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Why CMOs Need Standardized Measurements—Just Like CFOs and COOs

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At many companies, Marketing can't match the financially relevant, standardized measurements produced by peers in Finance and Operations.

In fact, among the three primary chief officers of most large companies—the chief finance officer (CFO), the chief operating officer (COO), and the chief marketing officer (CMO)—only the CMO does not use standardized measurements.

That is a big problem. The lack of financially relevant, standardized measurements weakens CMOs' stature.

As Amy Fuller, EVP/Group Executive, Worldwide Consumer Marketing at MasterCard Worldwide, succinctly state at the ANA Integrated Marketing Conference in 2008, "Measurement has always been the problem child in marketing and advertising. It's never been solved. The better we get at integrating things, the less easy it is to isolate specific effects to specific elements of the marketing mix" (see video, Grappling With Integrated Marketing's Metrics Paradox, Ad Age, June 2, 2008).

How Finance and Operations Standardized Their Measurements


The leaders of finance and operations long ago moved past their internecine rivalries, across preferences and even continents, to standardize measurements.

The Great Depression of the 1930s jolted the finance discipline into adopting standards for transparency and accountability, giving rise to Generally Accepted Accounting Principles (GAAP*).CFOs have become so reliant on GAAP that it's hard to imagine doing business any other way.

Similarly, as the industrial society scaled up after World War II, operations leaders reached a series of critical agreements that are in effect to this day. The ISO** came into existence as an international organization to define and codify a broad range of operational descriptions, practices, and measurement.

COOs from all types of industries rely on ISO agreements to efficiently manage their supply chain (which leads to lower costs, and hence higher profit margins) and to ensure consistent quality standards (which retain more customers and so contribute to higher profit margins), among other benefits.

Example Financial Metrics
Focused on High-Return Profit and Growth for a Client-Acquisition Program

If we look only at the cost of acquisition, first invoice return, or lifetime return, we cannot clearly determine whether any new client is a high-return acquisition. To determine the total value of the marketing investment, our approach must be more holistic than that.

One way is to measure the average value of a new client over the first year of acquisition, and assume (from market research data) the total lifetime value and profitability of each new client.

Measuring the investment to acquire these new clients then becomes a standard exercise (program by program, compared with control groups or hold-out samples).

The next step is to calculate and compare measures such as LTV (long-term value of a customer), NCA-TTBE (new client acquisition time to break-even), and NCA-CTTV (new client acquisition cost to total value).

 

Additional Scenarios

Assumption: NCA-TTBE=3 years; NCA-CTTV=3/4

Discussion: Three years to hit break-even and only one of four years for incremental profits is marginal at best. This must be a hard marketplace (long sales cycle, little return per new client).

Carefully examine annual retention cost to see whether it exceeds incremental profit, making this new client unprofitable.

This is tight even for luxury items (such as jet airplanes).

Assumption: NCA-TTBE=1/2 year; NCA-CTTV= 1/10

Results: Only half a year to pay back the investment, then nine more cycles of profits. If the retention costs aren't huge, this appears to be a campaign, department, or company with a high rate of financial return.

For Marketing Measurement Standardization, It's All About Financial Profit and Growth

We are chagrined to see marketers still putting forth hundreds, even thousands, of disparate measures for their specialized fields, with most of them stopping short of linking to financial return.

It saps years of progress from the marketing discipline to hear marketing specialists, many at the top of their field, still make passionate arguments that it's all about viewers or listeners or impressions or eyeballs or click-through or brand or awareness or pass-along or engagement, etc.

That trend seems only to be accelerating in the age of digital and social marketing.

These thousands of measurements may have use for daily activity, but when they attract such, well, un-standardized attention, they hurt marketing and they distract CMOs from their main tasks.

It's not all about eye-balls or click-through or brand awareness. It is all about financial profit and growth.

When marketers accept the primacy of profit, they will gain a reputation for delivering high rates of financial return by bringing in valuable new clients and retaining current ones.

If marketers do not begin operating from this perspective and generate standard metrics to prove it, they will continue to give up stature in relation to their peers.

