Measuring Marketing Performance
Marketing has come a long way from the days of being known as the arts and crafts department. Once considered an art form rather than a science, the key to today’s marketing success hinges on the marketing manager’s ability to measure marketing performance using marketing metrics and their accountability for delivering data-driven results.
Estimates indicate that by the end of 2020, we will produce more than 44 zettabytes of data. By 2025, we will have produced over 180 zettabytes (or 180 million gigabytes) of data. Data is like the “new” oil. How we measure that data is like how we process the oil, making it efficient and useful to fuel our marketing initiatives toward better return on marketing investments (ROMI) and improving marketing competitiveness.
However, few marketing managers can appreciate the range of metrics used to measure the data. Nor do they understand the pros and cons of using one metric over the other. Their lack of understanding metrics leads to measuring data that provides little to no viable information for their marketing needs or direction their organizations should take. Marketers must measure what matters and not necessarily all of the data available to them.
While measuring what matters is critical to marketing success, what is important to one firm may not matter to another. For this reason, I have identified several marketing metrics worth measuring that have a universal appeal for almost any marketing process. The metrics below are a good start for measuring marketing performance. However, additional metrics are necessary to measure the essential things that matter to your business goals.
What Are Metrics and Why Do You Need Them?
Metrics are quantifiable measures used to track trends, changes in activity, progress, or characteristics. In almost every discipline — government, business, and science — metrics are used to explain occurrences, determine cause and effect, share findings, and make projections of future events. Metrics require objectivity and make it possible to compare observations across sectors and time horizons. They help promote understanding and collaboration among team members and departments.
If metrics are quantifiable, then marketing metrics are the measurable touchstones used to communicate marketing activities. In other words, they are the quantifiable values used to demonstrate marketing effectiveness across all marketing initiatives. To better understand marketing metrics, we can split them into four types:
Milestones measure performance against a stated goal and apply to almost any marketing initiative. Milestones list and categorize what’s supposed to happen and when it’s supposed to happen. For example, let’s say that your marketing department is in the process of redesigning the company website to improve user experience (UX). Developing the wireframe for the website’s homepage and the due date for the task may be one milestone out of the many on the redesign project.
Inputs — or marketing inputs — are the levels of resources you are putting into your marketing strategy. Inputs are measured to determine if the marketing process is working and at what level. For example, how much money are you allocating to pay-per-click advertising? Are you generating your desired ROMI from your input amount? Hence, money is a resource. A resource can also include personnel, time, and equipment, to name a few.
Outputs measure the results of your marketing initiatives. For example, market share, channel performance, and brand equity are a few measurable outputs.
Ratios are a comparison of two numbers or metric values. In other words, they express the amount of one thing over the other one. Ratios are represented by the numerator over the denominator. They are expressed as a fraction or — more commonly — as percentages. For example, a typical marketing metrics ratio is the return on marketing investment, or ROMI.
To calculate the ROMI of a specific marketing campaign, you will need to know the baseline level of business activity. You measure the baseline against the business activity during the time the marketing campaign is running. The result is the profit earned above the regular business activity minus the cost of the marketing campaign.
The formula for ROMI:
Baseline Profit = Baseline revenue – Baseline Cost of Goods Sold
Marketing Campaign Profit = Revenue – Cost of Goods Sold
Profit with Marketing Campaign Cost = Profit – Marketing Cost
Campaign Uplift = Profit with Marketing Cost – Baseline Profit
Return on Marketing Investment = (Campaign Uplift / Marketing Cost) x 100%
Baseline Profit = $50,000 – $45,000 = $5,000
Marketing Campaign Profit = $75,000 – $60,000 = $15,000
Profit with Marketing Campaign Cost = $15,000 – 6,000 = $9,000
Campaign Uplift = $9,000 – $5,000 = $4,000
Return on Marketing Investment = ($4,000 / $5,000) x 100% = 0.8 x 100% = 80%
With the marketing campaign in our example, the firm received an 80% ROMI.
Measuring What Matters
Many executives — including marketing managers — tend to measure all the data available to them. The belief is that “if we have the data, then we need to measure it.” Measuring all available data at your disposal is often a waste of time and unnecessary.
Your metric strategy should be focused and not broad. In other words, the secret to selecting the best way and what to measure is what matters most to your business goals. Measuring too much leads to data fatigue; you become distracted from the daily marketing functions, which leads to unanticipated or unwanted results.
I will stress the point one more time; the key to measuring metrics is to measure what matters most to your business goals. To help you determine the right marketing metrics to measure, the three criteria below can serve as a guide.
- Align the metrics you measure with your marketing strategies.
- Act on the data. Establish a high and low number for your key performance indicators (KPIs) and execute a contingency plan once the low or high number hit.
- Select metrics that allow you to detect and diagnose problems before they occur. Also, choose metrics for evaluating marketing performance after the fact.
Below are five marketing metrics that every marketing manager should consider when measuring their firm’s marketing performance. Again, the metrics you measure are the metrics that matter most to your business objectives and marketing strategies. The following metrics serve as a general starting point to help you begin taking accountability for your data-driven marketing initiatives.
