value to make better informed decisions. We have added a discussion of the Gross Model for budget allocation and outlined our own variant of the budgeting model which describes how a manager can decide when to stop creating and testing further advertising copy and roll out the current best candidate. The space devoted to this model for advertising copy and media funds is not because this particular decision is more important than other decisions, but because it illustrates a general approach to thinking about how using marketing metrics can improve marketing decisions.
We hope that you enjoy the new edition of Marketing Metrics.
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.
)
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 Metrics: The central measures of advertising coverage and effectiveness, including reach, frequency, rating points, and impressions. Models for consumer response to advertising.
- Chapter 10—Online, Email, and Mobile Metrics: Specialized metrics for Web-based, Mobile, and Email campaigns.
- Chapter 11—Marketing and Finance: Financial evaluation of marketing programs.
- Chapter 12—The Marketing Metrics X-Ray: The use of metrics as leading indicators of opportunities, challenges, and financial performance.
- Chapter 13—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 1.2, 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 1.2 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 |
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 |
2.11 |
Neuro-Marketing |
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 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 |
Advertising Elasticity of Demand |
Online, Email, and Mobile Metrics |
|
10.1 |
Pageviews |
10.2 |
Rich Media Display Time |
10.2 |
Rich Media Interaction Rate |
10.3 |
Clickthrough Rate |
10.4 |
Cost per Click |
10.4 |
Cost per Order |
10.4 |
Cost per Customer Acquired |
10.5 |
Visits |
10.5 |
Visitors |
10.5 |
Abandonment Rate |
10.6 |
Bounce Rate (Web site) |
10.7 |
Friends/Followers/ Supporters |
10.7 |
Likes |
10.7 |
Value of a Like |
10.8 |
Downloads |
10.9 |
Average Revenue per User |
10.10 |
Email Metrics |
Marketing and Finance |
|
11.1 |
Net Profit |
11.1 |
Return on Sales (ROS) |
11.1 |
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) |
11.2 |
Return on Investment (ROI) |
11.3 |
Economic Profit (aka EVA®) |
11.4 |
Payback |
11.4 |
Net Present Value (NPV) |
11.4 |
Internal Rate of Return (IRR) |
11.5 |
Marketing Return on Investment (MROI) |
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.
Armstrong, J. Scott (1974) “Eclectic Research and Construct Validation,” Published in Models of Buyer Behavior: Conceptual, Quantative, and Empirical, Jagdish N. Sheth (Editor), (pages 3-14), Harper and Row, New York, NY.
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.
Watt, James H., and Sjef van den Berg, (1995), Research Methods for Communication Science, Allyn & Bacon.