Progress We Should Herald

Many marketing and related associations, such as the American Marketing Association (AMA) and the Coalition for Innovative Media Measurement (CIMM), are already working to standardize marketing measurements. We should herald their progress. And we should insist that their efforts lead to a set of standardized measurements for marketing that...

  • Link, ultimately, to financial return
  • Apply across industries, countries, monetary systems, etc.

As we make progress on standardized measurements, Marketing's influence will rise accordingly. CMOs will be able to sit at the table with CFOs and COOs—and discuss, in financially relevant, standardized language, how to drive their corporations toward more profit and growth.

*GAAP, Generally Accepted Accounting Principles: The standards, conventions, and rules that accountants follow to create financial statements. Established after the Great Depression, GAAP has grown to become the heart of rational financial decision-making. Many of these standards are required by law (for public companies), and investors and shareholders depend on their permanence and consistency.

**ISO: Iso is not an acronym; rather, it's Greek for "equal," implying a standard across boundaries. It is an international organization that defines and applies standards to thousands of items, as varied as steel pipe threads that must seal by pressure, rules for the abbreviation of titles of publications, and the transliteration of Arabic characters into Roman characters. Without these standards, manufacturing efficiency would suffer, depressing ultimate return on investment and long-term growth.


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Alexis Nahama is vice-president, marketing, at VCA Animal Hospitals (www.vcahospitals.com), a VCA Antech Inc. company. Alexis has a passion for delivering sustainable and profitable growth to organizations and for ensuring the wellbeing of animals. Contact him at 310-571-6534 or via Alexis.Nahama@vcaantech.com.Greg Banks is president of Javelin Marketing Group (www.JavelinMarketingGroup.com), an Omnicom company. Greg speaks and writes about standardized marketing and related topics for marketing and business professionals worldwide. Contact him at 972-989-0176 or via Greg.Banks@JavelinMarketingGroup.com.

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  • by Alexis Nahama Wed May 12, 2010 via web

    One of our readers asked the following question "Could you be kind enough to explain how do you calculate NCA-TTBE & NCA-CTTV".

    NCA-TTBE (or new client acquisition time to break-even) and NCA-CTTV (new client acquisition cost to total value) are not hard to calculate, but sometimes getting the baseline data to calculate those can be a real challenge.

    Why?

    Because as soon as you get into these metrics, you will want to go deeper and more granular (program by program), and that's were you will be faced with great variability in metrics as simple as calculating a lifetime value (revenue? profit? total value with possible referrals or just individual client spending?).

    I recommend you start simple, avoid the headaches and then move to fine tuning as a second step.

    If not you can drive yourself absolutely nuts (see later the simple NCA_TTBE formula - I can already tell you that it is wrong because it doesn't take into account the net present value of future returns; so some might argue calculating an internal rate of return is a better way). I like the unsavory but so much more effective approach of keeping it simple if it delivers what you need...

    Usually marketing departments have a rough idea of how much is distributed between programs targeted at lead generation (new client acquisition) and loyalty (retention). So this can be a good start.

    Let's start with the fundemental metrics you have to have to calculate these (and if you don't - survey clients or estimate):

    Average client tenure (the number of years they stay with you)
    Average client transaction revenue
    Average # of transactions a client makes annually
    $ marketing spent on client acquisition programs
    $ marketing spent on retention
    Number of new Clients acquired in the past 12 months
    Total # clients services in the past 12 months
    Company overall profit margin

    The beauty with this is that your CFO should be able to provide all these numbers for you. And if he/she doesn't have them it is a great opportunity to sit at the table and define for your company the relevant metrics (Should we assign a different profit margin for the first year? Do we take the average annual spending over their lifetime or just the first year revenue? etc..).

