What value marketing? a position paper on marketing metrics in Australia

Transcription

1 What value marketing? a position paper on marketing metrics in Australia 30597_AMI_V11.indd 1 24/09/2004 3:26:21 PM

2 S E C T I O N T I T L E 2004 Australian Marketing Institute for information on AMI call (02) or Design by Macimages using InDesign CS and Myriad typeface # _AMI_V11.indd 2 24/09/2004 3:26:21 PM

3 W H AT V A L U E M A R K E T I N G? P R O L O G U E Prologue Developing Agreed Marketing Metrics for Australian Business A basic requirement of any system which contributes to the planning and management of enterprises is that there should be feedback mechanisms to allow evaluation of performance. This is true of marketing, covering all its processes and functions, including market research, product development, marketing communications, pricing and distribution. Further, the overall role of marketing as a value creator requires measurement, both to demonstrate that role and to achieve continuous improvement. Finally, as a central part of marketing there is a need to understand the critical role of the brand, as an important asset for the organisation and as a vital part of the means by which value is generated. Leading marketers point out that while selling may be about creating cash flow now, marketing is more about creating future cash flows, and a powerful brand is like a reservoir of that future cash flow. If this is true, then it is very important to have measures, or metrics that help us manage and maintain brands and maintain marketing strength. But how do we go about measuring the performance of a brand and how do we integrate the many possible metrics that are available to assess overall marketing performance? On the one hand there are simple indices, such as overall sales, or market share; then there are more complex measures related to communications, such as share of voice or share of mind ; finally there are complex measures such as brand value and brand equity [which are different measures]. The Australian Marketing Institute (AMI) believes that it is in the interests of better business performance as well as in the interests of marketers, for marketing metrics to be adopted at all levels of business and across all sectors. It is important for the language and metrics of marketing to sit beside those of finance when CEOs and Boards assess company performance. One of the key reasons for this lies in the essential difference between most financial measures and higher order marketing metrics such as brand equity. Financial reports are essentially backward looking tracking cash generation in the past, while marketing metrics can tell us about future cash flows. While this is arguably true, two key obstacles to the wider adoption of metrics need to be addressed. In the first place there is a need to provide a fairly uniform and generally accepted approach to the development of suitable metrics for different types and sizes of enterprise [including both private and public sectors]. This is not to imply that all sets of metrics implemented will be essentially the same; each business and each type of activity may require somewhat different measures. But a more unified set of principles and processes will assist businesses approach the task of selecting appropriate metrics. Secondly, there is a need to promote the validity, value and efficacy of marketing metrics at the CEO or Board level of enterprises. Many marketing metrics currently in use by organisations never go beyond the marketing department. Widespread adoption and acceptance can only come about when those who hold the reins acknowledge and employ marketing metrics _AMI_V11.indd 1 24/09/2004 3:26:21 PM

4 W H AT V A L U E M A R K E T I N G? P R O L O G U E The Australian Marketing Metrics Project Over the past months the AMI has been engaged in a development project to establish this agreed set of marketing metrics and metrics selection methodology for Australian enterprises. The objective is to establish a framework of principles and processes together with a compendium of measures that will assist the measurement of marketing performance across all industry sectors. To oversee the project, the AMI has been assisted by a Marketing Advisory Board which includes some of the country s most senior and experienced corporate marketers. The first steps involved a review of existing literature and current measures, and culminated, after review and revision, in this discussion paper and its accompanying reference cards. The research of existing practices by Australian businesses was extensive, and included the memberships of the AMI and Australian Association of National Advertisers. The recommended principles, processes and measures will be followed by a Metrics Toolkit. The AMI has already had cooperative support and assistance from a number of marketing and research bodies and we look to continued dialogue from both marketers and senior managers. The Australian Marketing Metrics will always be to some extent a work in progress of course, and involvement from other professionals will provide valuable input to assist with their refinement. Marketing metrics in various forms have been available for a long time and the AMI project is not about establishing a novel set of measures but rather bringing together existing knowledge and process in a comprehensive, logical and user-friendly system. As the aim is to encourage greater adoption and use of metrics across industry sectors and at senior management and board level it is important that both the principles and their implementation are clear, readily understood and appreciated by non-marketers. While some technical terms are unavoidable, there is a need to ensure the expression of them is as free from jargon as possible. The Australian Marketing Metrics project addresses these issues, and will help establish greater unity in the approach and greater clarity in the communication of measures of marketing performance. The next steps will be the adoption of Australian Marketing Metrics by more and more businesses. We see this as a watershed for marketing, but more importantly, it will provide strong support for Australian business, as we strive to build a more competitive economy in terms of our capacity to value-add. Roger James FAMI CPM National President Australian Marketing Institute September _AMI_V11.indd 2 24/09/2004 3:26:22 PM

