what value marketing? - australian marketing · pdf file1 prologue developing agreed marketing...

What value marketing?a position paper on marketing metrics in Australia

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W H A T V A L U E M A R K E T I N G ? S E C T I O N T I T L E

© 2004 Australian Marketing Institutefor information on AMI call (02) 8256 1650 or www.ami.org.au

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Prologue

Developing Agreed Marketing Metrics for Australian Business

A basic requirement of any system which contributes to the planning and management of

enterprises is that there should be feedback mechanisms to allow evaluation of performance. This

is true of marketing, covering all its processes and functions, including market research, product

development, marketing communications, pricing and distribution.

Further, the overall role of marketing as a value creator requires measurement, both to

demonstrate that role and to achieve continuous improvement.

Finally, as a central part of marketing there is a need to understand the critical role of the brand, as

an important asset for the organisation and as a vital part of the means by which value is generated.

Leading marketers point out that while selling may be about creating cash flow now, marketing is

more about creating future cash flows, and a powerful brand is like a reservoir of that future cash

flow. If this is true, then it is very important to have measures, or metrics that help us manage and

maintain brands and maintain marketing strength.

But how do we go about measuring the performance of a brand and how do we integrate the

many possible metrics that are available to assess overall marketing performance? On the one

hand there are simple indices, such as overall sales, or market share; then there are more complex

measures related to communications, such as ‘share of voice’ or ‘share of mind’; finally there are

complex measures such as brand value and brand equity [which are different measures].

The Australian Marketing Institute (AMI) believes that it is in the interests of better business

performance as well as in the interests of marketers, for marketing metrics to be adopted at all

levels of business and across all sectors. It is important for the language and metrics of marketing

to sit beside those of finance when CEOs and Boards assess company performance. One of the

key reasons for this lies in the essential difference between most financial measures and higher

order marketing metrics such as brand equity. Financial reports are essentially backward looking

– tracking cash generation in the past, while marketing metrics can tell us about future cash flows.

While this is arguably true, two key obstacles to the wider adoption of metrics need to be addressed.

In the first place there is a need to provide a fairly uniform and generally accepted approach

to the development of suitable metrics for different types and sizes of enterprise [including

both private and public sectors]. This is not to imply that all sets of metrics implemented will be

essentially the same; each business and each type of activity may require somewhat different

measures. But a more unified set of principles and processes will assist businesses approach the

task of selecting appropriate metrics.

Secondly, there is a need to promote the validity, value and efficacy of marketing metrics at the

CEO or Board level of enterprises. Many marketing metrics currently in use by organisations never

go beyond the marketing department. Widespread adoption and acceptance can only come

about when those who hold the reins acknowledge and employ marketing metrics.

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The Australian Marketing Metrics Project

Over the past months the AMI has been engaged in a development project to establish this

agreed set of marketing metrics and metrics selection methodology for Australian enterprises.

The objective is to establish a framework of principles and processes together with a

compendium of measures that will assist the measurement of marketing performance across all

industry sectors.

To oversee the project, the AMI has been assisted by a Marketing Advisory Board which includes

some of the country’s most senior and experienced corporate marketers.

The first steps involved a review of existing literature and current measures, and culminated, after

review and revision, in this discussion paper and its accompanying reference cards. The research

of existing practices by Australian businesses was extensive, and included the memberships of the

AMI and Australian Association of National Advertisers. The recommended principles, processes

and measures will be followed by a Metrics Toolkit.

The AMI has already had cooperative support and assistance from a number of marketing and

research bodies and we look to continued dialogue from both marketers and senior managers.

The Australian Marketing Metrics will always be to some extent a work in progress of course, and

involvement from other professionals will provide valuable input to assist with their refinement.

Marketing metrics in various forms have been available for a long time and the AMI project is not

about establishing a novel set of measures but rather bringing together existing knowledge and

process in a comprehensive, logical and user-friendly system.

As the aim is to encourage greater adoption and use of metrics across industry sectors and

at senior management and board level it is important that both the principles and their

implementation are clear, readily understood and appreciated by non-marketers. While some

technical terms are unavoidable, there is a need to ensure the expression of them is as free from

jargon as possible.

