Emerging Metrics: Seven Topics of Increasing Relevance

 

Just as marketers establish competency by measuring the traditional elements of their marketing programs — things like click-throughs, direct mail response rates, and brand recognition — an entirely new group of key performance metrics is beginning to come into view. Inspired by changes in the societal, cultural, political, and economic landscapes, this emerging set of metrics tracks the evolving dimensions of “performance” that are making their way up the importance chain in the boardroom and in the media.

Here are seven such metrics we believe could significantly impact marketers’ future measurement efforts.

1. Carbon Footprint. Sustainability is fast becoming an entry-level benchmark for ensuring customer choice and satisfaction and for keeping up with competitors. One key “green” measurement is the carbon footprint, which more companies are beginning to apply specifically to their marketing operations.

To call the carbon footprint a singular metric would be a misnomer; it is actually the tip of a much larger iceberg comprising dozens of metrics that converge to become the overall carbon footprint measurement. The Institute for Sustainable Communication (ISC) recommends that every step of the marketing supply chain be tracked and measured independently for each medium.

For instance, marketers should understand the sustainability impacts of their advertising — separately by channel, as well as packaging, distribution, and selling methods. Then, within each of those dimensions, every step involved — from manufacturing of raw materials to delivery of the final product to the customer — should be charted, including both energy consumed and emissions produced in raw material cultivation, production, transit, promotion, and disposal. (Remember that online campaigns have a footprint too, since they are fueled by the data center.)

The carbon footprint is measured in metric tons of CO2-equivalent greenhouse gases. There are many organizations that offer services to help a company determine its carbon footprint, including consultancies and nonprofits. Other companies, such as Environmental Defense, offer do-it-yourself calculators (see papercalculator.org) for estimating the environmental impact of, for example, paper used in printing. Companies tracking their carbon footprints will want to follow the greenhouse gas protocol jointly developed by the World Reporting Initiative and the World Business Council for Sustainable Development and currently used by the CD Project, Global Reporting Initiative, and the ISC. For more information, go to www.wbcsd.ch.

As the marketing organization is chartered with managing the consumer/prospect perception of both the product brand and the corporate reputation, and sustainability is increasing in importance in the minds of the customer, it falls to marketing to measure and report on sustainability. In this respect, marketing’s responsibility is similar to its role in customer satisfaction: defining the goals, measuring performance, and translating the voice of the customer.

2. Innovation. Without question, innovation is being asked to play a greater role in the CEO’s organic growth strategy. Yet to date, innovation metrics have been vague at best, and more often elusive.

Some companies can calculate and track the value of their “innovation pipeline” in net present value terms, on a risk-adjusted basis. Their key metric is then expressed as the percentage of targeted innovation contribution realized compared to the pipeline forecast. Managers then focus their efforts on ensuring that there are a sufficient number and magnitude of innovations in the pipeline to hit the mid- and long-term corporate goals. This takes tremendous discipline in managing ideas through multi-gate commercialization processes and even greater forecasting acumen honed over several years.

For others lacking advanced pipeline management competencies, the most common approach to measuring innovation is stroke-counting the number of “new ideas” brought to market. This methodology is not only prone to significant political manipulation (e.g., what exactly constitutes a “new” idea and when exactly did it enter the market?), but it also fails to recognize the significant economic value differentials between various innovations.

Those still on the innovation learning curve may find that a more pragmatic approach emphasizes the “actual” vs. “targeted” percentage of revenue (or preferably profit or contribution margin) expected to be derived from new products monthly, quarterly, and yearly. In classic Ansoff Matrix format (see below), the company should be able to express its innovation goals in terms of the percentage of growth coming from new products and/or new markets from one period to the next. Performance metrics are then built around comparing the actual figures obtained vs. the forecast, leaving the debate to focus on explaining any gap between the two.

It’s certainly true that discontinuous innovation at the market level can wreak havoc with markets and forecasts (Google, anyone?). But effective innovation measurement is less a function of being perfect than being generally correct within the current environment. Remember, the actual percentage of profits derived from “new” products isn’t nearly as important as the performance vs. expectations. Provided that the process for setting the expectations and targets is suitably rigorous and involves all key stakeholders, periodic re-calibration will be seen as benefiting performance management, not circumventing it.

3. Unrealized Pricing. Another battleground in the CEO’s growth agenda is margin growth through strategic pricing. Extracting the price/volume mix that delivers maximum profit is increasingly critical in the face of higher customer acquisition costs. Yet determining a customer’s spending threshold for a particular product or service is an age-old problem that is not easily solved.

Traditional pricing metrics such as realized price (calculated as actual price paid net of discounts or incentives), and gross margin percentage (calculated as revenue less cost of sales, divided by revenue) tell only half the story. You may see gently upward-sloping curves depicting realized prices and/or gross margins and falsely conclude that you’re doing a good job of pricing to potential, when in reality you’re leaving a good portion of pure profit on the table.

“Unrealized pricing” is that portion of the realized price the customer would have paid without any change in quantity or frequency of purchase. Expressed in metric form, it is: willing-to-pay price less actual price paid, divided by the actual price paid. To measure unrealized pricing, companies need to develop the capability to define the price elasticity curve for each segment of their market, and then constantly test pricing to push against the upper limits of the curve. This research can be costly and time consuming, but consider this: What is the probability that you are under-priced by just 1%? Multiply that probability factor by 1% of your revenue, and you’ll immediately see the potential value in further investigation.