5 W H AT V A L U E M A R K E T I N G? A B O U T T H E A M I About the AMI Marketing is arguably entering the most exciting period in its history as businesses come to recognise that critical generators of value are to be found in the intangible assets that are the central concern of marketers. Marketing professionals are the key custodians of these assets: corporate image, customer relationships, brands, market information and sales performance. In this environment the development of the marketing profession assumes greater importance than ever. The Australian Marketing Institute is the professional association for marketers and has served Australian commerce, industry and the profession for 70 years, making it one of the oldest professional associations in Australia. The Institute offers its members: A respected and authoritative voice for the profession Strong advocacy of the highest standards The opportunity for marketers to achieve career advancement and enhanced credibility in the profession through professional development programs Access to the latest information on marketing practice Networking with fellow practitioners. The Australian Marketing Institute offers the Certified Practising Marketer Program to its members who meet the required practising standards. The CPM certification serves as the professional benchmark and distinguishes the truly qualified from those who have merely assumed their own titles and positions. An important initiative of the Australian Marketing Institute last year was the establishment of the Marketing Advisory Board comprising some of Australia s most senior marketers. The role of the Marketing Advisory Board is to assist with the advancement of the marketing profession and to promote the value of marketing to senior management and board directors. The first initiative is the Australian Marketing Metrics project. This initiative is an extension of the Certified Practising Marketer program in that the profession for the first time will provide complementary metric frameworks for both individual and organisational marketing performance. This integrated approach provides a key platform for promoting the role and value of marketing in business _AMI_V11.indd 3 24/09/2004 3:26:22 PM

6 W H AT V A L U E M A R K E T I N G? K E Y P O I N T S Key points Marketing and accountability In all sectors of Australian business, the level of accountability required at all levels has increased, making accountability the basis for perceptions of value added. Since the late 1990s, the economy has increasingly recognised that intangible (market-based) assets are the drivers of value. Marketing can become recognised as a leader in the creation and management of these market-based assets. To do this, the profession must introduce a common framework for measurement so that its contribution can be clearly articulated and acknowledged. A value-based approach Increased shareholder value should be the ultimate goal of any accountable marketing activity. By successfully improving customer value and managing market-based assets, marketing activities contribute to cash-flow generation, which leads to improved shareholder value. Key areas delivering improved cash flow and enhanced shareholder value _AMI_V11.indd 4 24/09/2004 3:26:23 PM

7 W H AT V A L U E M A R K E T I N G? K E Y P O I N T S A framework for measuring value The AMI does not support a prescriptive, one-size-fits-all approach, but offers a framework to guide individual companies choice of metrics yet produce uniform results. The framework s underlying principles are that metrics should be linked to strategy, and should include as a minimum four key elements: 1. return on marketing investment 2. customer satisfaction 3. market share in targeted segments 4. brand equity. The framework incorporates a common set of recognised corporate and marketing models and a process for developing a set of metrics relating to cash-flow outcomes _AMI_V11.indd 5 24/09/2004 3:26:23 PM

8 W H AT V A L U E M A R K E T I N G? K E Y P O I N T S Some commonly used metrics We present an overview of the most common metrics used today. These cover financial, brand equity, innovation and employee-based activities. Key metrics for best practice used by leading organisations. Choose, develop and monitor metrics that reflect your operational activities In addition there are commonly used metrics that cover the more functional aspects of marketing such as new product development, electronic marketing, direct marketing and sales force etc. We also make some observations on the frequency of measurement and reporting. Challenges and issues to consider The successful introduction of a common framework for marketing metrics is not without its challenges. These include terminology, the accuracy and cost of data collection and analysis, and the treatment of intangible assets in financial statements. We discuss the areas of most contention and provide some suggestions for managing the issues involved. Industry case studies We present a number of case studies from different industries where the companies involved have spent time and energy working out those metrics that best suit them. A worked financial example The report does not address in-depth financial cash flow analysis techniques or brand valuation methodologies. We have included an example of (a) cash flow and shareholder value calculations from a marketing expenditure and (b) an evaluation of a communications budget in financial terms. Easy reference cards Two cards are provided that summarise the key elements of the metric approach _AMI_V11.indd 6 24/09/2004 3:26:24 PM

9 W H AT T V A L U E M A R K E T IIN G? S E C T I O N T I T L E Contents 1. Marketing and accountability A value-based approach A framework for measuring value Some commonly used metrics Challenges and issues to consider Industry case studies A worked financial example 47 Additional material of interest 56 A. Easy-reference cards 57 B. Acknowledgements 60 C. References 63 D. Glossary 64 E. Financial Glossary _AMI_V11.indd 7 24/09/2004 3:26:24 PM