The Australian Marketing Metrics project addresses these issues, and will help establish greater unity

in the approach and greater clarity in the communication of measures of marketing performance.

The next steps will be the adoption of Australian Marketing Metrics by more and more businesses. We

see this as a watershed for marketing, but more importantly, it will provide strong support for Australian

business, as we strive to build a more competitive economy in terms of our capacity to value-add.

Roger James FAMI CPM

National President

Australian Marketing Institute

September 2004

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Marketing is arguably entering the most exciting period in its history as businesses come to

recognise that critical generators of value are to be found in the intangible assets that are the

central concern of marketers. Marketing professionals are the key custodians of these assets:

corporate image, customer relationships, brands, market information and sales performance. In this

environment the development of the marketing profession assumes greater importance than ever.

The Australian Marketing Institute is the professional association for marketers and has served

Australian commerce, industry and the profession for 70 years, making it one of the oldest

professional associations in Australia.

The Institute offers its members:

A respected and authoritative voice for the profession

Strong advocacy of the highest standards

The opportunity for marketers to achieve career advancement and enhanced credibility in the

profession through professional development programs

Access to the latest information on marketing practice

Networking with fellow practitioners.

The Australian Marketing Institute offers the Certified Practising Marketer Program to its members

who meet the required practising standards. The CPM certification serves as the professional

benchmark and distinguishes the truly qualified from those who have merely assumed their own

titles and positions.

An important initiative of the Australian Marketing Institute last year was the establishment of the

Marketing Advisory Board comprising some of Australia’s most senior marketers.

The role of the Marketing Advisory Board is to assist with the advancement of the marketing

profession and to promote the value of marketing to senior management and board directors. The

first initiative is the Australian Marketing Metrics project. This initiative is an extension of the Certified

Practising Marketer program in that the profession for the first time will provide complementary

metric frameworks for both individual and organisational marketing performance. This integrated

approach provides a key platform for promoting the role and value of marketing in business.

About the AMI

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Marketing and accountability In all sectors of Australian business, the level of accountability required at all levels has

increased, making ‘accountability’ the basis for perceptions of value added.

Since the late 1990s, the economy has increasingly recognised that intangible (market-based)

assets are the drivers of value.

Marketing can become recognised as a leader in the creation and management of these

market-based assets.

To do this, the profession must introduce a common framework for measurement so that its

contribution can be clearly articulated and acknowledged.

A ‘value-based’ approach Increased shareholder value should be the ultimate goal of any accountable marketing activity.

By successfully improving customer value and managing market-based assets, marketing

activities contribute to cash-flow generation, which leads to improved shareholder value.

Key areas delivering improved cash flow and enhanced shareholder value

Key points

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A framework for measuring value

The AMI does not support a prescriptive, one-size-fits-all approach, but offers a framework to

guide individual companies’ choice of metrics yet produce uniform results.

The framework’s underlying principles are that metrics should be linked to strategy, and should

include as a minimum four key elements:

1. return on marketing investment

2. customer satisfaction

3. market share in targeted segments

4. brand equity.

The framework incorporates a common set of recognised corporate and marketing models and

a process for developing a set of metrics relating to cash-flow outcomes.

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Some commonly used metrics

We present an overview of the most common metrics used today. These cover financial, brand

equity, innovation and employee-based activities.

Key metrics for best practice used by leading organisations. Choose, develop and monitor

metrics that reflect your operational activities

In addition there are commonly used metrics that cover the more functional aspects of

marketing such as new product development, electronic marketing, direct marketing and sales

force etc. We also make some observations on the frequency of measurement and reporting.

Challenges and issues to consider

The successful introduction of a common framework for marketing metrics is not without its

challenges. These include terminology, the accuracy and cost of data collection and analysis,

and the treatment of intangible assets in financial statements. We discuss the areas of most

contention and provide some suggestions for managing the issues involved.

Industry case studies

We present a number of case studies from different industries where the companies involved

have spent time and energy working out those metrics that best suit them.

A worked financial example

The report does not address in-depth financial cash flow analysis techniques or brand valuation

methodologies. We have included an example of (a) cash flow and shareholder value calculations

from a marketing expenditure and (b) an evaluation of a communications budget in financial terms.

Easy reference cards

Two cards are provided that summarise the key elements of the metric approach.

