In Search of the Holy Grail: Putting Marketing Productivity Measures Together
A group of leading academics with exceptional credentials in the arena of marketing effectiveness measurement got together over a few beers recently and, casting aside their differences over methodologies, concluded that the marketing community is closer than it thinks to finally being able to show how marketing expenditures add to shareholder value.
No, this isn't a sitcom pilot pitch. They never actually got together physically either. And if you really want the truth, there wasn't even any beer. Nevertheless, when this auspicious group compared notes, the outcome was encouraging.
First of all, they agreed that to accurately measure marketing effectiveness, we need to include not just short-term profits gleaned from our activities, but the long-term effects — organizational growth and sustained profits — of our assets in play. We need to step back a bit from surveying products and pricing and SKU-filled shopping baskets to look at the big picture and see how marketing expenditures (on advertising, promotions, packaging, etc.) influence the value of the company overall.
Company values (think stock prices) rise when free cash flows increase and/or assets become more valuable. Marketing, done right, presumably has a significant impact on both.
For example, brand and customer equities — assets built over the long term — can be leveraged for short-term profitability (strong brands sell better than weak ones when supported by advertising). But this requires a clear understanding of the financial consequences of how the brand assets influence customer buying decisions, and the correlating effect on cash flows.
Marketers pursue enhanced and sustainable profitability through marketing strategy, the first link in the marketing productivity chain. The tactics they employ make sense only if they have a positive impact on customers — on awareness, on their association of beneficial attributes with the organization and its brands, on their attitudes, on their emotional or practical attachments to the marketer and its offerings, and on their experiences. These are the switches, dials, and levers that improve the organization's competitive position through increased customer satisfaction and decreased price elasticity, resulting in some profitable combination of greater market share, successful brand extensions, and/or lower sales and service costs.
The team observes that the common tools to measure the impacts of marketing on cash flows are many — ROI, IRR, NPV, or EVA. No one financial metric perfectly expresses the full financial impact because we're interested in reviewing both past and future performance. In this respect however, the researchers suggest we're ahead of the bean counters in some sense, looking backward at our past performance through traditional financial metrics but also using brand and customer equities to forecast our growth and profitability down the line.
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Mapping the marketing productivity chain from strategy to execution to near-term tangible and longer-term potential impacts is the key to an effective analysis. Approaches that link market-based assets and marketing actions to shareholder value, though rare, are beginning to emerge. Few methods currently exist for comprehensively modeling the chain of marketing productivity all the way from start to finish, but there currently are a wealth of means to measure parts of the chain. Powerful methods exist to assess marketing tactics (short-term profitability); to model the market impact of marketing expenditures (customer satisfaction and perceived value of the offering); and to assess marketing assets, market position, market capitalization, and the organization's financial position. They just need to be linked together, tested, benchmarked, and then improved as new communications and computation capabilities develop.
In our rapidly-changing global marketplace, the relationship between marketer and consumer involves ever-shifting dependencies and independencies. If we establish chains of marketing productivity within our organizations now, we'll have a framework that assumes a flexibility for adjusting to dynamic competitive forces and market environments.
The linking of marketing actions through customer value to changes in market value is essential. "If there is one conceptual take-away from the paper," note the authors, "it is that the evaluation of marketing productivity ultimately involves projecting the differences in cash flows that will occur from the implementation of a marketing action."
To read more about it, visit www.marketingpower.com and look at the October 2004 Journal of Marketing article "Measuring Marketing Productivity: Current Knowledge and Future Directions" by Roland T. Rust (David Bruce Smith chair in marketing and director of the center for e-service, Robert H. Smith School of Business, University of Maryland), Tim Ambler (senior fellow, London Business School), Gregory S. Carpenter (James Farley?Booz Allen & Hamilton professor of marketing strategy, Kellogg School of Management, Northwestern University), V. Kumar (ING chair professor and executive director-ING Center for Financial Services, University of Connecticut), and Rajendra K. Srivastava (Roberto C. Goizueta chair in e-commerce and marketing, Goizueta Business School, Emory University).
