Why CMOs Need Standardized Measurements—Just Like CFOs and COOs
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.
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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.
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
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.
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