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Measuring Marketing

ffirs 6 November 2012; 14:1:44

Measuring Marketing

110+ Key Metrics Every Marketer Needs

Second Edition

JOHN A. DAVIS

John Wiley & Sons Singapore Pte. Ltd.


Copyright ª 2013 by John A. Davis

Published by John Wiley & Sons Singapore Pte. Ltd.1 Fusionopolis Walk, #07–01, Solaris South Tower, Singapore 138628

All rights reserved.First edition published by John Wiley & Sons Singapore Pte. Ltd. in 2006.

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To Barb, Kate, Chris, and Bridget . . . the Journey Continues!


Contents

Acknowledgments xiii

Introduction xv

SECTION I CORPORATE FINANCIAL METRICS 1

CHAPTER 1 Revenue 3

CHAPTER 2 Gross Profit 5

CHAPTER 3 Value-to-Volume Ratio 7

CHAPTER 4 Net Profit 9

CHAPTER 5 Earnings-Based Value 13

CHAPTER 6 Return on Sales 17

CHAPTER 7 Return on Assets 19

CHAPTER 8 Return on Equity 21

SECTION II MARKETING PLANNING METRICS 25

CHAPTER 9 Market Share 27

CHAPTER 10 Relative Market Share 29

CHAPTER 11 Market Growth 31

CHAPTER 12 Market Demand 33

CHAPTER 13 Market Penetration 35

CHAPTER 14 Program/Non-Program Ratio 41

CHAPTER 15 Program/Payroll Ratio 43

CHAPTER 16 Causal Forecast 45

CHAPTER 17 Time-Series Analysis 49

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SECTION III BRAND METRICS 55