10 W H AT T V A L U E M A R K E T IIN G? S E C T I O N T I T L E Detailed contents 1. Marketing and accountability The changing context of marketing The importance of intangible assets An expanded role for marketing The expanding marketing process A value-based approach The concept of shareholder value The link between customer satisfaction and shareholder value Measuring customer satisfaction The drivers of shareholder value The link between marketing and shareholder value A framework for measuring value Underlying principles Two types of value A common process Choosing appropriate metrics Underlying tools (key metrics) Communicating the new role and the framework Some commonly used metrics Strategy and operational metrics Feedback from the AMI /AANA 2003 member survey Top 5 metrics for the marketing mix Good practice in reporting Challenges and issues to consider Cost Required skill level _AMI_V11.indd 8 24/09/2004 3:26:24 PM

11 W H AT A T V A L U E M A R K E T IIN G? S E C T I O N T I T L E 5.3 Presenting metrics to the board Government and not-for-profit organisations (NPOs) Treating intangibles in annual financial statements Dealing with the terminology Valuing brands Industry case studies Automotive industry Telecoms Fast moving consumer goods PCs and retailing Entertainment and tourism (a Disney story) Retailing A worked financial example Cash flow and shareholder value calculations from a marketing expenditure Evaluating a communications budget in financial terms 53 Additional material of interest 56 A. Easy-reference cards 57 B. Acknowledgements 60 C. References 63 D. Glossary 64 E. Financial Glossary _AMI_V11.indd 9 24/09/2004 3:26:24 PM

12 W H AT V A L U E M A R K E T I N G? M A R K E T I N G A N D A C C O U N TA B I L I T Y 1. Marketing and accountability Summary In all sectors of Australian business, the level of accountability required at all levels has increased, making accountability the basis for perceptions of value added. Since the late 1990s, the economy has increasingly recognised that intangible (market-based) assets are the drivers of value. Marketing can become recognised as a leader in the creation and management of these market-based assets. To do this, the profession must introduce a common framework for measurement so that its contribution can be clearly articulated and acknowledged. 1.1 The changing context of marketing Changes in the environment economic, regulatory, social have had an impact on marketing across all industry sectors. Many industries are in the mature phase or are in hyper-competitive situations, with cycles of expensive and intensive competitor initiatives and retaliatory responses. Similarly, the service and business-to-business sectors have considerably increased their marketing resources and expenditure in recent years, while the government sector increasingly recognises the need to communicate and justify its decisions with its stakeholders. The mass media is increasingly expensive and cluttered. Boston Consulting Group stated that, for advertising, the overall cost of reaching consumers between the ages of 25 and 54 has increased 300 per cent since 1995 due to massive channel and advertisement number increases 1. This has led to greater emphasis on other promotional activities such as public relations, events and the Internet. Marketing continues to be under pressure in terms of achieving growth and short-term profit, while facing the challenges associated with category clutter, less loyalty and increasing customer sophistication. In addition, marketing s role has evolved over the years from one of advertising, sales and market research (the traditional view of marketing) to one that supports the total organisational response to meeting customers longer-term needs in a profitable way. Marketing therefore encompasses all aspects of an organisation s operation that have an impact on this result. And in all sectors, the level of accountability required at all levels and across all functions has increased, making accountability the basis for perceptions of value added. 1 Boston Consulting Report. Darwin plays a visit to advertising, _AMI_V11.indd 10 24/09/2004 3:26:25 PM

13 M A R K E T I N G A N D A C C O U N TA B I L I T Y 1.2 The importance of intangible assets Since the late 1990s, the economy has been moving from one that is product driven and based on tangible assets, to a knowledge and service economy based on intangible (or market-based) assets. Examples of market-based assets are: brands supplier and intermediary relationships databases and information sources responsive processes innovation capabilities and culture. Such assets are not measured by a company s financial system. Nevertheless, all organisations today create sustainable value from leveraging these assets. Even after the bursting of the NASDAQ and dot com bubbles, in 2002 market-based assets accounted for more than 75 per cent of a company s value 2. The average company s tangible assets net book value of assets less liabilities represent less than 25 per cent of market value. The intangible component of total assets is likely to continue to grow as organisations seek to control the increase of fixed assets and to outsource non-strategic assets. It is increasingly recognised that market-based assets drive long-term value creation and need to be measured and managed. 1.3 An expanded role for marketing CEOs and CFOs are demanding to know how effectively their marketing dollars are being put to use. However, few CEOs have marketing experience and few boards have directors with a background in marketing. UK research has found that only 12 of the top 100 company CEOs had experience in a marketing role 3. In the USA, only 9 per cent of strategic planning department heads had marketing backgrounds 4. While no comparable data are available for Australia, anecdotal evidence suggests that marketers are even less prominent at senior management level in this country. Traditionally, accounting mentalities have dominated senior management and board thinking. And yet mission/vision statements inevitably include customer focus as an imperative, and most organisations have strategies that encompass growth and customer service delivery and key marketing activities. This suggests that the need for marketing is well understood at senior management level and yet marketing s real contribution is not given the recognition it deserves. Marketers need to respond to this gap in understanding by leading the response to the challenge, and demonstrating to boards and senior management how their marketing dollars are being put to use. 2 Strategy maps, Kaplan & Norton, Harvard Business School Publishing Corporation, Ambler.T. (2003) Marketing and the bottom line. Prentice Hall. 4 Boston Consulting Report. Darwin pays a visit to advertising, _AMI_V11.indd 11 24/09/2004 3:26:25 PM

