THE MARKETING PERFORMANCE RHYMEFrom Profit Pools, Future-Value Premiums and Predictive Dashboards to… Share of Need Models and Stakeholder-

Value Driven Metrics

Professor Luiz MoutinhoFoundation Chair of Marketing

University of Glasgow Business SchoolSCOTLAND

The term “metric” comes from music and poetry and implies periodicity.

Use of Metrics

•It is most important that everyone in the organisation agrees on why you are doing it. There are a number of possible reasons, including:

•Measurement, strategy, articulation, alignment and incentivisation.

•Focus on identifying strategic objectives, not just on picking things to measure.

THE TRIPPLE BOTTOM LINE

…is used a framework for measuring and reporting

corporate performance against:

economic / financial parameters

social parameters and

environmental parameters

i.e. the profit, people and planet approach

PERFORMANCE METRICS SNAPSHOT

1. Environment scanning

2. Quality of product and/or service (NC+DA)

3. Resource allocation – response functions

4. Employee motivation and performance

5. Operating efficiency

6. Process improvement and PBM

7. Financial performance

8. Customer satisfaction (and beyond…) + customer-centric performance

THE STRUCTURE OF PERFORMANCE MEASUREMENT

Measures that reflect

o Profitabilityo Cost effectivenesso The distribution of saleso Qualityo Production efficiencyo Reliability of deliveryo Market positiono Customer satisfactiono Employee satisfactiono Product developmento Competenceo The environmental profile of the unito Value to shareholderso Process development/level of technology

(6,2)(5,5)(4,9)

4,94,84,74,74,53,53,43,43,43,43,3

Measures (1-7)(Nordic Study)Kald & Nilson 2000 EMJ 6% RE (800 SBUs)

SUPERIOR FINANCIAL PERFORMANCE

•The best managers and the best-run companies in the world all share one thing in common. They consistently deliver superior returns to their shareholders. But beating the market or the industry average is not in itself superior performance.

•Becoming a value creation leader means posting shareholder returns in the top quartile of industry year after year. This typically requires a doubling of economic profit every three to five years.

•Is this raising the bar while delivering corresponding higher perceived value experiences to consumers?

PROFIT POOLS

An analysis of any company’s financial performance reveals that its profits will group, or “pool”, around a discrete selection of opportunities within its overall portfolio. Sustaining high performance over the long term depends on a company’s ability to develop a clear and real-time understanding of its current profit pools; the impact of emerging trends on those profit pools; and potential profit pools (including their timing, magnitude and possible risks) so that a company is always changing ahead of the curve.

Future-value premium, a relatively new performance metric, can help to identify which companies have what is called a “growth advantage” – a perception by the market that the company will be growing faster over time than the overall gross domestic product. The future-value premium can be calculated by beginning with a company’s enterprise value – the total market value of debt and equity less excess cash – and subtracting its current value and expected economic growth … but, value to whom?

Common marketing measures used by Board

•AL Other Attitudes (i.e. liking) •AW Awareness•BK Brand Product Knowledge•CD Number of Complaints•CS Customer Satisfaction•DA Distribution Availability•DC Per cent Discount•DI Perceived Differentiation•EL Price sensitivity/elasticity•GM Gross Margin•IP Image/Personality/identity•LE Number of leads generated•LR Loyalty/retention

•LS Conversion (leads t sales)•MN Margin on New Products•NC Number of New Customers•NP Number of New Products•PC Number of Products per • Customers•PI Commitment Purchase Intent•PM Purchasing on Promotion•PT Penetration•QE Perceived quality/esteem•RC Relevance of Consumer•RN Revenue of New Products•RP Relative Price

COMMON MARKETING MEASURES USED BY FINANCE

•AL Other Attitudes (i.e. liking)

•BK Brand Product Knowledge

•DA Distribution Availability

•DC Per cent Discount

•DI Perceived Differentiation

•IP Image/Personality/identity

•LE Number of leads generated

•LR Loyalty/retention

•NP Number of New Products

•PC Number of Products per Customers

•PI Commitment Purchase Intent

•PM Purchasing on Promotion

•PT Penetration

•QE Perceived quality/esteem

•RC Relevance of Consumer

•RN Revenue of New Products

•SL Salience

•SP Marketing Spend

•VO Share of Voice

SOME LIMITATIONS OF LEY MEASUREMENTS SYSTEMS

•The validity of the measures and the measurement systems used•The acceptance and understanding of the approach/initiative across the organisation (cultural acceptance)•The time it takes to collect the base data•The assumption that the base data exist (as opposed to experimental knowledge)•The time it takes to embed the approach with an organisation

