Marketing Metrics and Financial PerformancePublished: April 26, 2006 in Knowledge@Wharton
When companies talk about marketing these days, they are talking about things like promotional strategy, advertising, and distribution; customer perception; market share; competitors' power; margins and pricing; products and portfolios; customer profitability; and sales forces and channels. How does a company measure the effectiveness of the various components of its marketing strategy? What metrics are most effective, and how can these help maximize profits? A new book out from Wharton School Publishing titled Marketing Metrics: 50 + Metrics Every Executive Should Master, identifies the pros, cons and tradeoffs associated with each metric. The book is by Paul Farris, Neil Bendle, Phillip Pfeifer and David Reibstein. Reibstein, a marketing professor at Wharton, agreed to talk with Mukul Pandya, editor in chief of Knowledge@Wharton, and Robbie Shell, editorial director, about this new book.
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Narrator: Welcome to the Knowledge@Wharton podcast. Knowledge@Wharton is the online research and business analysis journal of the Wharton School of the University of Pennsylvania. For more information, please visit our website at knowledge.wharton.upenn.edu. Support for Knowledge@Wharton podcasts comes from Vanguard, offering investments designed to help individuals and institutions reach their long-term financial goals, at vanguard.com.
Robbie Shell: When companies talk about marketing these days, they're talking about things like promotional strategy, advertising and distribution, customer perception, market share, competitor's power, margins and pricing, products and portfolios, customer profitability, and sales forces and channels. How does the company measure the effectivness of the various components of its marketing strategy? What metrics are most effective and how can these help maximize profits? A new book out from Wharton School Publishing called Marketing Metrics, 50+ Metrics Every Executive Should Master, identifies the pros, cons, and tradeoffs associated with each metric. The book is by Paul Farris, Neil Bendle, Phillip Pfeifer, and Dave Reibstein. Reibstein, a marketing professor at Wharton, has agreed to talk with Mukul Pandya, editor-in-chief of Knowledge@Wharton, and myself, Robbie Shell, editorial director, about this new book.
Robbie Shell: First of all, who is this book written for?
Dave Reibstein: It's written first and foremost for marketing managers. But the reality is that almost every executive in a company needs to be aware of these particular measures. The reason I say it's written for marketing managers is because all the time we are working with all the sets of metrics and more that you just got done listing in the introduction. And we need to make sure that we have a good understanding of these measures that we're gathering, including some of the flaws in how they might be measured, and some of the alternate interpretations. The reason it's relevant for others in the organization who aren't even in marketing is because we may find marketing says something about what our market share is, or what our margins are, and we're communicating in those marketing terms that we need to make sure we understand what it is that is really being said about the status of the firm.
Mukul Pandya: You referred to the way in which companies use these metrics. Could you give us any examples of the way in which companies might sometimes misuse these metrics, or they get the metrics wrong, or use them to draw their own conclusions?
Dave Reibstein: Well, one example, and perhaps the most commonly-used marketing metric, is that of market share. In fact, we see often companies looking closely at what their market share, evaluating how they are performing, and in some cases looking at market share more than profitability, because the profitability may be affected by things exogenous to the company, such as what's going on in the economy. But we often look at market share based on how we are doing relative to our competitors. The way it's sometimes misused is, on the surface it seems that market share is very clearly defined. But we may be talking about dollar market share, our share of the revenue from the industry, and someone else might be talking about unit market share, our share of the units being sold.
Secondly, when you think about market share, there's a numerator, which is our sales, and the denominator being industry sales. But the question is, what are we defining as the industry? So if you're in the printer business, the computer printer business, you might think of, my market share of all printers, but I may be dealing with a competitor that is looking at my market share of the inkjet or laserjet printer business. And so not all market shares are the same. It's interesting. One would think that market share by definition, must add to 100. And the answer is, they do if we all have the same denominator. When I say must add to 100, I'm talking about, must add to 100 across all competitors. But, again, it depends, are we talking about the same overall market? So, for example, Coca-Cola might want to look at their market share of the carbonated soft drink market, they might want to look at their market share of the liquid consumed market. And those are going to give you entirely different numbers. And while they're looking at, say, total liquids consumed, it may be that Pepsi is looking at the carbonated soft drink market, and so comparing various different things.
Robbie Shell: The title of your book is 50+ Metrics Every Executive Should Master. But what exactly qualifies as a metric, and what are, say, the top five metrics that you've found are most important?
