CEOs are likely to think of marketing as the money the organization has to spend in order to sell its products and services. They typically view marketing as “marketing spend,” the necessary annual expense to meet forecasted revenues.
We marketers must teach our CEOs to view marketing as “marketing invest,” the resources devoted to produce profits and future growth for the organization.
Marketing's value to the organization will be fully understood by CEOs when we manage marketing as an investment rather than as an expense.
Marketing budgets are typically set as a share of forecasted revenue, with the expectations that marketing will increase market share. Marketing expenditures, including sales, is typically 15-20% of each revenue dollar, while capital projects are typically 5-0% of the same revenue dollar. But while the capital expenditures are treated as investments, the much larger marketing slice is viewed as an annual expense.1
In Part 1 of the CEO education process, we explored “Marketing Upstream,” the value marketing brings to identify future sources of money. In Part 2, we explore “Marketing Downstream,” the investment in marketing we must make now to generate money both now and in the future.
Marketing downstream consists of managing resources and programs to generate sales, including: communications (promotion, advertising and public relations), pricing, sales, distribution and customer service. Downstream is where we marketers use our knowledge of customers to get those who are most desirable to know us favorably.
In the CEO education process, we must show how marketing resources and programs, applied downstream, direct customers to take action that makes money for the organization.
We must make sure that our work registers with CEOs so that they understand that marketers are primary contributors to building the bottom line. Marketing metrics—as you'll read in the next section—will go a long way toward establishing downstream marketing as work that makes money for the organization.
But first let's look at four unique attributes of downstream marketing that are of fundamental significance to the CEO for leading the entire organization. Our work in marketing downstream ensures that the organization…
- Keeps up with changes in the marketplace
- Acts on our knowledge
- Acts as entrepreneur
- Invests today for the future growth
1. Marketing downstream ensures that the organization keeps up with change in the marketplace
Organizations tend to see what they expect to see. Yet markets today change faster than ever before. Marketers are the first to learn about successes and failures. We can prepare an early assessment of consumer response and competitive threats, and communicate our interpretation to the CEO. Our experience and interpretation of changes in the external environment give us license to challenge the prevailing views within the organization.
2. Marketing downstream ensures that the organization acts on our knowledge
CEOs have told me that they are frequently frustrated because people who are intelligent, creative and skilled are not effective. Effective downstream marketing requires action, and decisive action actually becomes a competitive advantage. As Lee Iacocca said in his autobiography: “The biggest problem facing American business today is that most managers have too much information—it dazzles them, and they don't know what to do with it all.”2 Michael Dell suggests his company's success is more apt to be found in competitive efficiency and execution, rather than products and services.3 And research shows that gains in productivity and competitive advantage depend on the capacity of an organization to turn knowledge into action and action into results:
Organizational performance often depends more on how skilled managers are at turning knowledge into action than on knowing the right thing to do. Knowledge and information are obviously crucial to performance. But we now live in a world where knowledge transfer and information exchange are tremendously efficient, and where there are numerous organizations in the business of collecting and transferring best practices. So, there are fewer and smaller differences in what firms know than in their ability to act on that knowledge.4
3. Marketing downstream ensures that the organization acts as an entrepreneur
Successful organizations have no tolerance for managers who act by habit and out of self-protection. Marketers know best that this does not work in the marketplace, so it most certainly will not be effective within the organization. While processes are important and culture is powerful, the drive to make money from customers (outcomes or results) will carry the day. Marketers can show the way.
4. Marketing downstream manages marketing as an investment made today for future growth
We must be less concerned with how much we spend and more concerned with spending it well to build the right customer relationships. The difference between the two approaches is reflected in the questions in each column in the following table:
|What are our sales projections this year?
|What are long-term marketing goals?
|Are our advertising dollars comparable to those of the competition?
|What returns are we earning on our marketing investment?
|Are our expense ratios in line with industry norms?
|What is the quality of our customer base?
|Are we gaining or losing share?
|Which new customers should we seek?
|How can we reduce marketing expenses and allocate resources most efficient across our business lines?
|How can we reduce customer acquisition costs and improve retention of the best customers?