CHAPTER 18 Brand Equity 57

CHAPTER 19 Brand Scorecards 61

CHAPTER 20 Brand Premium 65

CHAPTER 21 Brand Contribution and Review Analysis 71

SECTION IV CUSTOMER METRICS 75

CHAPTER 22 Net Sales Contribution 79

CHAPTER 23 Time-Driven Activity-Based Costing 81

CHAPTER 24 Segment Profitability 83

CHAPTER 25 Customer Profitability 87

CHAPTER 26 Share of Customer 89

CHAPTER 27 Return on CustomerSM 91

CHAPTER 28 New Customer Gains 93

CHAPTER 29 Customer Acquisition Costs 95

CHAPTER 30 Cost per Lead 99

CHAPTER 31 Retention Rate 103

CHAPTER 32 Churn Rate 107

CHAPTER 33 Customer Losses 109

CHAPTER 34 Consumer Franchise 111

CHAPTER 35 Customer Equity and Customer Lifetime Value (CLTV) 115

CHAPTER 36 Customer Brand Value 119

SECTION V PRODUCT/OFFERING METRICS 121

CHAPTER 37 Usage 123

CHAPTER 38 New Product Purchase Rate 125

CHAPTER 39 Marketing Cost per Unit 129

SECTION VI PRICE METRICS 131

CHAPTER 40 Price 133

CHAPTER 41 Markup Price 137


viii Contents

CHAPTER 42 Target Return Price 141

CHAPTER 43 Sales Price Variance 143

CHAPTER 44 Markdown Goods Percentage 147

CHAPTER 45 Profit Impact 149

SECTION VII ADVERTISING/PROMOTION METRICS 153

CHAPTER 46 Share of Voice 155

CHAPTER 47 Recall 157

CHAPTER 48 Recognition 161

CHAPTER 49 Reach 163

CHAPTER 50 Frequency 165

CHAPTER 51 Gross Rating Points (GRP) 167

CHAPTER 52 Cost per Gross Rating Point (CPP) 171

CHAPTER 53 Response Rate 173

CHAPTER 54 Conversion Rate 175

CHAPTER 55 Advertising-to-Sales Ratio 177

CHAPTER 56 Promotion Profit 181

SECTION VIII DIRECT MARKETING METRICS 185

CHAPTER 57 Direct Marketing Revenue Goals 187

CHAPTER 58 Direct Marketing Profit Goals 191

CHAPTER 59 Direct Marketing Gross Profit 193

CHAPTER 60 Direct Marketing Net Profit 195

CHAPTER 61 Direct Marketing ROI 197

SECTION IX ONLINE/DIGITAL/SOCIAL METRICS 199

CHAPTER 62 Gross Page Impressions (or Gross Page Requests) 201

CHAPTER 63 Word of Mouth (WOM) 203

CHAPTER 64 Total Clicks 205

CHAPTER 65 Click-Through Rate (CTR) 207

CHAPTER 66 Cost per Click 209


Contents ix

CHAPTER 67 Cost per Action 211

CHAPTER 68 Pay per Lead 213

CHAPTER 69 Activity Ratio for Social Media 215

CHAPTER 70 Deductive Social Media ROI 217

CHAPTER 71 Resolution Time 219

CHAPTER 72 Social Media Profitability 221

SECTION X PLACE/DISTRIBUTION METRICS 223

CHAPTER 73 Cost per Sales Dollar 225

CHAPTER 74 Transactions per Customer 227

CHAPTER 75 Transactions per Hour 229

CHAPTER 76 Average Transaction Size 231

CHAPTER 77 Average Items per Transaction 233

CHAPTER 78 Hourly Customer Traffic 237

CHAPTER 79 Returns to Net Sales 239

CHAPTER 80 Inventory Turnover 241

CHAPTER 81 Percent Inventory Carrying Costs 243

CHAPTER 82 Gross Margin Return on Inventory Investment 245

CHAPTER 83 Sales per Square Foot 247

CHAPTER 84 Sales/Profits per Employee 249

CHAPTER 85 Retail Close Ratio 251

CHAPTER 86 Retailer’s Margin Percentage 253

CHAPTER 87 Percent Utilization of Discounts 255

CHAPTER 88 Shrinkage to Net Sales 257

SECTION XI SALES METRICS 259

CHAPTER 89 Net Sales Contribution 263

CHAPTER 90 Absolute Index (AI) 265

CHAPTER 91 Relative Index 267

CHAPTER 92 Percent of Sales 269

CHAPTER 93 Independent Sales Representative Analysis 273


x Contents

CHAPTER 94 Turnover Rate 275

CHAPTER 95 Recruiting 279

CHAPTER 96 Breakdown Approach 281

CHAPTER 97 Workload Approach 285

CHAPTER 98 Sales Performance Quotas 289

CHAPTER 99 Average Sales per Call 295

CHAPTER 100 Close Process and Close Ratio 297

CHAPTER 101 Cost per Call 301

CHAPTER 102 Break-Even Sales Volume 303

CHAPTER 103 Sales Productivity 305

CHAPTER 104 Four Factor Model 307

CHAPTER 105 Sales Variance Analysis 309

CHAPTER 106 Sales Volume Variance 313

CHAPTER 107 Straight Salary 315

CHAPTER 108 Straight Commission Plans 319

CHAPTER 109 Profit-Based Commission 321

CHAPTER 110 Salary Plus Commission or Bonus 323

CHAPTER 111 Salary Plus Commission and Bonus 327

CHAPTER 112 Commission Plus Bonus 329

CHAPTER 113 Team Selling Compensation 331

About the Author 335

Index 337


Contents xi

Acknowledgments

I would like to thank the Wiley team for their continued hard work and professionalism insupporting my work over the years (seven books now, including two second editions). Nick

Wallwork, Emilie Herman, Gemma Rosey, Jules Yap, Melissa Torra, Sharifah Sharomsah, PaulDiNovo, Stefan Skeen, and David Riedy in Wiley’s Asia and U.S. offices comprise a terrific globalteam that continues to enthusiastically support my projects. I know there are other Wiley folkswhose names I have inadvertently left out, but I want all of them to know how much I appreciatetheir efforts.