Dave Reibstein: Okay, first of all, when we came up with the title 50+, part of our objective in writing this was, we didn't want to make it too overwhelming and say 5,000 Metrics Everybody Should Master. There’s going to be some key metrics that are really important. And we set out with the objective of 50. When we got down to starting to itemize them and looking at what specific measures companies are gathering, it turns out that it was a number more than 50. What we end up doing within it is saying, here's key metrics and here are some sub-metrics of these that we might want.
Like the market share example that I just mentioned, market share in units, market share in dollars, do we call those two different measures or do we call them one measure. So it actually became a little bit fuzzy as to what some of those, the number was. But on your specific question, what constitutes a metric ... It is a measure that is gathered by a firm that they use for evaluating, for the performance of the company. It could be in the customer's mind, it could be in terms of our financials, it could be in terms of our overall performance in the marketplace.
Robbie Shell: How difficult is it to collect these numbers?
Dave Reibstein: The answer to that is, it varies dramatically from one environment to another. Collecting some of them is relatively straightforward in some environments. If we're talking about in some developing nations, being able to measure, let me just take a specific example. In the United States, it's very common to have, for supermarket sales, AC Nielsen, which regularly collects this information, and measures your sales, measures your competitor's sales. Turns out, we now don't have that data for Wal-Mart, because Wal-Mart refuses to cooperate with AC Nielsen. So in the United States, it's become a little bit more difficult, and as Wal-Mart grows as a percent of overall annual volume, the supermarket sales ... well, we've gotten non-Wal-Mart market share.
Then we go to China. And AC Nielsen is set up in China. But the amount of coverage that they have, of total sales that are going on, and because there are a few supermarkets and a lot of other food markets, the measurement is much, much more difficult. That's for something as straightforward as sales divided by industry sales. When we start looking at things like customer's attitudes and perceptions, in some cultures people are very willing to provide this information and it's simple to run the survey and collect such measures. In other environments it's harder to get people to respond to some of those particular questions.
Mukul Pandya: I wonder if I could ask a very basic question. Why should marketing managers be looking at metrics? And does that have an impact on the financial performance of the company as a whole? Is this something that CEOs should be looking at also?
Dave Reibstein: Both marketing managers and CEOs should be looking at these metrics, and the reason is because we're making budget allocation decisions, and the question is, are our decisions really working? So, for example, last week in class, I had the president of Diageo marketing in my class. He has a marketing budget of in excess of $2.2 billion. He would like to know, as I spend this money, is it really deriving anything for me? Are people aware of all the different brands that I have, and I want to follow it all the way through the pipeline of going from awareness down to consideration to preference and gaining distribution and trial and purchase. Where I am in the status of all that? ultimately, I want to know that when I spend $2.2 billion, that there's some return that I'm getting for that. Clearly, that the head of marketing is concerned about, am I spending wisely around alternative considerations, and certainly the CEO would like to know, I put this $2.2 billion plus over here, should I have been spending it somewhere else in the organization? So it's important for both.
Robbie Shell: For someone to read this book, how fluent do they have to be in mathematics, for example? Is this really meant for people who have a background in calculus or that kind of thing?
Dave Reibstein: It's not meant for people who have calculus, and I should say it's not really meant as a book that you would pick up and read cover to cover. It's much more of a reference book. And it is to make it really clear, in simple language, what each of these measures mean, how to collect each of these measures, and how to apply the knowledge that you gain by having these measures. There are occasions when we go through some of the math, short of calculus, but we go through some of the math that sort of talks about how some of these things are derived. But it really is intended for the operating manager.
Now you did ask a question earlier that I didn't get to answering, and I didn't want to avoid that. And you asked the question earlier about, so what would be the five key measures? That's a hard to question to answer, and the reason it's a hard question to answer is, it probably differs by firm. There are some measures, and when I'm at a stage of early growth, there might be different measures that I have versus when I am at later stages and at a mature stage I'm trying to retain some of my particular customers. But let me name what some of those measures might be. Market share is one we've already mentioned. And most people know the concept of market share and think they know how that's measured.
Another one that I think is real important is share of requirements, often referred to as share of wallet. Not everybody knows what that particular measure is, and it's real important to have a sense of how that's measured and what it exactly is that it means. And very quickly, it is, of the customers that I have, what percent of their involvement in this category do I own, do I have? And that becomes very important, because if my share requirement is really high, the best way for me to grow is to get new customers. If my share of requirements is really low, then I don't have to go out and get new customers, I can take my existing customers and sell them more so they're buying a greater portion of their overall purchases from me. So strategically it leads us in radically different directions, and hence it's a real important measure for us.