Measuring to demonstrate. Which metrics should you use and when?

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1 Measuring to demonstrate value in a tough economy Which metrics should you use and when? by Merry Elrick If you calculate ROI with help from the C-suite, you will have the quantitative rigor required to make a credible case for maintaining or increasing your budget. In this perilous economy, what are the most critical issues to communicators? What should we all be asking ourselves? Perhaps the most relevant question in hard times is this: What value do I bring to the organization? I m not telling you anything you don t already know. Budgets and jobs are in jeopardy. Entire businesses are at risk. Marketing communication departments are often the most beleaguered in times of economic stress. What can you do to relieve some of the pressure? Demonstrate the value you bring to the enterprise. And there is really only one way to do that: measurement. What measurement can do Communicators who make a commitment to measurement are bound to have more profitable operations because they are focused on performance. The problem is that there s such a dizzying array of metrics, it s hard to know which ones to use and when to use them. Do you have to measure everything? The short answer is no. Measure only what s important to you. What are your objectives? What is it you re trying to achieve? What are the results of your efforts? That s what you need to quantify. Measurement can help you in three fundamental ways: 1. Increase the efficiency of your operations. If your goal is to make your marketing communication department run more efficiently, then you should measure how well your processes are working. If you are trying to generate leads, you likely will want to track the cost per lead. If you want to get your message out to as many people as possible, you will want to know the cost per thousand impressions. These metrics tell you how efficiently you are operating. 2. Determine the optimal payback of your tactics. If you want to get the best possible payback from advertising and PR efforts, for example, you need to track how much you invest in each tactic and how great your return is. When you compare results for each tactic you employ, you ll know which ones bring the best results. 3. Help drive the profitability of your enterprise. This may seem like a pretty tall order, and out of GETTY IMAGES 16 Communication World May June

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3 There s just one problem: ROI is only useful for shortterm, lead-generating campaigns designed to bring in revenue. the realm of most communicators. But ask yourself how much more profitable your company would be if your marketing communication department were performing optimally. What if you could continually reallocate your budget throughout the year to increase advertising response rates by 100 percent? What if you could improve tactics so they all yielded maximum results? What if you could reduce sales cycle times by 40 percent? Or determine which creative campaigns produced the greatest results? Measurement can provide the guidance to making all these performance improvements and more. Case study: Using ROI to determine the profitability of a tactic Smurfit-Stone, a leading packaging solutions company, always attended the big biannual industry trade show. Why did they go? They didn t really have a good answer, except that all the big players attended, including their competitors. So the company spent good money on a booth, as well as the time, travel and expenses of the salespeople manning the booth. The powers that be, however, questioned the return on their investment. The company had done no pre-show promotion and got only 400 sales leads at the show. They did not track any resulting sales from those leads. When the trade show came up again, a new marketing director noted that research indicated the show had tremendous potential and that, unlike with some B2B shows, sales leads were generated right on the show floor. She invested US$300,000 in preshow PR, trade ads and online activities such as webinars. Instead of just counting leads from the show, the marketing director tracked the leads all the way through to the sales that resulted. Most likely because of the new pre-show promotions, the number of leads jumped from 400 to 2,400 an increase of 500 percent. And those 2,400 leads resulted in US$38 million in new business. The total investment was about US$800,000. The next time the show came up, management did not question the wisdom of attending. ROI is king Is it a coincidence that roi is the word for king in French? Well, yes, but marketing ROI (return on investment) guru James Lenskold says that ROI is actually the most critical measure of marketing programs for basing decisions that will help maximize company profits. Knowing the ROI of the tactics in your marketing mix gives you powerful knowledge you can act on. It allows you to stop doing things that cost too much for what you get. That gives you the flexibility to try something else that might work better. And that is how you can be more valuable to your organization by delivering tangible benefits. Once you begin to measure ROI, you will have a benchmark to use for comparison. You ll be able to see what areas need improvement. You ll know where you should cut your budget and where you should allocate more funds to programs that are working. Over time, you ll increase the ROMI (return on marketing investment). To determine ROI, first define it according to standards within your own organization. Basically, ROI is the profits generated over and above the initial investment and expressed as a percentage of the investment: (Gross margin Communication investment) / Communication investment = ROI (% total investment) It s a financial gain not an increase in awareness, not market share, not the number of leads you get or click-throughs to your web site. It s important to use the term carefully because you ll need to interact with people in your finance department if you want to calculate ROI according to best practices in your own company. You will need guidance from your finance department to determine what constitutes gross margin and how to define what your investment is. In fact, determining ROI can become a fairly complex exercise I ve only just scratched the surface here. That s why I suggest that marketers make friends with their CFOs. If you calculate the ROI of marketing communication with help from the C-suite, you will have the quantitative rigor required to make a credible case for maintaining or increasing your budget. Except ROI doesn t always work As a metric, ROI can be a useful diagnostic tool. CEOs love and understand it. It s a clear indication of the value you bring to the organization: You spent X and you brought in X+Y. But there s just one problem: ROI is only useful for short-term, lead-generating campaigns designed to bring in revenue. From the CEO s perspective, such campaigns help increase short-term cash flow always a good thing, especially in times like these. If you have a finite marketing communication effort say, a business-to-business direct mail pro- 18 Communication World May June

