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While chief executives and accountants debate
the return on company investment and productivity,
the activities which generate business rarely
appear to come under such scrutiny. Marketing,
which generates profit by anticipating and satisfying
customer demand, requires considerable investment
in money and resources, and is at the heart
of every business. If all marketing is investment,
why would companies not want to assess the returns
on their money? Increasingly Chief Executives
and Financial Officers are looking to ensure
that measurements of the return on investment
are used across the whole business area, including
marketing.
The push for accountability
in the marketing function is coming from the
Chief Executive Officers (CEOs) and Chief Financial
Officers (CFOs). Companies that have relentlessly
cut costs in every corner except marketing are
tired of funnelling cash into marketing, especially
advertising, which they say cost more and does
less. However, marketing is much more than the
advertising budget, and to measure the return
on marketing investment requires a deeper understanding
of all the activities which go to satisfying
customer demand profitably.
Management boards are increasingly
seeing Marketing as a necessary investment for
the generation and maintenance of profit, rather
than just a cost or expense. Finding, getting
and retaining business costs money. Marketing
was always the “unexplainable art”,
but now the Marketer, is frequently asked to
justify and account for the Marketing performance
by the CEOs and CFOs. There is hardly a marketer
today who is not demanding a more scientific
approach to help defend marketing strategies
in front of the chief financial officer, and
many marketers are now under direct mandate
to establish formal objectives, processes and
metrics that can clearly measure the benefit
of their programmes and activities.
Marketing has been the last
corporate function to formally develop and adopt
processes and standards that can measure quantitatively.
Companies throughout American business have
become obsessed with improving the measurement
of marketing performance. Procter & Gamble,
Kraft Foods, and Gillette have long chased statistics
to link different forms of marketing to sales
and brand awareness. But the desire to construct
a comprehensive set of performance measures,
what many call a marketing "dashboard",
is fast extending to marketers in other industries
A survey in the spring of
2004 of over 320 of America’s leading technology
Chief Marketing Officers reveals that less than
20% of the companies surveyed, had developed
meaningful measures for their marketing organisations.
Over 80% of the companies surveyed expressed
dissatisfaction with their ability to benchmark
their marketing programs’ business impact
and value. Yet those companies which had established
a formal, comprehensive measurement system achieved
superior financial returns and had higher CEO
confidence in their marketing function.
Establishing the Return on
Marketing Investment across the whole marketing
function requires the understanding of the various
marketing activities that drive sales and generate
revenue. The accepted standard formula to calculate
Return On Marketing Investment (ROMI) is based
on - 'Increase in sales attributable to the
activity' less 'Cost of the activity' (i.e.
the investment) divided by 'Cost of the activity'.
The formula is generally limited to a specific
marketing investment such as an exhibition,
but as it is difficult to identify which sales
are attributable to which activity, it does
not readily apply to the marketing function
as a whole. Increasingly Marketers believe that
measurement of all elements of the marketing
mix is critical to their personal success and
credibility, as well as that of the business.
The favoured result would be so-called “dashboard
reporting”, the use of key indicators which
collectively provide performance information.
Many Marketers use data on sales, market share,
customer satisfaction, customer retention and
customer profitability as their performance
indicators, but this information is of limited
value when considering the return on Marketing
investment.
For marketing to command an
equal seat at Board level, quantitative measurement
must prove marketing investment creates a positive
return for the business. Metrics must be communicated
to the intended audience, in a format clearly
understood. Frequent quantifiable data analysis
allows better understanding of the marketing
processes, which is essential for better informed
management and decision making, by the chief
marketing officer.
The prime interest of the
CEO and CFO is to ensure that assets and investment
are used efficiently to maximise profits and
minimise expenditure. To have equal importance
with other management performance indicators,
marketing needs to have a single indicator which
encompasses the overall performance of the marketing
function. Such a single indicator would enable
fluctuations in performance to be easily seen,
and would allow comparison with other business
indicators; Return on Assets, Stock turn, productivity
etc. The Optimum Marketing Performance (OMP),
is the particular indicator which encompasses
the overall marketing performance by directly
relating revenue with marketing investment.
Establishing the OMP for any
business requires detailed understanding of
the marketing budget, and the way that marketing
generates business and money. For many businesses,
the marketing budget covers little more than
advertising and sales expenditure. However,
since Marketing, includes all those functions
which anticipate and satisfy customer demand
profitably, most activities which are neither
purely financial nor production, tend to be
marketing related. Calculating the OMP requires
careful analysis of quantified performance data
from all of the activities involved in the wider
perception of Marketing. While the principle
of establishing the OMP is the same for every
business engaged in profit generation, the detail
and method may vary in different types of business,
e.g., consumer, industrial, business to business,
long term contracts, consultancies, and financial.
For Marketing to have the
impact in the boardroom that its importance
merits, marketing performance needs to be reported,
in a manner which is intelligible to CEOs and
CFOs, effectively demonstrating the relation
of marketing performance with profits. Chief
executives, Accountants and Managers responsible
for marketing, must know continuously how all
their business activities are performing, including
Marketing. They also need to identify the factors
that drive the marketing function, with quantified
indicators of marketing performance, providing
a clear guide to management performance across
the whole organisation. Continuously measuring
marketing performance will help to satisfy the
management need of Chief Executives and Accountants,
while enabling Marketers to demonstrate the
contribution of the Marketing to the business.
About the author
Nicholas C. Watkis AE DipM
CMC MCIM MIMC
Contract Marketing Service
(Specialists in measuring marketing performance
and Return on Investment)
Tele/Fax:01452 616465
e-mail: profits@contractmarketingservice.com
http://www.contractmarketingservice.com/
http://www.businessperformancemaximized.com/
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