First 10 Metrics - Part I: Measuring Marketing Effectiveness

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The First 10 Metrics – Part I
Where Intelligent Marketing Begins

A Story Before We Start

When I first started teaching
marketing measurement to
executives, I was told quite rudely
that I “didn’t understand.”

“Marketing is creative and you can’t
measure creativity,” I was told.

So I asked a question
of the executives –

“How many of you outsource the
creative component of your
marketing?”

72% of the executives
outsourced the creative

What does that tell us?

Marketing organizations are not in
the creative content business, but
instead manage the process of
marketing.

Now, I know that most organizations
and marketers struggle to measure
their marketing activities given the
hundreds of possible metrics.

I have consulted for Fortune 100
companies that have scorecards
with more than 50 metrics, which
took a great deal of time to put
together and provided no value to
the organization.

Why?

There is too much data and these
data do not provide managers with
information they need to make
decisions.

You need a simple approach to think
through which metrics are
important for a specific marketing
activity

Linking Marketing Activities to Metrics

In the 1960s, the standard
marketing behavioral impact model
was published. It was called the
purchasing funnel.

The idea was that different
marketing activities take the
customer through the stages of
awareness, evaluation, trial and
loyalty

In other words, marketing activities
are designed to “funnel” customers
from awareness to ultimately
becoming loyal customers.

Awareness Marketing
 Awareness marketing comes in
many forms – TV advertising,
billboards, sports sponsorship,
naming rights to stadiums
 Awareness & branding are
intimately related
 A brand is a consumer
perception of a particular
product or service and may
encompass the whole
company
 The perception is driven by
marketing, experience with
the product &
recommendations from
friends and colleagues

Awareness Marketing
 But in the purchasing cycle,
awareness is furthest from
the customer purchase
 There is also a significant
time delay between
awareness marketing &
actual sales
 Financial metrics are not
useful in measuring
awareness & brand
marketing

Awareness Marketing
 We use brand awareness
surveys to track customer
awareness across
geographies and over time
 Typical metrics measure the
effectiveness of awareness
marketing like number of
attendees at events,
eyeballs on a a website &
media impressions

Tiger Wood’s win in the 2005
Masters received $10.4 million of TV
exposure for Nike

Jeff Gordon received $9.9 million of
exposure for DuPont brand when he
won the 2005 Daytona 500

The problem is these metrics do not
connect to purchase intent and do
not capture the effectiveness of the
marketing.

Brand Awareness Metric
Ability to Recall a Product or Service

Top of Mind Recall means that in the
purchasing cycle, your
product/service will be one of the
first the consumer thinks about to
consider purchasing

How is it measured?
By asking

For (product/service), what is the
first name you think of?
For (product/service), what other
names have you heard of?

These questions uncover the
unaided reception of your
product/service and the relative
ranking of brands relative to it

These questions are the starting
point and should be refined for the
specific campaigns with follow-on
questions to uncover brand and
messaging impact and intent to act
(purchasing intent).

Let’s look at bottled water

Pure water is an odorless, tasteless
liquid made from molecules of 2
hydrogen atoms and 1 oxygen atom
(H2O) and approximately 70% of the
Earth is cover in water

The point – as far as products go,
water is pretty much on the low end
of complexity and fairly abundant

But then there are bottled water
brands… how many can you name?

Why spend Rs. 20 a bottle for the
brand and not drink the generic
store brand when the products are
identical?

“It’s really different – my water
comes from a mountain spring high
in the Alps.”

Do you really think there is a guy
hand dipping millions of bottles a
month into a stream to fill those
bottles?

Bottled water emphasizes the power
of brand – the product embodies a
feeling, an experience, and
perception of repeatable quality
that the customer is willing to pay a
premium for.

Brand equity, the value of a brand, is
difficult to express in a financial
value.

One way is to take all the assets of
the company and subtract it from
the market valuation of the
company based on stock price – the
remaining value is the “brand.”

