A recent book, Marketing Metrics: 50+ Metrics Every Executive Should Master (Wharton, 2006) by Farris, Bendle, Pfeifer, and Reibstein, claims that there are over 50 metrics every executive should master. Faced with such a daunting number, most marketers are likely to want to know which of the 50 are critical—and which are merely nice to know.
Before trying to identify the more important metrics, it is necessary to define the term. "Metrics" is usually defined as a measuring system that quantifies a trend, dynamic, or characteristic. However, this definition is not universal. Laura Paterson of VisionEdge Inc. defines "metrics" as the standards for measurement, providing target values that a company must achieve to reach a certain level of success. "Measurements" are the raw outcome of a quantification process, such as a company's numbers, ratios, and percentages, she says, while "benchmarks" are the standards against which all others values are judged.
Much of what is written about metrics and marketing performance measurements relate to large companies involved in fast-moving consumer goods (FMCG). For many marketers, it is difficult to relate these kinds of metrics and their relevance to small and medium-sized businesses, especially if they are involved in services, partnerships, or consultancies.
Similarly, relating such metrics to businesses involved in industrial markets or in long-term contracts is even more difficult, but it is not impossible. In fact, measuring marketing performance in both significant and useful ways is both essential and possible for every type of business.
Marketers will be interested in measuring performance in their own areas of responsibility, product management, advertising, or sales. However, measuring performance of the whole marketing function requires the chief marketing officer (CMO) to identify those metrics that are fundamental to the business.
The first questions that the CMO should ask are these:
- Are we making revenue?
- Are we making profits and how much?
- From where do the profits and the costs arise?
- Is the marketing growing or shrinking and at what rate?
- Are sales and profits growing in line with the market or differently?
Answers to these questions provide the initial framework on which more detailed analysis of marketing performance may be made.
The most effective way of measuring performance is by measuring output. In many businesses, the first measures of marketing are involved with sales, usually in terms of volume, value, and customers. These areas are easy to measure—and because they have a true and tangible output that is quantifiable, they are of fundamental importance. By contrast, measurements of customer perceptions can only be done only by subjective surveys that have limited importance.
Measuring marketing performance should be done on a regular and continuous basis. Ideally, business data should be collected automatically and processed into usable metrics so that comparisons and trends may be easily made and identified. Marketing metrics are only indicators of performance, so comparison with other measurements and previous metrics are essential if the data is to have any value. Metrics in isolation are of little or no value.
The prime objective of the marketing function is to generate profitable revenue. Metrics should therefore identify those areas of the market that generate profitable revenue, as well as areas and activities that incur costs rather than profits.
Two significant measures of performance, often confused with each other, are "return on investment" (ROI) and "return on marketing investment" (ROMI), but they are not interchangeable:
- ROMI is generally used to measure the financial performance of specific marketing activities, such as an exhibition or advertisement. Because it is difficult to identify which sales are attributable to which activity, ROMI is generally limited to measuring specific marketing investments and is not readily applied to the marketing function as a whole.
- ROI is generally considered to refer to the net income divided by the capital employed. However, in 2005, the American Marketing Association and Aprimo Inc. identified six other interpretations of ROI currently in use: incremental sales revenue, the ratio of cost to revenue, the cost per sale generated, changes of financial value of sales generated, cost of new customer, and cost of old customer retention.
What is obvious is that if marketers are imprecise in their terms and definitions, what is open to question is how they can quantify the contribution of marketing with any certainty.
Measuring market share for a large company may be important, but for many businesses it is probably more important to ascertain whether they are gaining market share in a growing or shrinking market. This may be done by comparing the business's rate of sales growth in a specific market with the growth trend for that specific market. Doing so would also reflect on the relative effectiveness of marketing activity. If for example, the rate of product growth exceeded that of market growth, then marketing activity would be judged effective, whereas if the product growth were less than that of the market it would be judged ineffective.
Marketing measurements and metrics exist to answer these questions:
- How much business has been gained and at what cost?
- Is the cost too high or would more business be gained by more investment?
- Is the balance of cost and investment about right in relation to the return of profitable revenue?
The most important measurements for any business are those with a quantifiable output rather than a subjective analysis. Before collecting any marketing performance data, marketers must be sure that they understand the true significance of any metric, what it actually means, and how useful the information will be in forming informed decision making.
There is no specific number of measurements that the effective marketer must have, but revenue, profit, and return on investment are fundamental for every marketing organization. For many small companies, the number of important measurements and metrics will be considerably less than 50, but for the larger and more complex businesses the number will be considerably more.
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