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Contents

1. Marketing and accountability 10

2. A ‘value-based’ approach 15

3. A framework for measuring value 21

4. Some commonly used metrics 29

5. Challenges and issues to consider 36

6. Industry case studies 41

7. A worked financial example 47

Additional material of interest 56

A. Easy-reference cards 57

B. Acknowledgements 60

C. References 63

D. Glossary 64

E. Financial Glossary 85

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1. Marketing and accountability 10

1.1 The changing context of marketing 10

1.2 The importance of intangible assets 11

1.3 An expanded role for marketing 11

1.4 The expanding marketing process 13

2. A ‘value-based’ approach 15

2.1 The concept of shareholder value 16

2.2 The link between customer satisfaction and shareholder value 17

2.3 Measuring customer satisfaction 17

2.4 The drivers of shareholder value 18

2.5 The link between marketing and shareholder value 19

3. A framework for measuring value 21

3.1 Underlying principles 22

3.2 Two types of value 22

3.3 A common process 23

3.4 Choosing appropriate metrics 24

3.5 Underlying tools (key metrics) 27

3.6 Communicating the new role and the framework 28

4. Some commonly used metrics 29

4.1 Strategy and operational metrics 29

4.2 Feedback from the AMI /AANA 2003 member survey 32

4.3 Top 5 metrics for the marketing mix 34

4.4 Good practice in reporting 35

5. Challenges and issues to consider 36

5.1 Cost 36

5.2 Required skill level 36

Detailed contents


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5.3 Presenting metrics to the board 37

5.4 Government and not-for-profit organisations (NPOs) 37

5.5 Treating intangibles in annual financial statements 38

5.6 Dealing with the terminology 39

5.7 Valuing brands 40

6. Industry case studies 41

6.1 Automotive industry 42

6.2 Telecoms 42

6.3 Fast moving consumer goods 43

6.4 PCs and retailing 44

6.5 Entertainment and tourism (a Disney story) 45

6.6 Retailing 46

7. A worked financial example 47

7.1 Cash flow and shareholder value

calculations from a marketing expenditure 47

7.2 Evaluating a communications budget in financial terms 53

Additional material of interest 56

A. Easy-reference cards 57

B. Acknowledgements 60

C. References 63

D. Glossary 64

E. Financial Glossary 85


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Summary

• In all sectors of Australian business, the level of accountability required at all levels has


• Since the late 1990s, the economy has increasingly recognised that intangible (market-based)

assets are the drivers of value.

• Marketing can become recognised as a leader in the creation and management of these

market-based assets.

• To do this, the profession must introduce a common framework for measurement so that its

contribution can be clearly articulated and acknowledged.

1.1 The changing context of marketing

Changes in the environment – economic, regulatory, social – have had an impact on marketing

across all industry sectors.

Many industries are in the mature phase or are in hyper-competitive situations, with cycles of

expensive and intensive competitor initiatives and retaliatory responses.

Similarly, the service and business-to-business sectors have considerably increased their

marketing resources and expenditure in recent years, while the government sector increasingly

recognises the need to communicate and justify its decisions with its stakeholders.

The mass media is increasingly expensive and cluttered. Boston Consulting Group stated that, for

advertising, the overall cost of reaching consumers between the ages of 25 and 54 has increased

300 per cent since 1995 due to massive channel and advertisement number increases1. This has led

to greater emphasis on other promotional activities such as public relations, events and the Internet.

Marketing continues to be under pressure in terms of achieving growth and short-term profit,

while facing the challenges associated with category clutter, less loyalty and increasing customer

sophistication.

In addition, marketing’s role has evolved over the years from one of advertising, sales and market

research (the traditional view of marketing) to one that supports the total organisational response

to meeting customers’ longer-term needs in a profitable way. Marketing therefore encompasses

all aspects of an organisation’s operation that have an impact on this result.

And in all sectors, the level of accountability required at all levels and across all functions has


1 Boston Consulting Report. “Darwin plays a visit to advertising”, 2003.

1. Marketing and accountability

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1.2 The importance of intangible assets

Since the late 1990s, the economy has been moving from one that is product driven and based

on tangible assets, to a knowledge and service economy based on intangible (or market-based)

assets. Examples of market-based assets are:

brands

supplier and intermediary relationships

databases and information sources

responsive processes

innovation capabilities and culture.