14 M A R K E T I N G A N D A C C O U N TA B I L I T Y Marketing taking the lead It is time for the marketing profession to be recognised for its central role in creating and harvesting profitable revenue (inward cash flow). To do this successfully, marketing needs to be able to manage and measure those marketing activities that contribute to cash flow. Organisational factors and the degree of innovation also play key roles in cash-flow generation; their links with marketing also need to be managed and measured. Until recently the objectives and intellectual foundation behind marketing measurement were unclear, even though strategy literature and marketing thought leaders have long commented on managing the sources of revenue and the building of intangible assets. The late Professor Peter Doyle has called this new role of concentrating on cash flows from marketbased assets value-based marketing 5. To achieve this recognition for marketing will require marketing executives to have proven and accessible ways of judging effectiveness, efficiency and returns from activities under their management. In addition, to be able to play a significant role in board and senior management deliberations, marketing executives will need to be able to explain, in plain language, their philosophy of using financial and quantitative performance metrics. Talking the language of the board is a critical step in being heard. There are many blue-chip multinationals with extensive brand equity and market-based asset evaluations and metrics, that also have the support of strong marketing skills and management at all levels of the organisation. Companies in fast moving consumer goods (FMCG) industries have tended to be leaders in this area. There is much to learn from them, including not being swamped in marketing metrics that confuse rather than enlighten performance. Marketers must be able to measure the value they are creating for customers and shareholders. Value is defined as the ratio of costs to benefits received from the brand attributes and related products and services for the customer and long-term return on investment for stakeholders as demonstrated by indices such as shareholder value. In other words, it is not enough to satisfy customers they must be profitable customers. These two aspects of value creation are clearly linked, by the profitable cashflows which will be generated by the brand. Smaller organisations will inevitably have limited organisational capacity to develop and monitor marketing metrics; however, they can make a start in areas that reflect their core strategies, whether operational excellence, product/service leadership or customer intimacy. The same applies to not-for-profit organisations (NPOs) and service organisations. 5 Doyle. P. (2000) Value Based Marketing. Wiley _AMI_V11.indd 12 24/09/2004 3:26:25 PM

15 M A R K E T I N G A N D A C C O U N TA B I L I T Y 1.4 The expanding marketing process Demonstrating marketing s true role implies a need to be more relevant at the board and senior management level, with greater links to overall strategy as well as deeper capabilities for organisation development, innovation and finally research and measurement. This is reflected in Figure 1. Figure 1. Expansion of the value chain Examples of this expansion can also be presented in a table, as in Figure 2. Figure 2. Marketing s true role Objectives Strategy Assumptions Contributions Not Just... Create customer value Increase market share Positive market performance leads to positive financial performance Knowledge of customers, competitors & channels But also... Use customer value to deliver shareholder value Develop & manage marketing assets Marketing strategies need to be tested in value terms. Use of scenarios. Opportunity cost analysis Knowledge of how to leverage marketing to increase shareholder value (SV) Focus Marketing orientation General management Advocacy Concept assets Importance of understanding customers Tangible Marketing s role in leveraging customers to create SV Market based (often called intangible) 6 Rationale Improves profits Increases SV Relationship with the board Relationship with the strategy group Sales & margins Average to minimal Jointly agreeing on the format & presentation of marketing metrics for board Ensure integration of business and marketing strategies more 6 Srivastava, R.K/Shervani,T.A/Fahey,L Market-Based Assets and Shareholder Value. Journal of Marketing _AMI_V11.indd 13 24/09/2004 3:26:26 PM

16 M A R K E T I N G A N D A C C O U N TA B I L I T Y from previous page Relationship with the finance group Relationship with HR Performance metrics Different perspectives and languages Functional Market share, customer satisfaction, return on sales and investment Agreement on key metrics and their source and illustration Working closer and even leading internal brand integration with the external brand Working jointly on SV analysis via discounted cash flows (DCF); links made between drivers (marketing inputs) and outcomes (financial) Source: Adapted from Value-Based Marketing, P Doyle, Wiley, 2000, p 29 To achieve this, marketing must adopt and promote certain key concepts: shareholder value (SV) cash flows from marketing activities and market-based assets (MBAs). This document explains these concepts (including a discussion about the terminology) and suggests ways in which they might be adopted or tailored as appropriate _AMI_V11.indd 14 24/09/2004 3:26:26 PM