But this isn’t correct because there
are so many unknowns that end up
multiplying together that the
derived “brand equity” is almost a
random number

The better approach is to use
surveys to ask how much a person
will be willing to pay for the branded
vs. non-branded product

The percentage difference
multiplied by product sales is the
approximate value of the brand.

A Simple Example
 Branded Product = 1000
 Non-Branded = 500
 Product Sales = 400,000
 Find the Percentage
Difference
(1000/500) = 200%
 Multiply by Product Sales
200% x 400,000 = 800,000
Brand Value = 800,000

Another way is with the internet and
SMS messaging

Placing a URL or SMS number on a
billboard can quantify the impact of
the marketing telling you how many
people acted as a result of the
awareness advertising.

Evaluation Marketing
 Evaluation marketing is
designed to drive customer
purchase intent by enabling
customer to compare
different products or
services
 Examples are – product
white papers, print ads with
breakdowns of the benefits
and features, product
brochures and websites
with product descriptions

 Evaluation marketing
demonstrates the value
proposition of the
product/service, the
benefits and cost trade-offs
 The challenge is the time
delay between the
evaluation and purchase
that could be weeks,
months or longer
depending on the product
 Another challenge is linking
the evaluative marketing
with an actual purchase

 Standard metrics for
evaluative marketing
include product information
downloads for a website or
impressions of marketing
print ads
 However, these metrics do
not measure the impact of
evaluative marketing well
 So how do we quantify the
effectiveness?
 We find metrics that point
to future sales

Dell competes based on price
because it has a low-cost direct
channel to the customer and
outstanding supply-chain
management that drives low-cost
manufacturing.

In Dell advertising, the price of the
product is prominently featured in
Dell’s evaluative marketing with a
list of the facts.

This is a great method if the
customer criteria is solely price – it
lets them quickly evaluate product
features and weigh the price against
performance trade-offs.

Apple takes a different approach in
its evaluative marketing,
emphasizing the cool designs and
product innovations

Apple iPhone ads highlight the
innovative benefits of the
technology, such as the App Store

When we look at Apple laptops,
Apple charges a price premium over
Dell and de-emphasizes price in the
evaluative marketing – you don’t see
the price on the Apple website until
you configure your computer

So how do we define a
metric with these things in mind?

Anyone who has purchased a car has
probably gone to a dealer and
picked up brochures for the new
cars that fit their purchasing criteria
& then done side-by-side
comparison of these glossy
documents

These brochures are examples of
evaluative marketing in the auto
business, but what is the value of
the glossy brochure?

That is hard to quantify, but we can
define a metric that is a measure of
future purchasing intent that
embodies the collective impact of
the evaluative marketing activities –
the test drive.

Metric 2 – The Test Drive
Customer Pretest of a Product/Service Prior to Purchase

It turns out that someone who test-
drives a car is very likely to purchase
the car. The purchase probability is
not 100% because of a test drive,
instead there is a probability of
purchase.

By measuring the number of test
drives and the number of customers
who subsequently purchase, we
calculate the average probability of
purchase.

Number of purchases
/number of test drives
= average probability of purchase

Test drives are a leading metric that
point to future sales. So evaluative
marketing should be designed to
increase the number of test drives
by increasing the amount of foot
traffic.

So we design experiments and
measure traffic and test drives
resulting from specific marketing
activities.

Intel Chip Sales

Intel has a greater than 80% market
share in processors for Windows-
based PCs and servers. This almost
monopoly power drives Intel’s sales
model.

It has a very large direct sales force
that engages OEM partners with the
goal of selling additional Intel chips
on the motherboard.

Intel’s sale cycle takes roughly 18
months, from initial discussions to
the manufacture of OEM boards
with new Intel processors. This
poses a problem for because of the
long sales cycle.

How does Intel do their test drive?

Within a few months of the initial
discussions with Intel, the OEM
must create a team to study the
feasibility of incorporating the Intel
product into the motherboard.

This is the “design win” for Intel and
the test drive that points to future
revenues.

When the OEM puts together a
team to investigate manufacturing
feasibility, it requires people and
money, which is not possible
without an implied commitment to
purchase.