4 gram you can probably get a good idea of ROI. You have to be sure the objective is to make sales. Then you need to acquire and save the data you get as a result. Here are the steps, using direct mail as an example: 1. Link the direct mail program to the lead and then to the sale. You do that by coding the bounce-back cards or providing a unique URL or phone number on the direct mail piece. 2. When the leads come in, make capturing and recording them systemic to your organization. 3. Develop a database where you can maintain the data you collect. 4. Establish a rigorous lead-qualification program, working closely with the sales team to ensure there s agreement as to what constitutes a good lead. 5. Distribute the good leads to the appropriate salespeople and nurture the remaining leads. 6. When salespeople make a sale from the leads you supply, capture that data. No. 6 can be a big stumbling block for many companies, but nobody said this would be easy. You ll need to develop a relationship with salespeople because sales data is absolutely critical to calculating ROI. And you need to be relentless in gathering it because a sale that s made but not recorded will make your ROI metric look worse than it really is. There are database programs that can help you with this. Tough as it is to collect the data you need to demonstrate ROI, it s often just not an option at all. Why? Because much of the work we do as communicators is not designed to bring in revenue. We may create marketing communications to inform or educate or predispose people to buy. We may create long-term brand-building campaigns that establish our company s value in the marketplace. And these campaigns cannot be measured using ROI. Don t abandon branding It is fashionable in hard times to insist that brand building, or anything else not directly related to bringing in cash, should be banished. Throw out all brand-building campaigns! We want concrete results! Only lead-generating programs will do! It is tempting, because ROI is such a powerful metric, to skew your marketing communication Marketing goals drive business outcomes Think about how you might be able to use the measured results of your marketing efforts to drive overall profitability in your organization. Goal Acquire new customers Retain existing customers Reduce cost per lead Increase customer satisfaction Build brand loyalty mix to those programs that lend themselves to ROI measurement. Even more tempting is to skew your programs toward easily measured communications, such as campaigns. But when you do, you may slight long-term brand building. This is like cutting off a leg. You need that brand-building leg to work with your leadgenerating leg to get you where you want to go. Especially in hard times. Have you ever tried to make a sale to someone who has never heard of your company or reputation or the service or product you offer? Who has no clue why they should let your salesperson in the door? Or answer your phone call? Or call you for an RFP? A good solid brand will give you much-needed recognition. Yes, you will need to be frugal, but it s important to keep your name out there. Silence, or going dark, is a terrible signal to send to prospects and customers during hard times. Find some cost-effective ways to help you maintain your brand. The problem is, brand-building measurement is much, much trickier, and ROI won t work. So what will? Good old-fashioned objectives and outcomes Measure by how well you achieve your objectives. Start by aligning your marketing communication goals with your company s business objectives. Otherwise you risk irrelevance, and you don t want to be irrelevant in times like these (or ever). Customer retention is a major goal in tough times, but it s useful to remember that there will be a recovery. Eventually. And the communication efforts you make now will affect how quickly your company recovers and grows as things start to pick up again. So perhaps customer acquisition may Outcome Increase short-term cash flow Increase profitability Reduce acquisition expenses Reduce customer service costs Increase long-term shareholder value about the author Merry Elrick creates marketing communications with measurable value at DataDriven MarCom Inc. She is the author of The Truth About B2B Marketing ROI, available at Communication World May June

5 also be your objective. If it is, here are some metrics you may want to consider: 1. Customer growth rate: How quickly are numbers of active buyers growing? 2. Average cost per customer: How much do you invest in marketing communications for each customer acquired? 3. Active customer ratio: What proportion of the total customer base is actively buying? 4. Customer churn rate: How quickly are customers leaving your company versus joining it? What if your objective is not as specific, such as increasing brand value? Ask yourself what the important drivers of brand value are for your company. For example: Market share Customer retention Price premium (the increased price people are willing to pay for brands they value) Perception of quality Share of wallet (the percentage of a consumer s budget for a product or service that is spent on your company s offering of that product or service) Rate of growth compared with competitors Rate of new customer acquisition Unique selling proposition or unique value proposition Benchmark the pertinent drivers and follow up after your communications. Be sure to quantify your objective with a specific number, such as the percentage of market-share increase you want to see over a particular period of time. When you can t use ROI, find other ways to measure your success that are relevant to the objectives you are trying to achieve. Make sure those objectives affect business outcomes that reflect the goals of the organization. For example, CEOs are often concerned about increasing short-term cash flow and long-term shareholder value. Do you know how your marketing communication efforts contribute to achieving those goals? The cure for meaningless metrics There are just so many ways to count and measure, it can be overwhelming. But if you link the metrics you use to your strategy and make sure they are useful so you can act on them, that s a good start. ROI is a great metric because it s diagnostic it helps you allocate your budget wisely and it s usually favored in the C-suite. But it s only useful in the short term. If you re working on a long-term, brand-building campaign, use metrics that are meaningful to your situation and reflect what you re trying to achieve. In the process, you may even help drive the profitability of your organization. And that s a value that will stand you in good stead no matter what the economy is like. 20 Communication World May June 2009