In the 1970s, the Polish government set out to make its furniture industry more competitive in the global economy. To that end, the government rewarded furniture factories based on the total weight of their products manufactured. As a result, the citizens of Poland now have the world's heaviest furniture, according to a March 4, 1999 article in the New York Times.
Of course, Polish officials didn't intend to produce heavy pieces of furniture; they wanted to increase production. Yet, as this example reveals, performance metrics can't produce their intended outcomes if they don't measure what really matters to the business.
As a marketer, you have no shortage of metrics at your disposal—including brand awareness, customer satisfaction, and ad readership, to name just a few. However, your CEO and CFO, as well as your firm's shareholders, care less about these metrics than they do about others—particularly cash flow—and though these metrics are generally not part of the marketing vocabulary, they should be. They enable you to tell the story of how marketing contributes to your firm's performance. Use the wrong metrics to communicate marketing's value, and you risk producing a lot of heavy furniture.
How to select the right metrics? Master the marketing metrics audit process—or Marketing MAP—by applying these seven steps:
Step 1: Identify your firm's cash-flow drivers
Your firm's cash-flow drivers stem from the company's business model, which may be based primarily on high profit margins, rapid turnover of inventory, or leverage (such as Disney's selling of characters to other companies).
Cash-flow drivers also derive from sources of cash—such as customer acquisition and retention, share of wallet within product category, and share of wallet across categories.
Each company's set of cash-flow drivers is unique. What are your firm's drivers?
Step 2: Identify marketing activities that ultimately affect your company's cash-flow drivers
Your marketing department engages in a wide range of activities. But probably only some of these activities ultimately affect your company's cash-flow drivers. List those activities that most influence your company's cash-flow drivers.
Your list will be unique to your department but may include activities such as executing TV ads, designing consumer promotions, creating product Web sites, and participating in trade shows.
Step 3: Define an outcome metric for each marketing activity
For each marketing activity you've listed, define an outcome metric—a measure enabling you to evaluate how well the activity generated the intended results. To illustrate, for executing a specific television commercial, you could define the outcome metric "brand preference." For designing a consumer promotion, the metric might be "coupon redemption."
Note that your outcome metrics represent intermediate results of particular marketing activities. That is, they don't necessarily represent cash flow. For instance, for the activity "participating in trade shows," suppose you defined the outcome metric "number of sales leads." Number of leads is only an intermediate result, because leads don't necessarily turn into sales—or cash flow.
Step 4: Show how your outcome metrics affect cash-flow drivers
For each intermediate outcome metric you've defined, articulate your theory of how successful performance on that metric will affect one or more of your company's cash-flow drivers. For example, consider the three sources of cash. How might high performance on the metric "number of sales leads" influence customer acquisition and retention? Share of wallet within and across categories?
Also ask yourself how each intermediate outcome metric influences your company's dominant business model. For example, suppose your firm's business model is based on profit margin. By excelling at your intermediate outcome "service quality," could you persuade customers to pay a premium for your product or service—and thus increase margin? Could you further improve margin by building brand preference through loyalty programs—and therefore willingness to pay a premium?
Step 5: Test the assumptions behind your cause-and-effect links
Closely examine the accuracy of your assumptions about how each intermediate outcome ultimately will affect cash flow. For example, suppose one of your intermediate outcome metrics is "customer satisfaction." Examine your assumptions: Do you presume that more satisfied customers buy your more expensive products and thereby increase margin? That they buy more frequently from your company than from competitors and thus beef up share of wallet within category? That they buy more of the products offered by your firm and so improve share of wallet across categories? Do you believe that satisfied customers tend to be loyal?
If you were to dig deeply into purchasing data, would the data confirm the accuracy of these assumptions? Or would you discover, for example, that satisfied customers don't, in fact, buy more frequently from your company than from rival firms and have no greater probability of remaining customers than dissatisfied customers?
The more you can articulate your causal assumptions and gather data to confirm or disconfirm them, the more you can make a credible business case for which marketing activities will affect which cash-flow drivers—and how.
Step 6: Quantify anticipated cash flow over time
Now estimate your marketing activities' impact on cash flow over time. For example, the brand you create today has the potential to generate a premium price and cash flow many years down the road. Identify this long-term cash flow and quantify it in a defensible manner for your executive team—even as you recognize the underlying assumptions and uncertainties in your forecasts.
Step 7: Identify future opportunities for your firm
Developing new products is risky business: Companies invest hugely in R&D—yet a disturbing number of new offerings fail. Boost your company's chances of launching money-making hits by helping to reduce the R&D team's risk, for both breakthrough innovation and more marginal product line extensions.
As you identify promising opportunities, put a dollar value on each. That may be hard to calculate, but finance people do it all the time—by putting a dollar figure on an option, including all assumptions and risks.
This article is adapted from the book I wrote with Allen Weiss and David Stewart titled Marketing Champions: Practical Strategies to Increase Marketing's Power, Influence, and Business Impact (Wiley, 2006). To learn more about the book, visit www.marketingchamps.com or order the book from Amazon.