[ M E T R I C S F R A M E W O R K ]
A major issue in linking marketing spending with financial performance is the length of time it takes to realize benefits from such expenditure. The benefit out of other functional spending is generally short term and visible. Operating costs in manufacturing, supply chain, sales, IT, Finance etc. provide immediate benefit that is visible and tangible in most cases. Money spent on marketing programs, however may take multiple years before the benefit is fully achieved and realized.
A second challenge with marketing spending is the lack of cause and effect relationship between the marketing programs and the financial results. For example, the outcome from marketing programs aimed at developing brand loyalty or improving customer relationship is hard to measure directly in financial terms.
Thirdly, the nature of the marketing programs is risky. Marketing executives argue that their marketing programs are investment in the future of the company. Accounting rules, however, consider these spending as expenses for the period and require to be charged off on the P&L statement of the current period. Influenced by accounting principles, financial managers unfortunately in general have not enthusiastically pursued ways and means to measure the ROI on marketing spending.
In the table below, a framework has been presented to show the linkages between typical marketing activities and marketing objectives with the corporate and financial goals of a company. This framework is based on the balanced scorecard approach, as developed by Robert Kaplan and David Norton. This framework considers the marketing activities as input to reach marketing objectives which lead to realization of corporate and financial goals. Put differently, marketing activities and marketing objectives should be treated as ‘input’ and corporate and financial goals should be considered as ‘outcome’.
Typical marketing activities can be clustered into the following categories
1. Demand Generation: Mainly consisting of selling and demand generation activities including short term marketing campaigns and promotions aimed at increasing sales.
2. Customer Fulfillment: Customer support activities focused on optimizing and delivering on a compelling customer value proposition.
3. Customer Relationship: Comprised of marketing communication, loyalty programs, and customer retention activities.
4. Branding & Image: Public relations, brand promotion and brand/corporate advertisement.
5. Infrastructure & Capability: Mainly IT and HR related structure and support activities. These activities and costs are considered ‘enablers’ for all other marketing activities.
It should be noted that the expected impact of different market activities varies in timeframe depending upon the category involved. Demand generation and customer fulfillment activities are short term in nature and their impact is usually noticeable within a year. Customer relationship activities are somewhat mid-term in nature and the impact of such activities is more significant in 1 to 2 year timeframe. Branding and Image building activities are long term in nature and their impact usually results in 2 to 4 year time period.
In the remainder of this book, the metrics have been proposed for each category listed above. It is to be noted however that the metrics suggested under each category are not mutually exclusive. Different metrics serve multiple purposes and can be used to measure the progress of several marketing objectives. This book should serve as a reference guide for the marketing professionals interested in developing and implementing an initial framework of marketing metrics in their organizations with an objective to create linkage and visibility towards accomplishing financial goals.
It is important to reiterate that many marketing programs are long term in nature and it is not possible to see the results and outcome in the same year when the money is spent. Unfortunately, accounting rules require closing the accounting periods on a quarterly or at most yearly basis. This creates challenge for many business managers to understand the linkage between cost and benefit. According to accounting rules, all marketing spending is considered expenses and charged off in the same year when spent.
A system and framework of marketing metrics, when regularly maintained and updated, help provide a better, meaningful and more realistic picture of the marketing and financial performance of the company. It is highly risky to depend and use only the accounting information for managing strategic part of the business. Accounting information is prepared based on strict GAAP rules and has its uses and benefits for the external shareholder. Marketing executives must ensure that their marketing performance is not being interpreted through accounting information only.