“Half my advertising is wasted. I just don’t know which half.” Countless other executives have felt the same as John Wanamaker, the 19th century department store magnate and marketing pioneer who uttered those words many decades ago. To be sure, companies have tried in rudimentary ways to measure the impact of their marketing initiatives on their companies’ profitability. For the most part, though, marketing has remained perhaps one of the only corporate departments that does not use the kind of metrics that are meaningful to bottom-line-oriented people like chief executive officers or chief financial officers.
But that indifference to metrics is becoming a thing of the past. Experts from Wharton, McKinsey & Company and the Marketing Science Institute (MSI) say that the search for better marketing metrics is underway throughout Corporate America. Marketing executives are devoting more attention than ever to ways in which they can link traditional marketing variables, such as market share and customer awareness, to hard-core financial concepts, such as a company’s stock price or return on investment.
Metrics are such a hot topic that a session will be devoted to the issue at a conference at Wharton on September 19 and 20. Titled the “CMO Summit: Excellence in Marketing,” the conference is co-sponsored by McKinsey, MSI and Wharton and it aims to provide a forum where chief marketing officers can discuss their challenges and concerns about the impact of marketing on business performance.
“When marketing people talk about what they do, the variables they cite aren’t the ones the CFO cares about,” says Donald Lehmann, a marketing professor at Columbia Business School and executive director of MSI, a Massachusetts-based non-profit organization that acts as a bridge between companies and academia. “Customer awareness, customer satisfaction and market share are metrics, and they are nice to know about. But the CEO [is more concerned with] shareholder value, market capitalization, return on assets and return on investment. In marketing, people don’t talk that way.”
“Historically, when the CEO wanted to know the ROI of marketing spending, the marketing people would say, ‘If you spend more, your market share will go up.’ But the marketing people haven’t done a great job quantifying that,” says Wharton marketing professor David Reibstein, a former executive director of MSI. John Forsyth, a principal at McKinsey and a leader of the firm’s marketing practice, says McKinsey’s clients are increasingly concerned about metrics. Many clients are “unhappy with the metrics they currently use “because they aren’t linked to performance as much as they ought to be.”
The Push for Metrics
The push to develop metrics is not new. Every two years, MSI conducts a survey of its members to determine their research priorities. “Assessing marketing productivity and marketing metrics” was ranked first in the surveys for 1998 and 2002; the subject placed second in the 2000 survey. Specifically, those surveyed said they were interested in assessing marketing program productivity; linking internal marketing program metrics (customer awareness) to external financial metrics such as ROI; how to value customers, brands and innovation; how to measure short- and long-term effects of marketing efforts; and the development of international metrics.
So, what is an example of a metric? “Let’s look at brand equity, which is something CEOs care about,” explains Lehmann. “Marketing people measure brand equity by using descriptive adjectives or associations. The brand has high ‘blank’ — fill in whatever adjective you want. Let’s say that our brand has high ‘presence.’ If you tell your CEO, ‘We’ve just increased the presence of our brand,’ he’ll nod and say, ‘That’s nice.’ But he can’t really evaluate it.” One possible metric to measure the value of a brand, Lehmann suggests, is simply this: the extra revenue a brand earns when compared to a similar product with a private label. “If you talk to CEOs like this, they’ll have some idea of what you’re talking about.”
The heightened interest in metrics stems from several factors. For one thing, because marketers typically are not equipped to speak the quantitative language of CEOs and CFOs, they find that they are able to exercise less and less “clout” in business deliberations, according to Lehmann. “For at least a decade, the boundaries have been breaking down between marketing, the function, as opposed to marketing, the activity,” he says.
“Marketing as a function is in some danger of becoming marginalized or not very important. Some think that marketing people do little more than blue-light specials and coupons. Distribution-channel responsibilities have migrated out to supply-chain management. The operations strategy has tended to be assumed by the general management function. And the customer-satisfaction responsibility — the core of marketing — has now become an information-technology function with database management. All of this may be good for these other functions but not so good for marketing departments.”
Another reason for the increased interest in metrics is that CEOs see no good reason to exempt marketers from the kind of accountability demanded of other corporate managers. “We are way past the point when the CMO can say to the CEO or CFO ‘Trust me,’” says Bill Moult, MSI’s president. “Every other part of a company is being held accountable in financial terms.”
Marketing typically requires more creative activity – copywriting, photography, analyzing and predicting human behavior, making TV commercials and the like – than other corporate departments. Hence, marketers often argue that what they do cannot be quantified. But Moult and the other experts say that that line of thought does not hold water. “At some point, you have to replace that argument with some truth,” Moult says. “The onus is on marketers to demonstrate returns on marketing investments.”
An Uncertain Economy
Although companies have been pushing for the development of metrics for years, today’s uncertain economic climate is placing more pressure on marketers to justify what they spend. “Our clients are increasingly concerned about metrics,” says McKinsey’s Forsyth, who heads the consulting firm’s customer and consumer insights practice. “In this environment, they have to do more with less. Companies want to reduce the marketing activities that have less of an impact for them, and they need to have the right metrics to make appropriate decisions.
“Let’s say a company conducts a big customer satisfaction survey on a regular basis, but it has never been able to relate that overall level of satisfaction with the company’s rate of return. You may think that as customers become more satisfied, the company would make more money from them. Some CEOs may think that isn’t true — and they would be right if it costs so much money to make those customers satisfied [that it cuts into profits.]”
In a study titled “Restructuring Marketing Spending to Do More with Less,” McKinsey’s Gary Singer states that marketers can restructure their spending without diminishing their brands’ presence in several ways. One is to manage marketing expenses through smarter strategic sourcing; another is to maximize the returns of marketing expenditures by adding analytic rigor to an often-unfocused budgeting process. Singer, a principal at McKinsey and a leader of its branding practice, says it can be helpful for companies to view the use of metrics as part of a broader, more integrated approach to understanding what marketing programs are trying to achieve and how to get the biggest bang for the buck.
Even though a company can measure response to a direct mail campaign, how can it know if direct mail is a better use of a dollar than a mass-media ad campaign or direct sales? “It’s critical to explore the integration of these various marketing levers,” Singer says.
Singer recalls that, during the 23 years he spent in advertising before joining McKinsey, he learned that it was important for companies to identify and articulate the key audiences (primary and secondary) they were targeting. In one case, a firm was considering launching a major national TV campaign, which would have reached millions of people. What it really wanted to do, however, was target one important buyer at a major retailer. “Our ad agency said to the client, ‘Why don’t you put billboards between the buyer’s home and office? It would cost $10,000 instead of $10 million.’ The buyer at the retail firm was captivated by the billboards and our client made the sale.”
At the conference at Wharton, the CMOs will have an opportunity to share ideas about the difficulties and opportunities that metrics and other issues hold for their organizations. (Metrics is just one of eight marketing topics to be discussed at the event, which is by invitation only.)
“Our marketing summit will be important,” says Wharton’s Reibstein. “Once chief marketing officers get to that level of an organization, they don’t have much of a peer group with whom to interact. We think our conference will facilitate interaction among world-class marketing people from companies like AOL Time Warner, Yahoo, Dell and others.”
Many marketers resist the notion of metrics, partly because they view their responsibilities as more art than science. But Reibstein urges marketers to adopt metrics because, if for no other reason, it will strengthen the leverage they wield in their companies. “CFOs are starting to play bigger roles in making marketing budgeting decisions,” according to Reibstein. “That’s disturbing from my standpoint. CFOs aren’t marketers.”