I am forever thankful to the many faculty and industry colleagues in Asia, Europe, and NorthAmerica whose work I admire and whose advice I have sought over the years. Here, as well, thereare too many to list, but I need to mention a few: David Montgomery, former Dean of the Lee KongChian School of Business at Singapore Management University and the Sebastian S. Kresge Pro-fessor Emeritus of Marketing at Stanford Business School; Annie Koh, Dean of Executive Educationat Singapore Management University; Jin Han, Professor of Marketing at Singapore ManagementUniversity; Dae Ryun Chang, Professor of Marketing at Yonsei University; Janis Andersen, Dean,School of Communication at Emerson College; Nitish Jain, President of SP Jain School of GlobalManagement; Lynn Kahle, the Ehrman Giustina Professor of Marketing at the Lundquist College ofBusiness�University of Oregon; Bernd Schmitt, Robert D. Calkins Professor of InternationalBusiness at Columbia Business School; Glenn Hubbard, Dean and Russell L. Carson Professorof Finance and Economics at Columbia Business School; and Jean-Claude Larreche, Alfred H.Heineken Chair at INSEAD and Founder/CEO of StratX.

The list of industry leaders whose expertise I deeply admire and respect include: David Haigh,Founder/CEO of BrandFinance; Chip Conley, Founder and Chairman of Joie de Vivre Hotels andauthor of Emotional Equations; Rod Beckstrom, President and CEO of ICANN and author ofThe Starfish and the Spider; Zach Nelson, President and CEO of NetSuite; David Maddocks, formerChief Marketing Officer of Converse; Steve Leonard, President of EMC Asia Pacific/Japan; BradGebhard, CEO USA of Hi-Tec; Bill Brown, President and CEO of Harris Corporation; Tom McCabe,Managing Director and Global Head of Transaction Banking at DBS Bank; Kevin Gould, CEO andGM of Chartis China; Brent Smith, Executive Chairman at Vietnam Venture Group; and RaviAgarwal, Professor of Practice at Nanyang Technological University and former senior executivewith Microsoft and Intel.

In the six years since the first book, and several books in between, my family continues to giveme the time to pursue these projects. I am exceedingly lucky because their support, love, andhumor are my main sources of inspiration, providing me invaluable and immeasurable joy!

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Introduction

The first edition of Measuring Marketing was released in 2006 and since that time, many morebooks on this topic have come to market. There is clearly an appetite in the business world for

evaluating the impact of marketing activities. With the rapid rise of social media, marketers nowhave even more tools to use for engaging with their customers. This second edition is revised andupdated, including new chapters on measuring social and digital media. The book has also beenreorganized based on the subdisciplines typically performed by marketers.

The measurement of marketing is one of the most important business needs today as com-panies face increasing pressures to demonstrate financial returns across the organization fromshareholders, investors, senior managers, and boards of directors.

A common question asked by senior managers is: What measure can I use to determine if mycompany’s marketing is effective? The answer is that there is no single measure that accomplishesthis. Companies develop with their own unique organizational DNA, including vision, strategies,corporate culture, hiring practices, products, and customers. No two companies are identical, evenwhen competing in the same markets with similar products. Relying on industry benchmarks isuseful as a starting point, but benchmarks hide the biases arising from competitors that have vastlydifferent cost structures, distribution networks, compensation practices, and even companypersonalities.

To effectively measure marketing, company management must begin by understanding thecontext of their business situation. Since a key determinant of business success is acquiring cus-tomers, managers must understand this relationship. Figure i.1 illustrates the relationship betweenthe company and its customers.

Brand Promise Brand Delivery

CUSTOMERS

Senior Management

Planning

Front Line

Execution

DESTINY

(Why?)

DISTINCTION

(What?)

EXPERIENCES

(How?)

CULTURE

(Who?)

FIGURE i.1 Components of Brand Value

Source: John Davis and Brand New View, INC.