Such assets are not measured by a company’s financial system. Nevertheless, all organisations

today create sustainable value from leveraging these assets. Even after the bursting of the

NASDAQ and dot com bubbles, in 2002 market-based assets accounted for more than 75 per

cent of a company’s value2 . The average company’s tangible assets – net book value of assets less

liabilities – represent less than 25 per cent of market value.

The intangible component of total assets is likely to continue to grow as organisations seek to

control the increase of fixed assets and to outsource non-strategic assets.

It is increasingly recognised that market-based assets drive long-term value creation and need to

be measured and managed.

1.3 An expanded role for marketing

CEOs and CFOs are demanding to know how effectively their marketing dollars are being put to use.

However, few CEOs have marketing experience and few boards have directors with a background

in marketing. UK research has found that only 12 of the top 100 company CEOs had experience in a

marketing role3 . In the USA, only 9 per cent of strategic planning department heads had marketing

backgrounds4 . While no comparable data are available for Australia, anecdotal evidence suggests

that marketers are even less prominent at senior management level in this country.

Traditionally, accounting mentalities have dominated senior management and board thinking.

And yet mission/vision statements inevitably include ‘customer focus’ as an imperative, and

most organisations have strategies that encompass growth and customer service delivery and

key marketing activities. This suggests that the need for marketing is well understood at senior

management level – and yet marketing’s real contribution is not given the recognition it deserves.

Marketers need to respond to this gap in understanding by leading the response to the challenge, and

demonstrating to boards and senior management how their marketing dollars are being put to use.

2 Strategy maps, Kaplan & Norton, Harvard Business School Publishing Corporation, 2004.3 Ambler.T. (2003) “Marketing and the bottom line”. Prentice Hall .4 Boston Consulting Report. “Darwin pays a visit to advertising”, 2003.

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Marketing taking the lead

It is time for the marketing profession to be recognised for its central role in creating and

harvesting profitable revenue (inward cash flow).

To do this successfully, marketing needs to be able to manage and measure those marketing

activities that contribute to cash flow. Organisational factors and the degree of innovation also

play key roles in cash-flow generation; their links with marketing also need to be managed

and measured. Until recently the objectives and intellectual foundation behind marketing

measurement were unclear, even though strategy literature and marketing thought leaders have

long commented on managing the ‘sources of revenue’ and the ‘building of intangible assets’. The

late Professor Peter Doyle has called this new role of concentrating on cash flows from market-

based assets ‘value-based marketing’ 5.

To achieve this recognition for marketing will require marketing executives to have proven

and accessible ways of judging effectiveness, efficiency and returns from activities under their

management.

In addition, to be able to play a significant role in board and senior management deliberations,

marketing executives will need to be able to explain, in plain language, their philosophy of using

financial and quantitative performance metrics. Talking the ‘language of the board’ is a critical step

in being heard.

There are many blue-chip multinationals with extensive brand equity and market-based asset

evaluations and metrics, that also have the support of strong marketing skills and management at

all levels of the organisation. Companies in fast moving consumer goods (FMCG) industries have

tended to be leaders in this area. There is much to learn from them, including not being swamped

in marketing metrics that confuse rather than enlighten performance.

Marketers must be able to measure the value they are creating for customers and shareholders.

Value is defined as the ratio of costs to benefits received from the ‘brand attributes and related

products and services’ for the customer and ‘long-term return on investment’ for stakeholders

as demonstrated by indices such as shareholder value. In other words, it is not enough to satisfy

customers – they must be profitable customers. These two aspects of value creation are clearly

linked, by the profitable cashflows which will be generated by the brand.

Smaller organisations will inevitably have limited organisational capacity to develop and monitor

marketing metrics; however, they can make a start in areas that reflect their core strategies,

whether operational excellence, product/service leadership or customer intimacy. The same

applies to not-for-profit organisations (NPOs) and service organisations.

5 Doyle. P. (2000) “Value Based Marketing”. Wiley.


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1.4 The expanding marketing process

Demonstrating marketing’s true role implies a need to be more relevant at the board and senior

management level, with greater links to overall strategy as well as deeper capabilities for organisation

development, innovation and finally research and measurement. This is reflected in Figure 1.