17 A V A L U E - B A S E D A P P R O A C H 2. A value-based approach Summary Increased shareholder value should be the ultimate goal of any accountable marketing activity. By successfully improving customer value and managing market-based assets, marketing activities contribute to cash-flow generation, which leads to improved shareholder value. From a company s point of view, marketing s prime role is to increase profitable demand for products and services, thereby creating value which in turn leads to an increase in shareholder value. Clearly this takes place in the context of ensuring environmental sustainability and ethical behaviour. This activity is achieved through both rationalisation and growth, as explained in Figure 3. Figure 3. Creating shareholder value Source: Value Based Marketing, P Doyle, Wiley, _AMI_V11.indd 15 24/09/2004 3:26:27 PM

18 A V A L U E - B A S E D A P P R O A C H 2.1 The concept of shareholder value The concept of shareholder value (SV) evolved from the perception that the main objective of any company was to maximise the shareholders return on their equity. In reality, SV is a useful technique for determining how best to spend cash flow, but it does not explain where that cash flow comes from. Marketing plays a role here, as marketing is the means of ultimately achieving shareholder satisfaction through meeting the goals of customers and employees. But the link between the means (marketing activity) and ends (financial outcomes) is not always clear. There is some debate over the merits of SV, possibly as a result of the terminology commonly used. In this paper we have used SV to mean the underlying financial logic by which organisations are valued, as opposed to simply share price. Modern finance theory looks at the value of a company being an unbiased estimate of its future cash flows discounted at its cost of capital. 7 This means looking at cash (vs accounting profit), the time value of money, and risk/return considerations, as expressed in the cost of capital. This approach also incorporates the merits of looking forward rather than backward in time. From a marketing perspective, a better term might be simply cash flow. However, shareholder value is widely accepted as a financial concept, and also provides a strong theoretical base for marketing. Marketing has often concentrated on areas such as increasing market share and customer loyalty as ends in themselves, which may or may not be translated into improved financial performance. Making increased shareholder value the ultimate goal of any marketing activity will enhance the credibility of marketing as an accountable function. Shareholder value analysis Shareholder value analysis (SVA) is a tool which calculates the total value of a marketing strategy by discounting future cash flows. Discounting reflects the fact that money has a time value cash received today is worth more than the same amount in the future. Discounting also allows for risk (the greater the risk the greater the returns required). Risk is reflected in the cost of capital used in the SVA formula. There is a strong case for using discounting to evaluate marketing expenditure, as it reflects true returns and allows for a long-term time horizon. To illustrate a base case see Section 7. Rationalisation vs profitable growth Cutting costs and investments usually increases profits and cash flow in the short term. Reducing funds available to support brands tends not to affect those brands for some time; however, eventually it does affect them. Rationalisation is fundamentally flawed as a long-term strategy, as it means that the organisation will not meet the emerging needs of its customers, will miss opportunities, and will eventually be left in mature markets with declining profitability and possibly old technology. Marketing investments may be costly in the short term and may take years before positive results reach the bottom line. Profitable growth depends on convincing the market that your product or service offers them superior value to the other competitors in the market. This is ultimately reflected in shareholders evaluation of the company s progress. 7 Footnote to come _AMI_V11.indd 16 24/09/2004 3:26:27 PM

19 A V A L U E - B A S E D A P P R O A C H 2.2 The link between customer satisfaction and shareholder value There is an empirical link between customer satisfaction and shareholder value. The recent USA study by Thomas S Gruca and Lopo L Rego 8 examined the impact of customer satisfaction on future cash flow and cash-flow variability, the key determinants of shareholder value. They also examined whether market concentration or company size explains differences. Since satisfied customers are less likely to defect and are more receptive to a company s offerings, the authors suggest that increases in customer satisfaction will improve a company s future cash flow and diminish its variability over time. Increased and less-volatile cash flows, in turn, decrease the company s cost-of-capital, thus further boosting shareholder value. Using the American Customer Satisfaction Index (ACSI) and the COMPUSTAT database, they compiled a nationally representative dataset, including 200 members of the Fortune 500, which spanned the years Overall, they found that customer satisfaction creates shareholder value by significantly increasing a firm s cash flow and reducing cash flow variability. More specifically, a one percentage point increment in a firm s customer satisfaction score (measured on a index) results in an increase of over 7 per cent in a firm s future net operational cash flow (an average of $40 million for their dataset) and a decrease of 4 per cent in its variability. The resulting growth in cash flow and decrease in the company s cost-of-capital significantly influences their bottom line and value to shareholders. The nature of the industry accounts for a significant portion of differences in future cash flow across companies: the influence of customer satisfaction on cash-flow growth and variability is stronger for companies operating in more concentrated industries (those with fewer and larger players). However, company size does not have an impact on these relationships. As managers seek to link their activities to the measures of most concern to senior management, this study offers important evidence that investments in customer satisfaction represent resources well spent: satisfied customers are central to creating shareholder value. 2.3 Measuring customer satisfaction There is no one right way to measure customer satisfaction. The way satisfaction is measured is determined by an organisation s objectives and strategy, as well as by the product or service category it operates in and its target segment. While some simple measures are absolute (eg asking customers to rate their satisfaction with the organisation on a 5-point very dissatisfied to very satisfied scale), comparing customer expectations with actual performance is often preferred. Thus, the process for measuring satisfaction usually involves some or all of the following: determining key consumer demands/desires and the most important product or service attributes 8 Gruca.T.S. and Rogo.L.L. Customer Satisfaction, Cash Flow, and Shareholder Value, Marketing Science Institute Report _AMI_V11.indd 17 24/09/2004 3:26:28 PM