As the diagram indicates, business leaders must have a clear sense of corporate destiny, orvision, which guides the company for the long term. The destiny provides direction for the

xv


business, answering the question: Why do we exist? This is then translated into strategies designedto create distinction and unrivaled competitive advantage for the firm, answering the question:What do we do that is unique and adds value? Having a clear understanding of both destiny anddistinction helps define how the organization will develop its culture, particularly the talent-development practices that will influence hiring decisions and inspire positive individual and teamperformance and behaviors. Culture answers the question: Who will be involved in helping usachieve our ambitions? These first three areas—destiny, distinction, and culture—comprise thecompany’s promise to the market (i.e., this is why we exist, this is what we do differently, this iswho we are, and this is how we do things). The final area, experiences, emphasizes how thecompany delivers its offerings to the market, answering the question: How do we create greatexperiences for our stakeholders? More than products and services, companies are increasinglydiscovering the importance of providing value-added experiences that connect to customers atmultiple points in the market (e.g., products, locations, advertising, social media, events, enter-tainment, design, service, etc.). Experiences represent the organization’s effort to deliver on thepromises made.

Below this chain of events are the connections between the vision-setters and the customer-facing implementers. It is clear that the further a company progresses along this path toward thecustomer, the more important the frontline staff becomes to delivering on the promises made bysenior management. As shown, the business effort shifts from senior management’s planning tofrontline execution. Each point along the way is both an opportunity to reinforce the organization’sofferings, or a potential point of failure between the brand promise and brand delivery.

For marketers, the implications are clear because their role is no longer functional or tactical,but strategic. For nonmarketers, understanding the importance of organizational alignmentthroughout means that execution must be accomplished with full knowledge of the organization’spromises to the market.

When the business-customer relationship is viewed from this perspective, the inadequacy of asingle measure of marketing performance becomes clear: Are we asking about strategy? Or cus-tomer relationship development? Or advertising? Or products? Or customer experiences?

The question grows more complex when life cycle stages are introduced in Figure i.2.

REVEN

UES

INTRODUCTION GROWTH MATURITY DECLINE

TIME

FIGURE i.2 Traditional Product Life Cycle


xvi Introduction

Each stage of the classic life cycle curve (known as the “S” curve for its shape) has differentimplications for marketing programs and, consequently, marketing measures. For example, theintroduction stage of a new product or a new company is an uncertain time at best. Marketacceptance is unknown, yet expense has been incurred to produce a product. However, withoutmarketing to announce the product to the market, it will fail for lack of awareness, no matter howinnovative or clever the design. The company’s objectives are to generate revenues, since survivalis most important. Volume-oriented sales programs and measures may be the best combination oftactics. Marketers will also argue for aggressive advertising to build awareness and educate themarket. Assuming the company is fortunate enough to enter the growth stage, the marketer willwant to build momentum by modifying the marketing communications message, emphasizingthe product’s unique value versus that of emerging competitors and reducing or eliminating theeducational aspects of their message (since the product is now known). Finally, as the firm entersthe maturity stage, the customers’ needs have changed, as has the required marketing commu-nication. Customers who have been loyal to the company throughout the life cycle want toknow why they should continue supporting its products, so a one-to-one, relationship-orientedmarketing campaign is developed, with entirely different goals and expectations.

Several events are occurring in this scenario:

j The launch of a new product to an uncertain market.j The development of marketing and sales efforts to build early awareness.j The rapid growth of the product’s acceptance and the concurrent demands on expanded

production, distribution, and product and customer support that this implies.j Refined marketing communications that reinforce the product’s unique value compared to the

competition.j The maturing of the customer base toward a loyalty-based relationship.

Again, no single marketing measure will succinctly or accurately capture and measure theseactivities. There must be multiple measures that reflect different marketing approaches, changinglife cycle stages, and a maturing customer audience. Marketers and senior managers mustunderstand this if there is to be useful measurement of marketing activities.