    Now let's develop the formulas:

    NCA_TTBE = Cost to acquire / Annual Profit = ($ spent on new client acquisition / # new clients acquired) / (Average # transactions * # transactions per year * profit margin)

    {If I spent $50 to get a new client, and they generated $100 in profit = I break-even on my investment in 0.5 years}

    NCA-CTTV = Cost to acquire / Lifetime Profit = ($ spent on new client acquisition / # new clients acquired) / (Average # transactions * # transactions per year * profit margin * Tenure - (($ spent on new client acquisition / # new clients acquired) + ($ spent on retention / Total # clients services * (Tenure - 1)))

    (If I spent $50 to get a new client, and they generate $500 in profit over their lifetime = my cost to total value is 1/10 ... They return 10 times in profits what I invested to get them over the relationship}

    I have this philosophy that ROI in itself is not a good metric as most people don't understand it (believe it or not!). I like POI (Profit/Investment) which is the inverse of NCA_CTTV {a 5/1 ROI is only viable if you have more than 20% contribution - otherwise you are automatically losing money... a 5/1 profit on investment means you get $5 of profit for each $1 invested... or you are investing $1 for each $5 returned as a client acquisition cost to total value).

    In most discussion with your CFO they will argue that NCA_CTTV is not precise enough (you are not including the retention costs in the first part of the formula and are substracting it from the lifetime profit).

    Well, that is correct - then just calculate the CTTV (cost to total value) and you have it.. my goal with the NCA component is to have a clear metric of new client acquisition value that I can track overtime, improve upon and compare accross industries.

    I hope this is helpful (sorry about the lenght!). :-)

    Alexis Nahama.

  • by Adnan Galabhai Fri May 14, 2010 via web

    I must say that I do not agree with this article. What I do agree with is that marketing needs standardised 'measurement philosophies' i.e. linking outcomes to financial returns. You can't really standardise marketing measurement - this fails to understand the nuances and complexities of marketing phenomena. Every program needs to be unique and treated this way - while you can establish metrics such as NPV, Cash Flow etc, the process/ methodology used to measuring these metrics is something that requires art, science and experience.

    www.marketingcrusader.blogspot.com

  • by Alexis Nahama Mon May 17, 2010 via web

    This argument reminds me of arguments given by doctors centuries ago.

    Each patient is unique and therefore the 'art of medicine' can not be standardized. Measuring success in medicine is not possible.

    It is true that each program is unique, the same way each patient is unique - but the total population of marketing programs can be tracked and standardized measures delivered.

    In medicine each patient is unique and can respond to medications in unpredictable ways (adverse events, or miraculous recoveries) -- but that doesn't mean that the proper methodology to measure and approve drugs has to rely on the personal experience and art of the physician. It is about double blind controlled trials and evidence based clinical studies - in which the measure of success is to show overall benefits from the administration of a drug to a population of patients; regardless of the physician skills, art, experience.

    It is not about diagnosing the problem - but measuring the impact of the solutions put in place.

    Without this sense of a standardized approach and consensus on what represents 'a measureable improvement', then progress can not be entertained, and one could always spend the time arguing about how the results were obtained.

    My gripe is against all those granular metrics that do not help advance the marketing position within an organization. Today we talk about eyeballs, tomorrow about BuzzClicks and Evangelistreferrallinks, or whatever else we can make up ... and those are proxies that every decision maker will look at and laugh at (as something marketers are 'spinning around' to try to justify their value).

    I could argue that every business is unique, and managing such complex entities as companies with thousands of employees, requires art science and experience ... P&L and Balance Sheets and GAAP measures are nonetheless the standard in measuring the health of a company, and it's progress over time.

    I do look forward to day an analyst will open an annual report, read the standardized marketing metrics and say 'Wow - these guys have done a great job this year - this will have an impact on the company value over time - time to upgrade the stock'.

    If we can't have a way to measure what 'a great job' is without having to explain how we came about it, then it means nothing.

  • by Su Doyle Wed May 26, 2010 via web

    Well put. Unfortunately many executives only see the outward-facing aspects of marketing without understanding the full continuum.
    Until Marketers have more empirical evidence, Marketing will still be considered an "Art", not a Science. (and therefore, less deserving of a seat at the boardroom table).

    @sudoyle

  • by bryanflake1984 Thu Jan 30, 2014 via web

    CMO's should definitely be held to the same standards are the other members of the executive teams. CEO,CFO,CTO, COO all have in intergral roll in the success of a business. If each one isn't pulling their weight, then the company is at a greater risk of failing.

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