Figure 1. Expansion of the value chain

Examples of this expansion can also be presented in a table, as in Figure 2.

Figure 2. Marketing’s true role

Not Just... But also...

Objectives Create customer value Use customer value to deliver shareholder value

Strategy Increase market share Develop & manage marketing assets

Assumptions Positive market performance leads to positive financial performance

Marketing strategies need to be tested in value terms. Use of scenarios. Opportunity cost analysis

Contributions Knowledge of customers, competitors & channels

Knowledge of how to leverage marketing to increase shareholder value (SV)

Focus Marketing orientation General management

Advocacy Importance of understanding customers

Marketing’s role in leveraging customers to create SV

Concept assets Tangible Market based (often called intangible)6

Rationale Improves profits Increases SV

Relationship with the board Sales & margins Jointly agreeing on the format & presentation of marketing metrics for board

Relationship with the strategy group

Average to minimal Ensure integration of business and marketing strategies

6 Srivastava, R.K/Shervani,T.A/Fahey,L. 1998“Market-Based Assets and Shareholder Value”. Journal of Marketing

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Relationship with the finance group

Different perspectives and languages

Agreement on key metrics and their source and illustration

Relationship with HR Functional Working closer and even leading ‘internal brand’ integration with the external brand

Performance metrics Market share, customer satisfaction, return on sales and investment

Working jointly on SV analysis via discounted cash flows (DCF); links made between drivers (marketing inputs) and outcomes (financial)

Source: Adapted from Value-Based Marketing, P Doyle, Wiley, 2000, p 29

To achieve this, marketing must adopt and promote certain key concepts:

shareholder value (SV)

cash flows from marketing activities

and market-based assets (MBAs).

This document explains these concepts (including a discussion about the terminology) and

suggests ways in which they might be adopted or tailored as appropriate.

from previous page


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Summary

• Increased shareholder value should be the ultimate goal of any accountable marketing activity.

• By successfully improving customer value and managing market-based assets, marketing

activities contribute to cash-flow generation, which leads to improved shareholder value.

From a company’s point of view, marketing’s prime role is to increase profitable demand for products

and services, thereby creating value which in turn leads to an increase in shareholder value. Clearly

this takes place in the context of ensuring environmental sustainability and ethical behaviour.

This activity is achieved through both rationalisation and growth, as explained in Figure 3.

Figure 3. Creating shareholder value

Source: Value Based Marketing, P Doyle, Wiley, 2000

2. A ‘value-based’ approach

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2.1 The concept of shareholder value

The concept of shareholder value (SV) evolved from the perception that the main objective of

any company was to maximise the shareholders’ return on their equity. In reality, SV is a useful

technique for determining how best to spend cash flow, but it does not explain where that cash

flow comes from.

Marketing plays a role here, as marketing is the means of ultimately achieving shareholder

satisfaction through meeting the goals of customers and employees. But the link between the

means (marketing activity) and ends (financial outcomes) is not always clear.

There is some debate over the merits of SV, possibly as a result of the terminology commonly

used. In this paper we have used SV to mean the underlying financial logic by which organisations

are valued, as opposed to simply ‘share price’. Modern finance theory looks at the value of a

company being “an unbiased estimate of its future cash flows discounted at its cost of capital.”7

This means looking at cash (vs accounting profit), the time value of money, and risk/return

considerations, as expressed in the cost of capital. This approach also incorporates the merits of

looking forward rather than backward in time.

From a marketing perspective, a better term might be simply ‘cash flow’. However, ‘shareholder value’

is widely accepted as a financial concept, and also provides a strong theoretical base for marketing.

Marketing has often concentrated on areas such as increasing market share and customer loyalty

as ends in themselves, which may or may not be translated into improved financial performance.

Making increased shareholder value the ultimate goal of any marketing activity will enhance the

credibility of marketing as an accountable function.