The Impact of Globalization on Marketing

While the classic Four Ps of marketing—product, price, promotion, and place—help shape thebusiness offering, actually implementing a go-to-market plan is an entirely different and complexchallenge. Globalization has complicated the Four Ps by compelling marketers and their compa-nies to develop their offerings based on the needs of each international market. Planning con-ventions that are familiar to marketers in the Western markets of Europe and North America eitherdo not exist or are not applicable to the developing economies of Southeast Asia, China, and SouthAmerica. Customers in Western markets have grown up surrounded by marketing communicationspractices that seem second nature. Yet in emerging markets, the practices may never have existed,so neither does a common knowledge base nor the infrastructures upon which marketers rely togain market information.

Product variation has increased during globalization, not decreased, despite the belief that akey requirement of product and brand success is having the same look and feel everywhere.Consistency may mean a product is of the same quality everywhere, but the message conveyed istailored to the needs of the local market. Or, it may mean that the product has to be redesigned tofit local needs and country-specific regulatory requirements. Uniformity implies that an identicalproduct and message is developed in all markets, irrespective of local tastes and preferences. Butuniformity is not desired or recommended for most markets today. Part of the marketer’s role is tounderstand the unique characteristics of each market the brand enters. Language and culturaldifferences may prevent marketing messages from successfully translating across markets.


Introduction xvii

A memorable example is the infamous Pepsi campaign that years ago adopted the slogan:

“Come Alive with the Pepsi Generation!”

It certainly sounds positive, reflecting the uplifting, youthful image Pepsi has cultivated over theyears. But when it was translated into Chinese, it had a very different meaning:

“Pepsi brings your ancestors back from the grave!”

The slogan clearly lost something in the translation. For marketers, the lesson is hopefully self-evident: Local adaptation is important for successful international growth.

In the B2B environment, entering new markets, specifically new countries, can be a formi-dable challenge as well. As carefully planned as most large companies are today, new marketsdevelop very differently and rarely according to corporate or industry specifications. Marketers,therefore, must know how to employ the key marketing frameworks for planning, then adapt asthe situation warrants.

Despite these challenges, the fundamental simplicity of the Four Ps translates well acrossmarkets and cultures and offers marketers a useful tool for planning their general approach to themarket. The measures discussed in this section help marketers answer the harder questions thatthe Four Ps cannot address.

Brand

Brands can be products, services, companies, or experiences. Companies in almost every industryare taking their branding efforts more seriously than ever before because of the additional valueconveyed by a brand. Even if the offering is identical to a lesser-known competitor, a well-knownbrand can command a higher price. With the growing complexity of markets and the expansion ofproduct choices, brands play an increasingly important role. Brands are a form of trust betweencustomers and companies. Today’s marketing strategies involve developing brand experiences thatgo far beyond a product or price. A brand experience describes the multifaceted effort by com-panies to connect to customers with entertainment, lifestyle, communications, and relationshipdevelopment. Each of these components is seen as part of the customer’s overall use of, andattachment to, products and services.

Brand experiences shape the customer’s perception and strengthen their relationship with thebrand. For marketers, branding has evolved from a simple effort of developing a logo and sloganinto a three-dimensional experience designed to inspire customer loyalty. Brands have becomestrategic assets, and marketers have an opportunity to turn ordinary products into extraordinaryexperiences that add emotional value for consumers and financial value for companies.

Brand measures, particularly brand equity, help marketers understand the complexity inmeasuring brands. Nonmarketers need to appreciate that brands are not easily measured, nor isthere a universal standard for brand valuation. Brands are complex strategic assets comprised oftangible and intangible inputs.

How the Book is Organized

This new edition of Measuring Marketing has been updated and revised, including a new sectionon online/digital/social metrics. In addition, there are now over 110 metrics that have been reor-ganized and placed into specific subdisciplines that marketers regularly use. Each metric isdescribed by measurement need, solution (including sample calculations where relevant), andimpact on decision making.


xviii Introduction

Overview by Section

SECTION I: CORPORATE FINANCIAL METRICS Corporate financial metrics are used to analyze thecompany’s performance. The metrics discussed in this section help describe overall performance,thereby helping marketers gain a clearer understanding of how their activities contribute to thefirm’s financial success. The metrics reviewed in this section are:

1. Revenue2. Gross profit3. Value-to-volume ratio4. Net profit5. Earnings-based value6. Return on sales7. Return on assets8. Return on equity

SECTION II: MARKETING PLANNING METRICS Marketers are responsible for developing theircompany’s marketing plans. Marketing plans are intended to describe how marketing strategies arealigned with overall corporate strategies, placing particular emphasis on the company’s currentmarket situation relative to competitors, customer needs, and similar opportunities and threats. Thefollowing metrics are discussed:

9. Market share10. Relative market share11. Market growth12. Market demand13. Market penetration14. Program/non-program ratio15. Program/payroll ratio16. Causal forecast17. Time series and control

SECTION III: BRAND METRICS Brands are strategic assets for today’s companies and are therebyunderstood to reflect the entire organization as seen through the eyes of stakeholders, whereas inyears past, brands were commonly understood to be a company or product name, or even moresimply, a logo. The current definition reflects the increasing importance of brand value as acomponent of total market capitalization, and also the general understanding that a brand is a keydriver of a company’s reputation. The following metrics are discussed:

18. Brand equity19. Brand scorecard20. Brand premium21. Brand contribution and review analysis

SECTION IV: CUSTOMER METRICS Marketers today must have a detailed plan for attracting anddeveloping profitable customers, including understanding customer acquisition costs, the financialimpact customers have on the business, and how to foster long-term customer loyalty. The metricsdiscussed in this section are:

22. Net sales contribution23. Time-driven activity-based costing


Introduction xix

24. Segment profitability25. Customer profitability26. Share of customer27. Return on customer28. New customer gains29. Customer acquisition costs30. Cost per lead31. Retention rate32. Churn33. Customer loses34. Consumer franchise35. Customer equity and customer lifetime value36. Customer brand value

SECTION V: PRODUCT/OFFERING METRICS The metrics in this section help marketers describemarket potential for their product, based on different market conditions and variables, and theyinclude:

37. Usage38. New product purchase rate39. Marketing cost per unit

SECTION VI: PRICE METRICS Price metrics affect many of the key decisions marketers make,both in planning and evaluating the company’s marketing activities. Price influences customerperception, revenues and profits, and brand-related intangibles such as brand value and reputa-tion. The price metrics discussed within are:

40. Price41. Markup pricing42. Target return pricing43. Sales price variance44. Markdown goods percentage45. Profit impact

SECTION VII: ADVERTISING/PROMOTION METRICS Advertising and promotion are two of theprimary marketing tools company management uses to communicate their offerings to the mar-ketplace. This section highlights metrics most commonly used in traditional mass marketing,although many of the new marketing tools (discussed more in Section IX “Online/Digital/SocialMetrics”) can also be evaluated by adapting the metrics in this section. They include:

46. Share of voice47. Recall48. Recognition49. Reach50. Frequency51. Gross rating points52. Cost per gross rating point53. Response rate54. Conversion rate55. Advertising-to-sales ratio56. Promotion profit


xx Introduction

SECTION VIII: DIRECT MARKETING METRICS Direct marketing refers to company efforts tocommunicate directly with individual customers, whether via conventional postal services or viaonline methods, such as email. Each potential customer contacted represents both costs andbenefits to companies, and marketers are keen to carefully measure the financial impact of thesemarketing activities. The key direct marketing metrics discussed are:

57. Direct marketing revenue goals58. Direct marketing profit goals59. Direct marketing gross profit60. Direct marketing net profit61. Direct marketing return on investment

SECTION IX: ONLINE/DIGITAL/SOCIAL METRICS The rapid emergence of online/digital/socialmarketing tools has given marketers many new ways to attract and retain customers. Online/digital/social tools are easier for marketers to track, due to the digital footprint each user createswhenever he/she is online or using mobile networks. These tools also help marketers directlyengage and interact with their customers in a two-way, real-time dialog (as opposed to the one-wayapproach, from company to customer, represented by traditional media), yielding the potential forhigh-value relationships over time. The following metrics are discussed:

62. Gross page impressions63. Word of mouth64. Total clicks65. Click-through rate66. Cost per click67. Cost per action68. Pay per lead69. Activity ratio for social media70. Deductive social media return on investment71. Resolution time72. Social media profitability

SECTION X: PLACE/DISTRIBUTION METRICS Customers purchase products either from online/virtual or physical locations. Physical environments, such as retail stores, offer marketers a uniquepoint of contact in which they can influence a customer’s experience (through merchandising,packaging, promotional displays, retail environment design, etc.) with the product/offering/brand.The following metrics are described within:

73. Cost per sales dollar74. Transactions per customer75. Transactions per hour76. Average transaction size77. Average items per transaction78. Hourly customer traffic79. Returns to net sales80. Inventory turnover81. Inventory carrying costs82. Gross margin return on inventory investment83. Sales per square foot84. Sales/profits per employee85. Retail close ratio


Introduction xxi

86. Retailer’s margin percentage87. Percent utilization of discounts88. Shrinkage to net sales

SECTION XI: SALES METRICS Personal selling and sales management remain one of the mosteffective, and expensive, methods for companies to move their products to market. Measuring theperformance of sales representatives and sales teams is vital to ensure that corporate, marketing,and sales strategic goals are in alignment. The sales metrics discussed within are:

89. Net sales contribution90. Absolute index91. Relative index92. Percent of sales93. Independent sales representative analysis94. Turnover rate95. Recruiting96. Breakdown approach97. Workload approach98. Sales performance quotas99. Average sales per call100. Close process and close ratio101. Cost per call102. Break-even sales volume103. Sales productivity104. Four factor model105. Sales variance analysis106. Sales volume variance107. Straight salary108. Straight commission plans109. Profit-based commissions110. Sales plus commission or bonus111. Sales plus commission and bonus112. Commission plus bonus113. Team selling compensation

Finally, this book is designed as a reference for marketing and sales management. But themeasures are important for all managers across the organization since few company decisions havea contained impact. The more that senior management and emerging managers understand aboutthe complexity of measuring marketing, the greater their appreciation and understanding ofmarketers, which can only benefit organizations.


xxii Introduction

SECTION ICorporate Financial Metrics

Marketers have an array of challenges, responsibilities, demands, and expectations to performtheir jobs successfully. The days of marketers focusing mostly on creativity and commu-

nications programs, such as advertising and public relations, have been rendered obsolete by theneeds of a more sophisticated globalizing business world. Marketers have a strategic role in mostorganizations that guides companies toward achieving long-term objectives. Success is predicatedon quickly synthesizing volumes of data, understanding rapidly changing markets and theirunderlying dynamics, building complex business and customer relationships, and doing all of thisprofitably. Marketing plans must align with the overall corporate business strategy while alsoproviding specific information about customer needs (and how those needs will be addressed) andthe probable impact to the company if the plan succeeds.

Understanding marketing’s role in the overall corporate business strategy includes payingclose attention to corporate-level measures. Marketers must have more than a cursory under-standing of the company’s financial performance; they must understand the details of how mar-keting contributes to the firm’s overall success. Corporate financial measures derive their resultsfrom the performance of a marketing-related activity, whether that is customer development,product, price, place, or promotion. When developing a marketing plan, marketers must under-stand the connection between their pricing strategy for a new product and the ultimate influenceon revenue, for example. Furthermore, marketers add credibility to their plans if they forecastalternative scenarios and demonstrate the potential financial implications of different product andpricing choices.

The objective measures described within this section provide marketers with a sensible andsimple review of key financial measures and why they are relevant to the marketer’s work. Thissection discusses:

1. Revenue2. Gross profit3. Value-to-volume ratio4. Net profit5. Earnings-based value6. Return on sales7. Return on assets8. Return on equity

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1Revenue

Measurement Need

Companies need to measure whether there is financial gain from the production and sale ofproducts and services.