20 A V A L U E - B A S E D A P P R O A C H measuring expectations in relation to these demands/attributes in comparison with actual performance measuring satisfaction of customers in comparison with competitors monitoring changes in satisfaction over time. Satisfaction measurement schemes for complex services may include broad summary measures, as well as satisfaction scores for key components or processes (eg customer service). These components or processes may then be broken down further into specific attributes (eg response times). The key processes and attributes to be measured are usually determined through qualitative research (such as focus groups), with reference to the positioning strategy of the organisation. This research should identify which attributes the organisation wishes to be most known for or has the greatest competitive advantage in. Further information about customer satisfaction measurement can be gained from most marketing services agencies and market research text books The drivers of shareholder value Figure 4 summarises the drivers of shareholder value and marketing s key position in the process. Figure 4. The drivers of value in a business 9 For a comprehensive text on the subject, see Satisfaction: A Behavioral Perspective on the Consumer, Richard L Oliver, McGraw-Hill, _AMI_V11.indd 18 24/09/2004 3:26:28 PM

21 A V A L U E - B A S E D A P P R O A C H The marketing value drivers are also referred to as market-based assets 10. Market-based assets include: strong brands or brand equity What is in the mind of the customer and or channel members that makes them disposed to prefer the brand? customer loyalty (relationships) Current, potential and future relationships that are loyal to the product/ service and use, reuse and recommend the product/service to others. strategic partner relationships The alliances and networks that support the organisation and deliver customers. marketing knowledge Deep experience in the industry and chosen market segments. 2.5 The link between marketing and shareholder value By successfully managing the company s market-based assets, marketing contributes to cash-flow generation, which leads to improved shareholder value. This is illustrated in Figure 5 below. Figure 5. Linking marketing and shareholder value 10 Srivastava, R.K/Shervani,T.A/Fahey,L Market-Based Assets and Shareholder Value. Journal of Marketing _AMI_V11.indd 19 24/09/2004 3:26:29 PM

22 A V A L U E - B A S E D A P P R O A C H Figure 6. Measuring quality of service Source: Adapted from A service quality model and its marketing implications, Christian Gronroos, European Journal of Marketing, 1984, Vol 18(4) pp 36-44; and numerous updates of this model _AMI_V11.indd 20 24/09/2004 3:26:29 PM

23 A F R A M E W O R K F O R M E A S U R I N G V A L U E 3. A framework for measuring value Summary The AMI does not support a prescriptive, one-size-fits-all approach, but offers a framework to guide individual companies choice of metrics yet produce uniform results. The framework s underlying principles are that metrics should be linked to strategy, and should include as a minimum four key elements: return on marketing investment; customer satisfaction; market share in targeted segments; and brand equity. The framework incorporates a common set of recognised corporate and marketing models and a process for developing a set of metrics relating to cash-flow outcomes. For the marketing profession, boards and senior management of Australian companies to be able to measure the effectiveness of marketing expenditure and activity, it is essential to employ a common set of metrics. Most organisations are already addressing the development of their marketing metrics, and tend to be somewhere on the following spectrum: no metrics short-term financial metrics many short-term financial and market-based metrics focused metrics scientific metrics, including specific modelling. The AMI does not support the idea that one set of metrics should be used uniformly by all organisations. On the contrary, we propose a framework for measuring marketing performance that is based on underlying principles and a basic process, as described in this section. Our framework is presented graphically in Figure 7. Figure 7. A framework for measuring the value created by marketing _AMI_V11.indd 21 24/09/2004 3:26:30 PM