Shareholder value analysis

Shareholder value analysis (SVA) is a tool which calculates the total value of a marketing strategy

by discounting future cash flows. Discounting reflects the fact that money has a time value – cash

received today is worth more than the same amount in the future. Discounting also allows for risk

(the greater the risk the greater the returns required). Risk is reflected in the cost of capital used in

the SVA formula. There is a strong case for using discounting to evaluate marketing expenditure, as it

reflects true returns and allows for a long-term time horizon. To illustrate a base case see Section 7.

Rationalisation vs profitable growth

Cutting costs and investments usually increases profits and cash flow in the short term. Reducing

funds available to support brands tends not to affect those brands for some time; however,

eventually it does affect them. Rationalisation is fundamentally flawed as a long-term strategy,

as it means that the organisation will not meet the emerging needs of its customers, will miss

opportunities, and will eventually be left in mature markets with declining profitability and

possibly old technology.

Marketing investments may be costly in the short term and may take years before positive results

reach the bottom line. Profitable growth depends on convincing the market that your product

or service offers them superior value to the other competitors in the market. This is ultimately

reflected in shareholders’ evaluation of the company’s progress.


7 Footnote to come.

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2.2 The link between customer satisfaction and shareholder value

There is an empirical link between customer satisfaction and shareholder value. The recent USA

study by Thomas S Gruca and Lopo L Rego8 examined the impact of customer satisfaction on

future cash flow and cash-flow variability, the key determinants of shareholder value. They also

examined whether market concentration or company size explains differences.

Since satisfied customers are less likely to defect and are more receptive to a company’s offerings,

the authors suggest that increases in customer satisfaction will improve a company’s future cash

flow and diminish its variability over time. Increased and less-volatile cash flows, in turn, decrease

the company’s cost-of-capital, thus further boosting shareholder value.

Using the American Customer Satisfaction Index (ACSI) and the COMPUSTAT database, they

compiled a nationally representative dataset, including 200 members of the Fortune 500, which

spanned the years 1994-2000.

Overall, they found that customer satisfaction creates shareholder value by significantly increasing

a firm’s cash flow and reducing cash flow variability. More specifically, a one percentage point

increment in a firm’s customer satisfaction score (measured on a 0-100 index) results in an increase of

over 7 per cent in a firm’s future net operational cash flow (an average of $40 million for their dataset)

and a decrease of 4 per cent in its variability. The resulting growth in cash flow and decrease in the

company’s cost-of-capital significantly influences their bottom line and value to shareholders.

The nature of the industry accounts for a significant portion of differences in future cash flow

across companies: the influence of customer satisfaction on cash-flow growth and variability is

stronger for companies operating in more concentrated industries (those with fewer and larger

players). However, company size does not have an impact on these relationships.

As managers seek to link their activities to the measures of most concern to senior management,

this study offers important evidence that investments in customer satisfaction represent

resources well spent: satisfied customers are central to creating shareholder value.

2.3 Measuring customer satisfaction

There is no one right way to measure customer satisfaction. The way satisfaction is measured

is determined by an organisation’s objectives and strategy, as well as by the product or service

category it operates in and its target segment.

While some simple measures are absolute (eg asking customers to rate their satisfaction with

the organisation on a 5-point ‘very dissatisfied’ to ‘very satisfied’ scale), comparing customer

expectations with actual performance is often preferred. Thus, the process for measuring

satisfaction usually involves some or all of the following:

determining key consumer demands/desires and the most important product or service attributes

8 Gruca.T.S. and Rogo.L.L. “Customer Satisfaction, Cash Flow, and Shareholder Value”, Marketing Science Institute Report


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measuring expectations in relation to these demands/attributes in comparison with actual

performance

measuring satisfaction of customers in comparison with competitors

monitoring changes in satisfaction over time.

Satisfaction measurement schemes for complex services may include broad summary measures,

as well as satisfaction scores for key components or processes (eg customer service). These

components or processes may then be broken down further into specific attributes (eg response

times). The key processes and attributes to be measured are usually determined through

qualitative research (such as focus groups), with reference to the positioning strategy of the

organisation. This research should identify which attributes the organisation wishes to be most

known for or has the greatest competitive advantage in.

Further information about customer satisfaction measurement can be gained from most

marketing services agencies and market research text books9 .

2.4 The drivers of shareholder value

Figure 4 summarises the drivers of shareholder value and marketing’s key position in the process.