- Market Share
- Customer profitability
- Customer lifetime value (CLV)
- Channel performance
Measuring Market Share
Market share is a metric that communicates how well a business or brand is doing against the competition. Market share analysis helps marketing managers judge their company’s market growth and decline and trends about customers’ competitor selection.
The market share metric can either lead to meaningful or meaningless information for your company or brand. That is, if you are in a market where three or four firms own 90% of the market, you are in a concentrated market. In this scenario, it helps if you track market share. However, if the top three or four firms owned only 5% of the market, tracking market share in the highly fragmented market is a waste of time.
The same holds if you are a small business in a local market. As an example, let’s assume that you are a local bakery. If you calculate your market share nationally, then the market share analysis is meaningless as thousands of bakeries exist across the country. Your market definition is too broad of an area, or it’s a fragmented market. However, suppose you define your market within a 10-mile radius. In that case, calculating market share makes more sense in determining where you stand in the market than your competitors within that same 10-mile radius market.
The three market share formulas worth using are unit share, revenue share, and relative market share.
Unit Market Share Formula
Unit market share compares the units of a product or service sold by one firm compared to all the units sold by competitors in the same market. We express unit market share as a percentage. The unit market share formula is:
Revenue Market Share
Revenue market share analysis reflects the unit sold prices of one firm to the same units sold by their competitors. Expressed as a percentage, the revenue market share formula is:
Relative Market Share
Suppose your business is in a market where the top three or four competitors maintain a large portion (75% or higher) of the market. In that case, using the relative market share analysis is a better marketing performance metric. It’s a better metric because the top competitors are in a concentrated market, meaning there’s better customer loyalty and repeat business from those customers.
However, if the top three or four competitors in a given market share, only 5% of the market share, relative markets share becomes meaningless.
With a market share so low among the top competitors, the market is fragmented.
A fragmented market indicates no big players in the market. Thus customer loyalty is non-existent. Without customer loyalty, it makes it difficult for marketing managers to grow market share with existing customers. Expressed as an index (I) number, the relative market share formula is:
Customer profitability is the profit your firm earns from serving a customer or customer group over a specific period. It’s important to track customer profitability to understand which customer relationships generate more revenue than others.
Customer profitability is the difference between the revenues earned and the customer relationship costs for a specific period.
Many executives and marketing managers fall into a pitfall by lumping all customers into one group and calculating customer profitability from that group. Not all customers are equal; therefore, your customer profitability metrics need to reflect the different levels (or tiers) of customers that purchase from you.
For example, in a three-tiered customer system, your top tier is the most valuable customer group to your business. They bring you the most profit.
The second tier of customers is the group’s middle. They are low to middle-profit producers for your company. Most customers within this middle category can increase their spending and move up a tier with more nurturing. Thus they are worth keeping.
The bottom tier is the set of customers that lose your company money. If you can devise a strategy to get them to spend more money and move them up a tier, great. If not, you may consider charging them more for the products or services or “firing” them all together.
A useful marketing metric for customer profitability metric is to track repeat customers. Repeat customers can be followed by monitoring the purchase recency rate, the length of time the customer last purchased from you to their next purchase.
Another metric that is useful with the customer profitability rate is the retention rate of current customers. Both of these two metrics can apply to any of your established customer tiers. Suppose there are changes in customer numbers over time. It could signal a problem if the customer numbers drop or success if they increase.
Customer Lifetime Value (CLV)
The customer lifetime value metric is what the customer is worth to the company — in cash — for the customer’s lifetime in today’s dollar. The CLV is a vital marketing measurement because it encourages companies to focus on their customers’ long-term health and not so much quarterly profits. In other words, it helps marketing managers focus on higher potential customers over customers with a lower value in terms of profitability.
There are many formulas to calculate customer lifetime value. The following calculation is a simplified version for calculating CLV.
For firms that work with channel partners, measuring your partners’ success is crucial to your continued relationship. After all, channel partners are an investment that you make with a third party seller.
A channel partner is a company that partners with a manufacturer or producer to market and sell the manufacturer’s products, services, or technologies. More often than not, channel partners operate as a co-branding relationship with their suppliers, the manufacturer.
Monitoring their performance is essential to your own firms’ survival. It helps the channel partner find areas of weakness in their marketing or areas of success. If a channel partner consistently underperforms, it may be time to replace them.
To determine channel partner effectiveness, calculate the ROI or the output divided by the input. In other words, divide what you gain from the channel partner by what you spend. Examples include:
Total sales/ active accounts
Total sales/sales calls
Gross profit/number of sales reps
Marketing has come a long way from the days where one message fits all. Today’s marketing department personnel need to be data-driven to help navigate their firms toward success. The challenge is that data is abundant. Many marketing managers and executives do not know how to use that data or use too much data to render itself useless and a waste of time. If marketing professionals want to be effective and help companies reach their financial and market share goals, they need to measure what matters. They need first to know their companies’ business objectives, then ask the necessary questions about what types of metrics they need to measure to reach those objectives. The four metrics discussed above are just a start. Perhaps the most common metrics used, but others are equally important to the marketer’s success.