24 A F R A M E W O R K F O R M E A S U R I N G V A L U E 3.1 Underlying principles The fundamental principle is that metrics should be linked to strategy. If strategy is that which sets a company or brand apart from its rivals, then exactly the same metrics cannot apply to all organisations. That is not to say that there cannot be commonalities within an industry. But metrics which reflect a company or brand s value proposition (relating to outcome and process performance) need to be tailored to that company s brand or unique positioning. However, a broad framework to guide the choice of metrics will assist in producing a uniform approach which will in turn produce a clear, widespread understanding of the effectiveness of marketing. This broad framework combines key aspects of major models from leading thinkers in this field. The framework specifies that at a minimum, any company s tailored metrics should include four elements: 1. return on marketing investment 2. customer satisfaction 3. market share (in targeted segments) 4. brand equity. 3.2 Two types of value The value created by marketing should be measured by the value created for customers as well as by the value created for shareholders, as demonstrated in Figure 7 previously. These two types of value are clearly linked, as returns to shareholders only eventuate as a result of creating superior value for customers. A recent US study 11 suggests that a one percentage point increment in a company s customer satisfaction score results in an increase of over 7 per cent in the company s future net operational cash flows. Metrics and methodologies differ for the two elements of the framework: Customer value Customer value is driven by the cost: benefit ratio, which is in turn determined by the performance of the company or brand. Performance should be measured in terms of the outcome of the core product/service as well as the process that the customer experienced (ie relationship, service factors). The specific positioning attributes and relationship strategy of the company or brand will determine the specific metrics. In addition, there may be generic metrics, such as customer retention, for companies that have the development of long-term customer relationships as a key part of their strategy. 11 Gruca.T.S. and Rogo.L.L. Customer Satisfaction, Cash Flow, and Shareholder Value, Marketing Science Institute _AMI_V11.indd 22 24/09/2004 3:26:30 PM

25 A F R A M E W O R K F O R M E A S U R I N G V A L U E Shareholder value The focus of shareholder value is return on investment as indicated by discounted cash flows. The specific drivers of cash flow (inflows and outflows) are company-specific. Depending on circumstances and strategy, certain marketing levers (activities/expenditures) will drive particular market-based assets (eg brands), which will result in certain market outcomes (eg market share), which will in turn affect the amount, speed and risk of cash flows (see Figure 8). At the same time issues of sustainability and ethical behaviour need to be taken into account. Figure 8. How an advertising investment grows shareholder value The critical task is to understand the relationship between these different levels such that cause and effect can be estimated, and the ultimate impact on cash flow determined. This provides the basis for a business case to be presented to senior management. Using past data to model these relationships can be an important starting point. 3.3 A common process We recommend that the following process be adopted for developing a set of metrics relating to cash flow outcomes: 1. Be clear about the strategy (target markets, value proposition, key service/product attributes etc), as metrics should reflect strategy. 2. Determine which marketing actions drive key market-based assets, such as brand equity or firm reputation, client relationships and knowledge generation _AMI_V11.indd 23 24/09/2004 3:26:30 PM

26 A F R A M E W O R K F O R M E A S U R I N G V A L U E 3. Understand relationships between actions and market-based outcomes (via modelling use past data and constantly add new data). 4. Express market-based outcomes in cash-flow terms. This process can be complex and costly, and clearly there is a cost : benefit relationship to be determined as to the resources a company devotes to this process. The process itself of determining metrics can be highly beneficial as it results in a far deeper understanding of market dynamics and critical cause and effect relationships. Furthermore, greater rigour will ultimately allow stronger business cases to be presented at senior levels and perhaps greater value to be created. The end goal is not to have a number of metrics, but a manageable, cost effective series of metrics which are: precise and sensitive to change predictive (eg of future customer purchase, retention, cash flow) reliable over time so trends can be tracked relevant to the organisation s strategy and context. The process described above should include the identification of those metrics that tell most of the story. Decisions need to be made as to how frequently measurement takes place, and what level of management reviews these metrics. Section 4.4 provides some guidance for these decisions. 3.4 Choosing appropriate metrics Our position is that no one set of metrics should be used uniformly by all organisations, but that organisations should choose and, if necessary, tailor those metrics that suit their particular requirements. The key to choosing successfully is to ensure the metrics reflect the organisation s industry environment and strategic position at a particular point in time, while being realistic about the difficulties and costs of obtaining valid data. Leading edge organisations are now devoting up to 10 per cent of their marketing budgets to the collection and robust analysis of marketing data 12. So they need to choose carefully the key measures from which to source this data. There are well known frameworks of company and customer behaviour that will assist marketing functions to choose the best measures for them. We review eight of these models in this section. This information provides an additional advantage for marketers, in that they can use it to add intellectual rigour to the process and as a basis for discussions and agreement with other key functions such as strategy and finance. 12 Doyle. P. (2000) Value Based Marketing. Wiley _AMI_V11.indd 24 24/09/2004 3:26:31 PM

