the financial metrics

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The Financial Metrics – Part INumbers, Numbers and More Numbers

A Marketing Balanced Scorecard

When you drive, there are a number of information pieces available to you in your car

Looking through the windshield lets you see the hazards ahead of you

The dashboard with the speed and tachometer are metrics that complement what you see and help you to determine whether you are driving too fast or too slowly

The rearview mirror provides feedback on what is behind and the side mirrors give a backward looking input

The temperature and oil gauges are operational metrics that measure how well the engine is running and the fuel gauge provides information so you don’t run out of gas

In marketing, measuring only sales revenue is like driving a car by only looking in the rearview mirror, because sales measures what has happened in the past

Just like driving, you need a balanced set of metrics, or a scorecard, as a marketer

What Is The Takeaway?

Since demand generation, new product launch, and loyalty marketing drive measurable sales revenues, you can use financial return on marketing investment calculations more than 50% of the time

But financial ROMI is not the answer for all marketing measurement and you have to have a balanced approach with multiple metrics

FinanceHello Darkness My Old Friend!

Finance is the language of business and the sooner we learn to speak this language, we gain respect in the boardroom.

The one question that most of you have asked me over and over is

“How do we get top management to accept this method of marketing?”

Show them the money!

I once told a CEO that if they did a specific marketing initiative, it would increase their share price by 40 cents a share – it was funded almost immediately.

Now as you might remember from the early lectures, I explained that financial ROMI is applicable to more than 50% of marketing activities.

These include trial and demand generation marketing, and new product launch marketing.

Now, we will look at these metrics and insights that are achieved through quantifying marketing using financial metrics.

55% of CMOs report that their staff does not understand financial

metrics

Whether you understand math and finance or not, you need to understand these relationships otherwise your career in marketing will be over very quickly.

Metric - Profit

Revenues- CostProfit

There is nothing special about this metric, since we all know the math behind it

But there are some insights that you need to keep in mind when working the math….

The marketing divide exists because some firms choose to invest more in demand generation marketing, running sales and promotions, which drive sales revenues, but kill profits.

Top brands invest more in brand and customer equity, and as a result are able to charge a premium price, which means higher profits.

Competing on price is a losing game since it kills profitability.

A few firms, such as Wal-Mart and Dell, have been effective with this strategy because they have exceptional supply-chain management capabilities that drive cost down to a minimum.

So if operational efficiency is your core strategy, then by all means consider competing on price – but for everyone else, using marketing to drive profits is a better strategy.

Profitvs.

Market Share

When you talk to brands, they are most interested in “grabbing” share in the market.

Market share is important, but if you consistently lose profits to gain share, the over time – this is a losing strategy.

There is a conflict between marketing and sales, since sales is incentivized on volume, not profits.

If you analyze your sales forces, you will see the the top performers, those who get regular rewards, are often the least profitable and may even by negative in profitability.

How do youchange this?

When Mark Hurd became CEO of HP, he changed the incentive packages for all the HP Enterprise Sales team.

He incentivized the sales people based on the profits of the products they sell, not the volume.

Result?

HP’s overall revenues grew by 20% between 2005 and 2007, but the net income grew from $2.3 billion to $7.3 billion – increasing the stock price by 243%!

Solving for the “right” price point to maximize profits and sales revenue is a pricing exercise and, if you are interested, there are many books to teach you how to do that

But at the end of the day, price is set by what the market is willing to pay for the value of the products/services you provide.

One approach is to use a brute force method and increase prices by 5 - 10% a month and see where sales start to drop off – this is what we call the optimal price maximizing sales and profits.

But I don’t teach pricing methodology!

The intelligence behind the whole discussion is that facing difficult times and competitive pressures, the first thought is to compete by cutting price, at the cost of profitability.

This will lead you to a death spiral of losing money in the majority of marketing activities.

A better strategy is to build brand and customer equity so that you compete on value, instead of price. This is what we call Value-Based Marketing.

Value Based MarketingMarketing Based on the Value of the Customer

Value-Based Marketing drives significant performance gains and firms that bridge the marketing divide focus on customer value in all marketing activities.