SOME LIMITATIONS OF KEY MEASUREMENT SYSTEMS

•The legacy of TQM approaches which have focused only on continuous improvement, ignoring organisational and cultural change•The assumption that an organisation has a business (deliberate) strategy as opposed to an emergent strategy in response to environmental drivers•The assumption that an organisation is a process-driven as opposed to being departmental/hierarchically organised•Budgeting confused with strategy•Re-organisation confused with business strategy

SHORTCOMINGS OF PERFORMANCE MEASUREMENT

•Overly focused on the past•Overly focused on the short-term•Overly focused on a financial performance•Overflow of information•Information not available in time•Easy to manipulate•Too aggregate•Imprecise, often provides erroneous information

•Most financial indicators are backward looking•Financial performance tends to be measured over the short term and induce short term “fixes”•Necessary, but not enough •Three important reasons why financial measures alone are not enough•They may not capture all of a company’s strategic objectives •Bottom-line measures are after the fact•They are not very diagnostic

… From financial measurement to balanced measurement and back again …

Scorecards work well at the corporate, divisional and business unit levels, although different measures will matter to different entities.

At the departmental or functional level, care must be taken to ensure that they do not become a means of confirming “functional silos”. As more and more emphasis is rightly placed upon processes and demand value chains, it may be counter productive to focus measurement within an

individual function.

Instead of developing divisional and departmental supporting metrics, the company should create cross-functional metrics based on its value delivery systems (end-to-end business processes). These cross-functional metrics should be driven down to specific roles that employees play within each delivery system.

NEW TYPES OF SCORECARD

•Intangible assets monitor – that divides intangible assets into external structure, internal structure and competence of people.•The IC Index – that combines value drivers into a distinction tree (hierarchy)•The Inclusive Value Methodology – this combines financial and non-financial hierarchies of value•IC Rating (Intellectual Capital) – also a hierarchy but adds a risk factor•The VAIC (Value Added Intellectual Coefficient) method

DETERMING MEASURES

•Measure causes, not effects•Look for trends, patterns and structures, not events•Introduce new measures each time you introduce new goals!•The measurement must reflect the strategy!•Develop composite measures if necessary

… There is more to it!

•What has been experienced over the last several decades has been a steady shift of company valuations being based primarily on physical assets of the company to more of the company’s intangible assets.

•Nearly half of the value of the company is now based on these intangible assets. Three of the most highly valued intangible assets are: intellectual property, brand and company customers. Other recent advances include for example, lifetime value of customers.

•Making intangible assets tangible. Intangible Assets now can make up more than 80% of a company’s value… many of these are related to Marketing!

Difficulties with non-financial measures©

•Lack of statistical reliability: introducing “measurement error” where a measurement does not measure what purports to measure, or where it leads to conclusions which are statistically unsound. Inadequate samples may compound this problem.

•Measurement disintegration: Implementing a system with too many measures dilutes their effectiveness.

The general pattern of evolution of marketing metrics appears to be:

•Little awareness of the need for marketing metrics at top executive level•Seeking the solution exclusively from financial metrics•Broadening the portfolio with a miscellany of non-financial metrics•Finding some rationale(s) to reduce the number of metrics to a manageable set of about 25 or less

•Marketers often argue that what they do cannot be quantitative … a fear of analysis paralysis…

•This line of thought does not hold matter… At some point you have to replace this argument with some truth…! The onus is on marketers to demonstrate returns on marketing investment (ROMI).

•Marketers can also restructure their spending without diminishing their brand’s presence in several ways. One is the manage marketing expenses through smarter strategic sourcing, another is to maximise the returns of marketing expenditures by adding analytical rigour to an often-unfocused budgeting process.

•Measurement is inherently more difficult in marketing but that does not mean you should not try it!

•… Customer awareness. Customer satisfaction and market share are metrics, and they are nice to know about. But the CEO is more concerned with shareholder value, market capitalisation, return on assets and return on investment.

•In marketing, people do not talk that way… the question CEOs ask is this:" what does an extra point of customer satisfaction do for my shareholders?”

… because marketers typically are not equipped to speak the quantitative language of CEOs, they find that they are able to exercise less and less “clout” in business deliberations. CEOs are starting to play bigger roles in making marketing budgeting decisions.

Marketing today is still treated as expense depreciations, with a schedule of one year.