4. Engagement. “Engagement” is a concept rapidly gaining favor among marketers and media buyers. Some see it as an eventual substitute for the increasingly irrelevant gross rating point (GRP), while others (such as the Advertising Research Foundation) use the term to refer to the extent to which people are stimulated by advertising they see on TV. Both uses are worthy of further exploration, but in the results-now world we live in, engagement needs more tangible context.

In the most literal sense of the word, “engagement” should be behaviorally defined and focused on measuring the evolution of the behavioral relationship between prospect and company. In this form, it is a measure of how customer segments or individuals are progressing through one or more desired paths toward a closer, more commercial relationship with the product or services provider.

Note that behavioral doesn’t necessarily mean buying something; it can also mean going to a Web site, entering into an anonymous dialogue, inquiring for further information, or any number of pre-sale activities that can be predictive of purchasing something. In the trackable Internet age, such behavioral measures of engagement hold the potential to displace awareness and brand preference as interim measures of marketing effectiveness.

Engagement stages may include any part of the buying process, from initial inquiry to placing an order or reorder to referring the company to a friend or colleague (yes, Net Promoter is, in this definition, an engagement metric). We can then measure not only which stage buyers are at in their progression from prospects to customers, but also the velocity at which they are moving toward the end goal. The result is an insightful window into the value of the customer pipeline and the impact that marketing efforts may have on increasing it.

5. Payroll Leverage. As the human cost of running companies continues to escalate, CEOs are increasingly looking for ways to measure how much bang they’re getting from their payroll budget on a per-employee basis. Payroll leverage serves as a means of measuring efficiency in delivering on key goals in relationship-to-payroll expenses.

It is already commonplace to see companies in some industries (retail, professional services, etc.) publishing their “sales per employee” figures in 10K and 10Q filings. Extending this trend forward suggests that marketing organizations would do well to begin tracking output per departmental payroll dollar, particularly as they increasingly request funding for technology tools and platforms.

To calculate productivity per dollar of payroll, select several of your critical marketing metrics (e.g., customer acquisitions, customer franchise value, relative brand equity advantage, or even change in Net Promoter scores) and divide the magnitude of the change in each metric by the fully loaded payroll costs of the department for the period in question. Then monitor the change in those ratios over time to gauge the extent to which productivity is increasing. To be even more credible, include in the payroll cost denominator fees paid to consultants, agencies, or other labor-driven outsource partners.

This approach is virtually guaranteed to add insight to the business cases for staffing or further investments in technology.

6. Diversity. Driven by a more culturally diverse U.S. consumer base and increasing globalization, multiculturalism has permeated organizations of every size. In the marketing department, the implications go far beyond just reflecting a rainbow of complexion in ads and brochures.

Companies will increasingly come under both economic and political pressure to support those who are supporting them. This means staffing and spending with an eye toward cultural diversity. Investing in programs and initiatives to support key constituent communities is an expectation that rises with commercial success in those communities. Selecting vendors and suppliers that do the same also becomes more important.

Measuring the portion of marketing dollars spent in such supportive efforts will proactively set the marketing department in a position to evaluate its cultural balance between ideal and actual expenditures, exposing strengths and vulnerabilities. The findings can be helpful in establishing dialogue with community leaders or in clarifying the need for changes in hiring, outsourcing, or investment processes.

7. Design. Product design, in both graphical and industrial form, is playing an increasingly important role in marketing effectiveness. In a world where commodity and parity are accelerated by globalization and the Internet, it’s virtually impossible to underestimate the potential power of design to improve the perceived value of products and services. But new design work is often accompanied by significant expense in tooling, packaging, and distribution, not to mention marcom enhancements. So how do you measure the power of design?

Consider this example. A leading appliance manufacturer’s marketing team was having a hard time getting its CEO to authorize a redesign of one of the company’s washing machines. The CEO had an engineering mentality, and because the marketing team wasn’t proposing any functional improvements, he didn’t see the value in spending the money. However, marketing believed the design changes would significantly increase sales by improving the overall value proposition of the product.

The team created drawings of different product designs and showed them to a study group. Through some choice-options research methodologies, the team was able to tease out the preferences for any given change (a bigger dispenser, for example, vs. a front loader) as compared to all other possible changes. The work clearly established a greater purchase interest at a higher price point for the new design with existing features compared to the existing design with more features and functions added, and as a result marketing was able to construct a successful business case for making the necessary investments. Further, “innovative design” became one of the key differentiating brand equity drivers that separated the manufacturer from its competitors.

This example shows how conjoint techniques can be used to determine potential return on investment from design. There is no compelling need for a “design metric” per se, but rather a better understanding of how design impacts customer and prospect buying behaviors, and how it interacts with other elements of the marketing mix.

As the understanding of dashboards progresses from static reporting structures to dynamic, evolving insight tools, we expect to see more of these types of metrics. The living nature of dashboards suggests that the wise marketer anticipates how the metrics landscape will continue to evolve as a reflection of the societal, political, cultural, and econometric issues of the times.