An Example of Direct Mail OffersLow to Medium CLTV + Low to Medium Response Rates are not sent a mailing

From a ROMI point of view, these customers are slow on the take rate, so why waste marketing dollars here?

An Example of Direct Mail OffersHigh CLTV + Low Response Rates are also not sent a mailing

The cost of the mailing is not justified

Our focus, as marketers, must be on the medium to high CLTV + Medium to High Response Rate customers

An Example of Direct Mail OffersNotice

Highest Expected Response Rate + the Highest CLTV get the 2nd most expensive offer

Highest Expected Response Rate + Medium CLTV get the 3rd most expensive offer

While the Lowest CLTV don’t get an offer at all

Why do you think that is?

Those that have the lowest CLTV are coming anyway so they get the lowest, most cost effective offer. They are coming because they value your product but don’t respond to the “offers”; so it would be a waste targeting them.

By focusing this single strategy on a value-basis, we cut our marketing costs in half – since we now focus on less than 50% of the potential customer base, but the impact is significantly higher because we are focusing on profitability.

Golf, Marketing & Finance

Ask someone with a golf handicap if they keep score and they will laugh…

“Of course, how else do I know if I am improving or not?”

A golf handicap is calculated by taking the average golf score over the last 10 rounds of golf played. The handicap is the average number of shots over par.

For those who have never been on a golf course, there are 18 holes – some with a par of 3, some with a par of 4 and some with a par of 5. Par is the number of strokes (shots) expected for the “expert” golfer.

Adding up the 18 holes, par for playing a golf course is typically 72 strokes.

Understand that golf is an incredibly difficult sport where you have to account for wind speeds, water hazards, and trees.

Why am I talkingabout golf scores?

Golf and marketing are very similar and it’s very easy to demonstrate finance’s role in a simple story.

Let’s assume that you have a golf handicap of 10. This means that you routinely keep score and on average shoot 82 – or 10 strokes over par.

But today, you get the opportunity to play at Pebble Beach, one of the world’s top golf courses. Will you shoot exactly 82 again?

Doubtful. Most likely, you will shoot more – let’s say 90. Exactly 90?

Well, no – let’s say there is a range from 82 to 100.

What does this mean?

Good golfers keep score so that they know how well they played

Second

They keep score multiple times to had a handicap.

The handicap is trend data that helps them predict the future, but when playing a new course for the first time, there is a risk..

Because of risk, it is not possible to predict the future exactly – there is a range of possible outcomes.

For financial ROMI, these are the three major takeaways that you must remember.

Every year in February, there is a pro-am tournament at Pebble Beach that bring great golfers and celebrities together. Let’s assume that you enter this tournament and win!

Very excited, you get the large trophy and a check from $ 1 million, but there is fine print on the bottom of the check -

You must chose $100,000/year for 20 years or $520,000 today. You have to decide – which would you chose?

Being a financial decision, it would be helpful to know how much the $100,000 per year is actually worth today.

Basic education tells us that a dollar today is not worth a dollar a year from now, but how much is it worth?

If I invested $1 today, what would it be worth next year –

$1 x (1 + r)

r = rate of return we expect to get

So the $1 today should grow to (1 + r) dollars with interest next year

To make this easier, you can divide both sides by (1 + r) meaning that:

$1/(1 + r) = today’s dollar

So if r = 10%, then a dollar received a year from now would be worth 91 cents today.

$1/(1 + 10%) = $1/1.1 = .909

So let’s go back to Pebble Beach

If we had $ 100,000/year for 10 years, with payments at the end of each year, the value today is:

PV = $100K/(1+r) + $100K/(1+r)2 +

$100K/(1+r)3 + …… + $100K/(1+r)10

So, the value of $100K per year for 10 years in today’s dollars, assuming a discount rate of 10%. You would have $614,000 instead of the $520,000 today.

This example highlights that calculating the metric is only the first step in management decision making.

In management, one can argue that there are no wrong answers. But with metrics, there are “better” answers.

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