Figure 4. The drivers of value in a business

9 For a comprehensive text on the subject, see Satisfaction: A Behavioral Perspective on the Consumer, Richard L Oliver, McGraw-Hill, 1997

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The marketing value drivers are also referred to as market-based assets10 . Market-based assets

include:

strong brands or brand equity

What is in the mind of the customer and or channel members that makes them disposed to

prefer the brand?

customer loyalty (relationships)

Current, potential and future relationships that are loyal to the product/ service and use, reuse

and recommend the product/service to others.

strategic partner relationships

The alliances and networks that support the organisation and deliver customers.

marketing knowledge

Deep experience in the industry and chosen market segments.

2.5 The link between marketing and shareholder value

By successfully managing the company’s market-based assets, marketing contributes to cash-flow

generation, which leads to improved shareholder value. This is illustrated in Figure 5 below.

Figure 5. Linking marketing and shareholder value

10 Srivastava, R.K/Shervani,T.A/Fahey,L. 1998 “Market-Based Assets and Shareholder Value”. Journal of Marketing

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Figure 6. Measuring quality of service

Source: Adapted from ‘A service quality model and its marketing implications’, Christian Gronroos, European Journal of Marketing, 1984, Vol 18(4) pp 36-44; and numerous updates of this model.

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Summary

• The AMI does not support a prescriptive, one-size-fits-all approach, but offers a framework to

guide individual companies’ choice of metrics yet produce uniform results.

• The framework’s underlying principles are that metrics should be linked to strategy, and

should include as a minimum four key elements: return on marketing investment; customer

satisfaction; market share in targeted segments; and brand equity.

• The framework incorporates a common set of recognised corporate and marketing models and

a process for developing a set of metrics relating to cash-flow outcomes.

For the marketing profession, boards and senior management of Australian companies to be able

to measure the effectiveness of marketing expenditure and activity, it is essential to employ a

common set of metrics.

Most organisations are already addressing the development of their marketing metrics, and tend

to be somewhere on the following spectrum:

no metrics

short-term financial metrics

many short-term financial and market-based metrics

focused metrics

scientific metrics, including specific modelling.

The AMI does not support the idea that one set of metrics should be used uniformly by all

organisations. On the contrary, we propose a framework for measuring marketing performance

that is based on underlying principles and a basic process, as described in this section. Our

framework is presented graphically in Figure 7.

Figure 7. A framework for measuring the value created by marketing

3. A framework for measuring value

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3.1 Underlying principles

The fundamental principle is that metrics should be linked to strategy. If strategy is that which sets a

company or brand apart from its rivals, then exactly the same metrics cannot apply to all organisations.

That is not to say that there cannot be commonalities within an industry. But metrics which reflect

a company or brand’s value proposition (relating to outcome and process performance) need to

be tailored to that company’s brand or unique positioning.

However, a broad framework to guide the choice of metrics will assist in producing a uniform approach

which will in turn produce a clear, widespread understanding of the effectiveness of marketing. This

broad framework combines key aspects of major models from leading thinkers in this field.

The framework specifies that at a minimum, any company’s tailored metrics should include four

elements:

1. return on marketing investment

2. customer satisfaction

3. market share (in targeted segments)

4. brand equity.

3.2 Two types of value

The value created by marketing should be measured by the value created for customers as well as

by the value created for shareholders, as demonstrated in Figure 7 previously. These two types of

value are clearly linked, as returns to shareholders only eventuate as a result of creating superior

value for customers. A recent US study11 suggests that a one percentage point increment in a

company’s customer satisfaction score results in an increase of over 7 per cent in the company’s

future net operational cash flows.

Metrics and methodologies differ for the two elements of the framework:

Customer value

Customer value is driven by the cost: benefit ratio, which is in turn determined by the

performance of the company or brand. Performance should be measured in terms of the

outcome of the core product/service as well as the process that the customer experienced (ie

relationship, service factors). The specific positioning attributes and relationship strategy of the

company or brand will determine the specific metrics. In addition, there may be generic metrics,

such as customer retention, for companies that have the development of long-term customer

relationships as a key part of their strategy.

11 Gruca.T.S. and Rogo.L.L. “Customer Satisfaction, Cash Flow, and Shareholder Value”, Marketing Science Institute


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Shareholder value

The focus of shareholder value is return on investment as indicated by discounted cash flows.