By adding data that are not normally part of the balance sheet or P&L statement – such as new customer growth, customer retention rates and share requirements - the impact of marketing efforts can be seen more clearly

THE 10 MOST VALUABLE METRICS ACCORDING TO DAVIDSON (1999)

•Market trend•Market share•Major brand trends•Customer retention levels•New Products/services in the past 5 years as a % of sales•Unit volume trend (%)•R&D as a % of sales•Capex as a % of sales•Marketing as a % of sales•Distribution trend (%)

•The four criteria for the selection of the short list were importance to analysts, practical ability to report, importance to management, and economic importance

CURRENT THINKING

Ratio Analysis

Leverage RatiosLiquidity ratios

Activity ratiosGPM = SR-CGS SRNPM = NP SRROTA = NI TARSE = PAT TE

CR = CA INV to NWC = INV CL CA-CL QR = CA-S CL

D to A = TD TAL-TD to Equity = L-TD

TE

INV TURN = S

INV

FixA TIRN = S

FixA

Avera Coll Perio = Acc Receive

Avera Daily Sale

Profit Ratios

Cost Behaviour and Price Variance Analysis

Exponential Marketing

P VC(+), VO , TVC , Po

> GR

P FC(+), VO , UNC , Po

P VC(-), AC VO , Po

> P

S iT = RiTeri, PiT

-epi, (aiT + AiT) eAI, diTDiT)eDI

[RiTeRi, PiT-epi, (aiTAiT)eAi, (diTDiT)eDi]∑

Total V = QaCa – QpCp

P/CV = Qa (Ca – Cp)

QV = Cp (Qa – Qp)

MSizeV = CpSHp(Mara – Marp)

MSV = Cp Mara (SHa – SHp)

MARKETING METRICS

•Correspondence Data.•Leading-indicator Metrics enable you to capture directional data.•Statistical modelling will follow (e.g., predictive GLM models). These statistical models become the basis for predictive metrics.•It is amazing how many people think of value as checklist. The checklist are almost worthless…

» Build linkages between the key metrics» Metrics drive behaviour» Drive value, do not just measure it!

Linking Market-Based Assets, Market Performance and Financial Performance

Market-Based Assets

Customers/ Brands

Partner Networks:

• Channels• Co-branding• Complements• Diagonal Marketing

system

Financial Performance

• Cash flows• Cash flow growth• Cash flow velocity• Reduced volability

and vulnerability of CF

• ROI, EVA• Valuations of lifetime

value• Brand equity• Higher P/E

Marketplace Performance

Structural metrics

• Price/Share premium• Marketing costs

Dynamical metrics

• Market penetration• Time-based premium• Loyalty/retention• Long-term sustainable

preferenceAdapted from Srivastava, Shervani and Fahey, Journal of Marketing,

1999

•The marketing profession is being challenged to assess and communicate the value created by its actions on shareholder value.•Is this a too narrow vision?•Consumer/customer value?•Stakeholder/society at large value?

Marketing Management Analytics (MMA)

•Marketing metrics will be increasingly oriented towards share of customer, and in terms of customer equity, CMR, and Customer processes, rather than MS … and other company-focused metrics …!

•Concentration on true brain value-adding activities

Since Marketing is intimately involved with 3 customer or market-facing processes that drive customer value – product innovation, supply-chain/operational excellence and customer/value-web management – it is also worth examining the link between these processes and stakeholder value.

Marketing Analytics Theatre

Impact of Market Assets + Processes on Company Performance and

ValueBusiness and marketAssets- Customers, brands

Market-facing processes

(Customer Management)

Customer Solutions andSatisfaction-True Loyalty/L-TSP, B-Cu Partnership, Involved Customer, Earned Attention Gained,…

Resource allocation- Investment

Shareholder value- EPS, EVA, Cash flow

ProfitabilityGrowth and Risk- ROA, ROI, ROIC

CAPABILITIES

MARKETING

STRATEGY

Marketing Metrics Classification and their future impact(Kokkinaki + Amber, 1999)

1. “Consumer intermediate” (consumer attitudes)

2. Consumer Behaviour (quarterly penetration)

3. Direct Trade Customer (distribution availability)

4. Competitive Market Measures (MS, measured relative to a competition or the whole market)

5. Innovation (share of turnover due to new products)

6. Financial Measures (advertising expenditure, brand valuation)

(+++)

(+)

(++)

(+)

(+) (+)

(+) (+)

From Company-Driven Metrics•Cost per lead (CPL)•Cost per click (CPC)•Customer Behaviour Maps (Recency)•Visual Customer Maps•Return on Ad spend (ROAS)•The Drilling Down Method•Life Cycle Metrics•Mapping Visitor Conversion•CRM Analytics: Micro vs Macro•Customer Model: Recent Repeaters•Keyword Effectiveness Index (KEI)(SEO)

… to Consumer-Driven Intermediate Measures•Cost per involved reader/viewer/ listener•Cost per earned attention•Cost per touch•Cost per touching

•Share of Need Models Marketing Performance

LONG-TERM VALUE OF STRATEGIC MARKETING INVESTMENTS

TIME

CASHFLOWS

StrategicMarketing

Programmes

Price/Share premiumsHigher advertising &Promotions elasticities

Faster market acceptanceand lower risks for brands

Lower Distribution costsLower cost of defending brandsLower tactical marketing costs

A marketing dashboard is like a “reverse prism” that pulls together a rainbow of data, key performance indicators, graphic analysis, and modelling into a coherent and focused team… in “stormy weather” marketers need to learn to “fly by instrument”… Dashboards should have real-time information.•Simulations and “what if” tests of different strategies.•Performance and predictive dashboards.•Customised performance dashboards.