By collecting data from its
operational CRM, Intel can measure
the conversion rate from design
wins to sales to predict the
probability of future sales revenues.

So, for Intel, the focus is on
improving evaluative marketing
material to drive more design wins

What do we learn?

The test drive is an essential metric
at the evaluation marketing stage of
the purchasing cycle

You should first decide what the
“test drive” for your product is, then
design the evaluative marketing
campaigns to incentivize the test
drive.

Metric 3 - Churn
The Percentage of Existing Customers Who Stop Purchasing Your Product

Churn is the essential loyalty metric
because it measures the percentage
of existing customers who stop
purchasing your products/services
each year

Customer churn is an interesting
metric and impacts some industries
more than others.

For example, the U.S. cell phone
industry, for example, has a churn
rate on average of 22% per year.

That means in 4 years, a firm could
potentially lose all of its customers.

In South Africa,
the churn rate is 50%.

When we talk about loyalty
marketing, there is again a
significant time delay between the
marketing activity and the
repurchase, especially if the product
is a high-end appliance.

This is part of the reason why churn
is such an important metric –
reducing the average annual churn
rate over the product life cycle can
be directly translated to improving
annual sales.

Where do we start?

Firms that do not know who their
customers are often don’t know
what their churn rate is.

My friend Bob
&
his Lexus

Bob lives in an old house in the
Chicago area with a garage door that
is somewhat small. One day, he
scrapped the side door of his Lexus
while pulling into the garage.

Now, we all know how much it costs
to get a small dent fixed and for a
Lexus that price can easily be tripled,
so Bob went to the Lexus dealership
expecting the worst…

When he got the dealership, the
dealer took the keys to his Lexus and
gave him a free loaner car and told
Bob to return at the end of the day.

When Bob got back, he asked
“How much do I owe for the
repairs?”

“There is no charge sir. Touch ups
are free.”

How much does that
improve customer loyalty?

In the auto industry, Lexus has
incredibly loyal customer –
approximately 70% of Lexus owners
repurchase a Lexus as their next car.

So how do we calculate
Lexus’ churn rate?

Lexus Churn Rate
 If we assume that a car is
purchased every 5 years,
that means Lexus has a
churn rate of 30% over 5
years
 Since churn is calculated on
an annual basis, in one year
Lexus loses 6% of its
customers
 6% x 5 years = 30%

How does Lexus keep
their churn rate so low?

Loyalty marketing initiatives for
Lexus include – a free loaner car,
free car washes, free breakfast on
Saturday morning at certain
dealerships, a free subscription to
the Lexus lifestyle magazine and of
course, free touch-ups.

Free touch-ups are important to
Lexus because so many Lexus
owners trade in their old Lexus for a
new one.

This low-cost service prevents rust
and increases the resale value of the
“pre-owned” Lexus after trade-in.

This is the best type of loyalty marketing
because it is low-cost to the company,
high perceived value to the customer
and creates opportunity for the sale of
additional high-margin
products/services, building loyalty &
increasing retention.

Loyalty marketing reduces churn!

Calculating Churn
 Customer Base
– 100,000
 Annual Revenue/Customer
– 1,000
 Annual Churn Rate
– 30%
 Revenue without Churn
– 100,000,000
 Customers Lost to Churn
– 30,000
 Revenue Lost to Churn
– 30,000,000
 Revenue After Churn
– 70,000,000

Most business-to-consumer (B2C)
companies have direct access to
customer data.

For these companies, a loyalty card
and/or branded credit card is often
the key to measuring and tracking
churn, and frequent flyer point
rewards or card-only discounts
incentivize continuous purchases.

Churn measurement may seem
challenging, though, especially for
B2B companies, if you do not know
who your customers are.

How do we get started?

First, measure your customer churn
rate either by tracking repeat
purchases or through surveys.

More likely than not, the churn is
higher than you think.

Implement loyalty marketing
campaigns to the highest value
customers and run experiments on a
small sample to measure the
effectiveness of the campaigns

First 10 Metrics - Part I: Measuring Marketing Effectiveness

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