27 A F R A M E W O R K F O R M E A S U R I N G V A L U E The models we have reviewed are: Portfolio analysis Industry dynamics model The positioning model The product life cycle The marketing value chain Unique activities Marketing competencies assessment Balanced scorecard A short explanation of insights to be obtained from each of these follows. Portfolio analysis This analysis places the various strategic business units in a matrix of market attractiveness and competitive positioning. The analysis allows us to consider which business units to concentrate or focus our efforts on from a cash flow perspective. We can examine whether a unit s return on capital employed exceeds its cost of capital. We can also consider future cash flows or economic profits. This analysis helps us to determine which business units to concentrate on from either a growth or a need to quit perspective. Industry dynamics model This model illustrates the involvement of key players in an industry and their market power. This includes the competitive rivalry of existing competitors, the threat of new entrants, the power of buyers and suppliers and the threat of substitutes. From a marketing perspective it can identify key players in the industry that marketing may wish to watch closely. Hence it helps you choose key competitors to compare for either perceived quality or perceived price. It considers whether there are substitutes in the market place that should be measured and tracked for their impact, and finally, which of the channel members are the most important and therefore require the most focus on their activities as intermediaries. The positioning model In this model, developed by Harvard s Michael Porter, an organisation concentrates its strategy on either a cost basis or a differentiation basis. This may be either across a wide industry spectrum or within a narrow niche. This model assists us to consider whether our prime metrics should cover costs or differentiation as a priority. We can then make the decision as to which metrics to consider and track in depth _AMI_V11.indd 25 24/09/2004 3:26:31 PM

28 A F R A M E W O R K F O R M E A S U R I N G V A L U E The product life-cycle Products and services pass through a cycle of development, growth, shake-out, maturity and decline. At different stages of this cycle, different metrics will be required to reflect the changing circumstances and marketing focus. For example, in the growth stage the focus may include awareness in the market, while in the maturity stage it may include market share and retail penetration. The marketing value chain The marketing value chain, examined in Section 4.3, can be used to identify where value is being created in the chain, and hence key focus areas for metric development. If new product development is the key focus or extensive advertising or sales force effectiveness then metrics in these areas can receive the most attention. Unique activities model Activity-system maps as devised by Michael Porter 13 show how a company s strategic position is contained in a set of tailored activities designed to deliver that strategy. Higher-order strategic themes can be highlighted by showing clusters of related and linked activities. From a metric perspective it will show the key activities and additional ones that link to them. For example, new product development may be a key activity, while quality market research is a key link in the cluster together with (possibly) a strong culture of innovation. Marketing competencies assessment The marketing function should be considering its skill set in light of its current and future tasks. It should be asking what competencies are required to defend and leverage existing products/ markets, and what needs to be built to be a player in new markets (which can include overseas). Companies that have a strong service focus, such as professional service organisations, tend to measure marketing staff/skills per fee earner compared to that of competitors. Balanced scorecard The balanced scorecard approach to metrics 14 gives a more concerted view of a company s progress and links short-run and longer-term metrics. Within the model there can be leading and lagging measures (eg units sold) and customer loyalty and result and process measures (eg customer complaints and resolution time for customer complaints). The four perspectives covered are financial, customer, internal business processes, and innovation & learning. 13 Towards a dynamic theory of strategy, M Porter, Strategic Management Journal, 1991, vol 12, pp Kaplan & Norton, Strategy Maps, Harvard Business School Publishing Corporation, _AMI_V11.indd 26 24/09/2004 3:26:31 PM

29 A F R A M E W O R K F O R M E A S U R I N G V A L U E Figure 9. The balanced scorecard 3.5 Underlying tools (key metrics) While metrics are strategy specific, we can provide a starting point as to the metrics available and commonly used. Figure 10 summarises the quantitative information that boards and senior management require these are the leading metrics being used in the market place and recommended by academics. The specific metrics that are commonly used to provide this information are explained in more detail in Section _AMI_V11.indd 27 24/09/2004 3:26:32 PM

30 A F R A M E W O R K F O R M E A S U R I N G V A L U E Figure 10. Key metrics for boards and senior management Note: This information should be presented with comparisons with plan/prior year %, and/or compared with the competition where possible. Marketing function metrics Figure 11 details the key metrics being used in the market place for each major marketing function area. Organisations should tailor these by choosing carefully from the metrics to reflect their own industry structure, positioning and the importance of key activities being undertaken. Figure 11. Key operational metrics. A segmented view of the best practice metrics above. It is important to remember that if strategy changes, the metrics need revisiting. It would be wise to formally review the metrics on a yearly basis. 3.6 Communicating the new role and the framework To assist the understanding of the key issues by boards, senior management and practising marketers, we have prepared easy-reference cards for use by both marketing and non-marketing personnel. They can be found at the back of this document _AMI_V11.indd 28 24/09/2004 3:26:33 PM