“When we work to answer the investment questions, marketing downstream is directed toward building customer quality. This effort capitalizes on the work of marketing upstream where we generate answers to the questions of ‘who should we sell to?' and ‘what should we sell?'” (see Part 1 in this series).5
To document the effectiveness of marketing “upstream” and “downstream” for the CEO, we need metrics that evaluate our effectiveness now—and, more importantly, point the way for future success.
Marketing Metrics: Evaluating Effectiveness
The last of the three-part process of educating the CEO about marketing's value is the creation and application of quantitative measures of marketing's effectiveness.
Metrics should aim to serve three functions in the process of educating the CEO about the effectiveness of marketing:
- Provide information about current and future sources of money (i.e., customers and prospects)
- Guide resource allocation decisions
- Establish credibility and accountability for marketing
Organizations typically have a great deal of information about products. But products are not the source of money—customers are. For marketers to demonstrate value in terms of influencing how the organization gets paid, therefore, the marketing metrics must focus on customers and competition, not products and sales. To demonstrate the value of marketing to the CEO, the metrics must be customer-centric measures that support business strategy.
The following table provides a sample of the wide range of marketing metrics with customer focus, each aligned with a specific business strategy:6
Metrics of Effectiveness With Customers
|Metrics of Effectiveness
Increase customer satisfaction
Increase customer loyalty
Provide best customer service
Create lifetime customers
Create sole-source relationships
% of customers highly satisfied/intend to buy again
Customer retention rate of premium customers; service levels by channels
Customer lifetime value
% of revenue from sole-source relationships
Measures of satisfaction at touchpoints
# of products bought per customer of service agreements
Hours with customer
# of agreements with intermediaries
Create new sources of revenue
Increase revenue per customer
Retain existing customers
Revenue from new customers
Share of customers' expenditure in category
Revenue from existing customers
Increase customer profitability
Focus on profitable segments
Profit per customer
Look for 80/20 rule
|Financial: Reduce Marketing Costs
|Improve sales productivity
Cost of sales (by channel)
Cost per lead
To see how organizations select metrics to support their business strategy, consider the following six diverse examples:7
Hewlett-Packard: Passion for customer experience as a competitive advantage
“Passion” is the word used by CEO Carly Fiorina when she wants to inspire employees to focus on customer needs. To “operationalize” this customer focus, HP uses metrics tied to customer experiences with products and services. Total Customer Experience (TCE) measures are used to drive decisions, priorities and improvement based on results covering every point in the customer lifecycle: awareness, choosing, ordering, installing, learning, using, supporting, upgrading (intent to recommend, repurchase and overall satisfaction).
Salt River Project: Enhance reputation in the community to keep business and residential customers loyal
SRP is the nation's third-largest public power utility; customers are 10% business, 90% residential; revenue is 50% business, 50% residential. The following metrics chart reputation, using customer attitudes as indicators of future behavior:
- Retention (willingness to buy again); expansion (willingness to expand the types of services they receive); compliance (inclination to comply with requests to be influenced, e.g., energy conservation); advocacy (tendency to recommend or support)
- Perceived value: to the individual customer (overall value for the money, time and effort); to the community (belief that SRP brings value and benefits to the community)
- Brand commitment: image and sense of relationship
- Customer satisfaction: quality and reliability; attitudes toward ads; billing; services; corporate citizenship
Andersen Windows: Grow share of customer expenditures in adjacent markets
Metrics on attitudes among trade (builders, contractors) as indicators that end users want Andersen products:
- Recommend to colleague/friend
- Recommend to potential customers
- Continue using
- Increase volume
- Sole source for clad windows
- Would consider for own home
Payless Shoesource: Grow loyal customer base
With 5,000 retail stores and online sales, competition comes from small mom-and-pop stores to the large mass retailers, like Wal-Mart, and all in between. Customer metrics used:
- Market share—aggregate and by category
- Customer traffic
- Customer acquisition, cost of acquisition and lifetime value
- Ratio of loyal to new customers
- Share of requirements captured by customer segment
- Customer satisfaction measures including product, communication and shopping experience
- Attitude and usage quarterly tracking
3M: Reputation as innovator of new products
A few simple metrics are used to chart progress:
- Performance: % of sales due to recent innovations
- Consumer Attitudes:
• Intent to purchase
Enterprise Rent-A-Car: Customer loyalty
Just two attitudinal measures of satisfaction as indicators of loyalty:
- Quality of experience
- Likelihood to purchase again
Selecting the Metrics
The primary job of marketing metrics is to show us where the money is. We must select and use customer metrics to guide the business strategy and investment of valuable resources.