Driving performance with the Marketing Dashboards

Sales

Prices

Revenues

Market size

Marketingexpenses

•Profits•ROI•ROA•EVA

Marketshare

Marketshare

Consumerpreference

Pricing

Consumerloyalty

Channelpush

Markercoverage

. Brand attractiveness

. Brand awareness

. Relative price

Degree of Search

. Reseller advertising

. Share of SKUs

. Displays

. Distribution

. Stockouts

Investmentassets

Advertising

Merch. Allowance

Credit offered

Consumer promos

Coop advertising

Salesforce

DASHBOARDS

Business management dashboard software will be redefined for support of mobile devices. Traditionally, dashboards have focused on consolidating Key Performance Indicators into a single screen or view. Mobile interfaces do not support the ability to provide this type of information in a single view, thus future management dashboard applications will need to use multiple views for mobile dashboards.

Interactive marketing is changing quickly, and is at the forefront of many societal changes.

A new mindset is required …!

SHAREHOLDER CALUE – TWO-SIDE COIN…

One side

•Shareholder value is a much hyped phrase, and inevitably invites questions about other stakeholders…•Internally it is measured by “economic profits” (CEP) which can also be known as economic value added.•EP measures the future cash flow•Shareholder value is a long-term measure ….? Is it?•It takes into account the return that shareholders expect from you and so focuses on exceeding their expectations (the cost of equity)

SHAREHOLDER VALUE – TWO-SIDE COIN…

The other side•Forget shareholder value – EPS•Shareholder value is a meaningless concept to most employees•Shareholder value never creates passion and human involvement•There has to be more to life than making your numbers…•We have to find ways to give people meaning at work – well beyond just money•Most people have far wider interests and passions that most organisations recognise – usually concerns beyond narrow self-interests…

Companies focus onIndividual focus on

Value in my life

Emotional authenticity

Personal productivity

“solution assembly”

Family, friends and community

Passion partnership

“Customers”

+ …

Growth

Profitability

Shareholder value

Earning per share (EPS)

The Only Good Metric is a Stakeholder-Value Driven Metric

Everyone is talking metrics these days as if it were some new discovery. Yet with all the dialogue there still seems to be a bit of confusion as to how to create meaningful metrics. Maybe it is because so many managers just do not get it. It is easy to find things to measure; it is altogether different to measure the right things. So what are the right things to measure in an organisation? The things to measure are those things that make you successful. And what makes a company successful? Simple, delivering value to stakeholders (customers, owners and employees to name the big three). Therefore it only stands to reason that all metrics should be stakeholder-value driven.

STAKEHOLDER METRICS

•Engagement Metrics•Change Management•Expectations Management•Humanity of the Project•Share of Need Models•Memetics Research

The Diversity Performance Factor:the soft stuff is the hard stuff

Once written off by some as the latest corporate fad, diversity may in fact, prove to be the little single most important performance factor of the 21st Century.

Some companies have even introduced a CDO/Chief Diversity Officer) charged with overseeing diversity efforts. The reason is simple: the diversity of our global population affects every facet of business and society.

For business, diversity represents the inexorably intertwined global marketplace, talent pool, vendors and suppliers; the countries in which we operate; the governments with which we negotiate; and the communities in which we live. It is reflected in our laws and our values.

Diversity is creating a sheer force of inescapable change for companies. A company’s ability to align, integrate and leverage diversity initiatives will determine its success in the 21st Century.

Innovators change the world by stepping into the intersection

Business Objectives

The Diversity Performance

Factor

Diversity Initiatives

as Catalysts Results

X + Y +

Utilisation of affinity and networking groups

• Cross-cultural competency development

• Accountability for diversity

• Diversity related metrics• Integration of diversity into business processes

=• Innovation• Improved productivity• Greater problem-

solving• Cost savings• More efficient

processes

Examples: IBM, Texas Instruments /TIDN + TI Diversity Network), Agilent Technologies, Microsoft + Morgan Stanley Bank

Profit Sharing – The Performance Marketing Model of the Future

“Change is not merely necessary to life – it is life.”

(Alvin Toffler)

Therefore, …

WHEN TO USE A QUALITATIVE METHODOLOGY