Solution

Revenue is the total income from sales of products and services. It is represented by thefollowing:

R ¼ P3Qt

whereR 5 revenueP 5 price of products or servicesQt 5 quantity in time period t

Price refers to the actual price received for all products and services sold, not a projected price.Quantity is simply the number of units sold. If a marketer is selling services, then revenue may becalculated by multiplying the hours worked by the amount billed each hour. Or, revenue may becounted based on an agreed-upon fixed fee for a contracted amount of time. An advertisingagency, for example, bids based on a combination of the client’s advertising budget and thecommunications objectives the client is trying to accomplish.

Impact on Decision Making

From a marketing standpoint, revenue is the first indicator, and often a lead driver, of performancemeasurement. Revenue is included in this book because it comprises two ingredients vital tomarketing: price and quantity; in other words, how much and how many. When marketers startconsidering the factors that influence price and quantity, they begin to understand more about thebusiness.

Revenue is, of course, merely a starting point and marketers must resist the temptation to focusonly on top-line growth, because their financial colleagues are going to be concerned with bottom-line results and how much it costs to earn those revenues. Therefore, marketers must be concernedwith costs as well. Revenue must be evaluated in the context of the total performance of thebusiness and, for comparison, the market and the business’s key competitors. Furthermore,understanding revenue ought to inspire management to consider more carefully its sources

3

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(e.g., customers, products, price, competitors, market conditions) and how it can leverage itscurrent level of business into additional growth.

Source

Davis, J. Magic Numbers for Consumer Marketing. John Wiley & Sons (Asia) Pte. Ltd., 2005: 55–56.

c01 5 November 2012; 14:4:23

4 Corporate Financial Metrics

2Gross Profit

Measurement Need

A high gross profit suggests that a company is efficient, well run, and has its costs under control.Operations costs are controlled through internal programs designed to ensure they remain withincertain limits. Marketing costs are more difficult to control since the expenditures usually go towardmarketing programs and communications that have unpredictable longer-term impact. Marketersmay be tempted to grow market share through low prices that drive revenue, but profitability willbe sacrificed as a result. Marketers have a responsibility to know whether their efforts contribute togross profit.

Solution

Gross profit is a company’s total revenue minus the costs it incurred when producing the productthat generated the revenue. More simply, gross profit is total sales less total costs (or COGS, for costof goods sold), and it is represented by the following:

Pg ¼ R � C

wherePg 5 gross profitR 5 revenueC 5 costs

To illustrate, take a look at the figures for Apple 2009–2011 in Table 2.1.Clearly, Apple is doing well based on gross profits.

Impact on Decision Making

Gross profit by itself doesn’t tell marketers much about the overall performance of their companyor product line, except to suggest whether its performance is generally positive, or cause forconcern. Gross profit is calculated before accounting for operating expenses including: SGA(selling, general, and administrative), R&D (research and development), and nonrecurringexpenses. Therefore, a company could have a positive performance trend with gross profitincreasing each year, but the operating expenses might have increased substantially during thattime (perhaps to pay for the effort to grow revenues and gross profit), which would severely affectnet profit or net income. Marketers want to know and understand these numbers because they maysuggest areas where their marketing expenses are growing too quickly, not quickly enough, or are

c02 5 November 2012; 14:12:40

5

being improperly directed. Gross profit is found in the income statement and follows the total salesminus cost of sales figures.

Sources

Davis, J. Magic Numbers for Consumer Marketing, John Wiley & Sons (Asia) Pte. Ltd., 2005: 57–59.

Shim, J. K., J. G. Siegel, and A. J. Simon. The Vest Pocket MBA, Prentice-Hall, 1986: 18.

TABLE 2.1 Income Statement Summary for Apple, Inc.

Period Ending 9–24–2011 9–25–2010 9–26–2009

Total Revenue $108,249,000 $65,225,000 $42,905,000Cost of Revenue $64,431,000 $39,541,000 $25,683,000Gross Profit $43,818,000 $25,684,000 $17,222,000

Source: Adapted from Yahoo! Finance. Income Statement Summary for Apple, Inc.

6 Corporate Financial Metrics

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