When metrics give us answers to the following questions, it becomes clear how marketing is performing:8
- Are we servicing our customers better?
- Have we differentiated our products in a visible way that matters to customers?
- Is our differentiation generating profits for us?
- Does our price premium reflect the additional value delivered to customers?
- Are we exploiting market opportunities faster than others?
- Do employees understand how we create value for our customers?
Here's the problem: there is no “one-size-fits-all” set of metrics, and there is a plethora of choices. Coming to a final selection is hard work. But the process of making the selection is helpful for building an understanding of the business today and in the future, and for getting everyone on the same page.
In addition to the resources already cited, these five books are very helpful for directing your selection and use of customer-focused metrics:
- Angel Customer and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock, Larry Selden and Geoffrey Colvin, Portfolio, 2003
- Driving Customer Equity: How Customer Lifetime Value is Reshaping Corporate Strategy, Roland Rust, Valarie Zeithaml and Katherine Lemon, The Free Press, 2000
- The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, Frederick Reichheld, Harvard Business School Press, paperback edition 2001
- Customer Connections: New Strategies for Growth, Robert Wayland and Paul Cole, Harvard Business School Press, 1997
- The Eleventh Commandment: Transforming to Own Customers, Sandra Vandermerwe, John Wiley & Sons, 1996
A Word About the Board and Wall Street
We should not end our discussion of our relationship to the CEO without acknowledging the importance of the Board of Directors and Wall Street (in public companies). These two stakeholder groups are of primary importance to CEOs. The CEO is hired and fired by the Board, and CEOs spend as much as 75% of their time with Wall Street analysts because stock price has become some a critical variable of financial performance.9
Essentially, the Board and Wall Street are both unlikely to understand the importance of marketing. Marketing backgrounds are few and far between in both groups. In addition, both groups face increased scrutiny of financial reporting from regulators and stockholders, leaving even less time and attention for marketing issues. Therefore, just as we must educate the CEO, so must we educate the Board and the key Wall Street analysts about the significance of marketing in the future success of the enterprise.
In Part 3, I will conclude this series by reviewing an important new book about how to elevate marketing to the CEO's agenda: Marketing as Strategy: Understanding the CEO's Agenda for Driving Growth and Innovation. I will also share excerpts of an interview I conducted with the author, Nirmalya Kumar, Professor of Marketing at the London Business School.
1 “Leveraging to Beat the Odds: The New Marketing Mind-Set,” Adrian Slywotzky and Benson Shapiro, Harvard Business Review, September/October 1993.
2 An Autobiography, Bantam, 1984. 3 Direct From Dell, Harper Business, 1999.
4 The Knowing-Doing Gap: How Smart Companies Turn Knowledge into Action, Jeffrey Pfeffer and Robert Sutton, Harvard Business School Press, 2000.
5 Adapted from Slywotzky, 1993.
6 Adapted from Strategy Maps: Converting Intangible Assets into Tangible Outcomes, Robert Kaplan and David Norton, Harvard Business School Press, 2004.
7 HP, SRP and Andersen reported by Sheree Johnson at the Conference Board Marketing Conference, October 2003; Payless and 3M from Marketing and the Bottom Line.
8 Marketing as Strategy: Understanding the CEO's Agenda for Driving Growth and Innovation, Nirmalya Kumar, Harvard Business School Press, 2004.
9 According to Leslie Gaines in CEO Capital.
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