The specific drivers of cash flow (inflows and outflows) are company-specific. Depending on

circumstances and strategy, certain marketing levers (activities/expenditures) will drive particular

market-based assets (eg brands), which will result in certain market outcomes (eg market share),

which will in turn affect the amount, speed and risk of cash flows (see Figure 8). At the same time

issues of sustainability and ethical behaviour need to be taken into account.

Figure 8. How an advertising investment grows shareholder value

The critical task is to understand the relationship between these different levels such that cause

and effect can be estimated, and the ultimate impact on cash flow determined. This provides the

basis for a business case to be presented to senior management. Using past data to model these

relationships can be an important starting point.

3.3 A common process

We recommend that the following process be adopted for developing a set of metrics relating to

cash flow outcomes:

1. Be clear about the strategy (target markets, value proposition, key service/product attributes

etc), as metrics should reflect strategy.

2. Determine which marketing actions drive key market-based assets, such as brand equity or

firm reputation, client relationships and knowledge generation.

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3. Understand relationships between actions and market-based outcomes (via modelling – use

past data and constantly add new data).

4. Express market-based outcomes in cash-flow terms.

This process can be complex and costly, and clearly there is a cost : benefit relationship to

be determined as to the resources a company devotes to this process. The process itself of

determining metrics can be highly beneficial as it results in a far deeper understanding of market

dynamics and critical cause and effect relationships. Furthermore, greater rigour will ultimately

allow stronger business cases to be presented at senior levels and perhaps greater value to be

created. The end goal is not to have a number of metrics, but a manageable, cost effective series of

metrics which are:

precise and sensitive to change

predictive (eg of future customer purchase, retention, cash flow)

reliable over time so trends can be tracked

relevant to the organisation’s strategy and context.

The process described above should include the identification of those metrics that tell ‘most of the

story’. Decisions need to be made as to how frequently measurement takes place, and what level of

management reviews these metrics. Section 4.4 provides some guidance for these decisions.

3.4 Choosing appropriate metrics

Our position is that no one set of metrics should be used uniformly by all organisations, but

that organisations should choose and, if necessary, tailor those metrics that suit their particular

requirements.

The key to choosing successfully is to ensure the metrics reflect the organisation’s industry

environment and strategic position at a particular point in time, while being realistic about the

difficulties and costs of obtaining valid data. Leading edge organisations are now devoting up to

10 per cent of their marketing budgets to the collection and robust analysis of marketing data12 .

So they need to choose carefully the key measures from which to source this data.

There are well known ‘frameworks’ of company and customer behaviour that will assist marketing

functions to choose the ‘best’ measures for them. We review eight of these models in this section.

This information provides an additional advantage for marketers, in that they can use it to add

intellectual rigour to the process and as a basis for discussions and agreement with other key

functions such as strategy and finance.

12 Doyle. P. (2000) “Value Based Marketing”. Wiley


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The models we have reviewed are:

Portfolio analysis

Industry dynamics model

The positioning model

The product life cycle

The marketing value chain

Unique activities

Marketing competencies assessment

Balanced scorecard

A short explanation of insights to be obtained from each of these follows.

Portfolio analysis

This analysis places the various strategic business units in a matrix of market attractiveness and

competitive positioning. The analysis allows us to consider which business units to concentrate

or focus our efforts on from a cash flow perspective. We can examine whether a unit’s return on

capital employed exceeds its cost of capital. We can also consider future cash flows or economic

profits. This analysis helps us to determine which business units to concentrate on from either a

growth or a ‘need to quit’ perspective.

Industry dynamics model

This model illustrates the involvement of key players in an industry and their market power. This

includes the competitive rivalry of existing competitors, the threat of new entrants, the power of

buyers and suppliers and the threat of substitutes. From a marketing perspective it can identify

key players in the industry that marketing may wish to watch closely. Hence it helps you choose

key competitors to compare for either perceived quality or perceived price. It considers whether

there are substitutes in the market place that should be measured and tracked for their impact,

and finally, which of the channel members are the most important and therefore require the most

focus on their activities as intermediaries.

The positioning model

In this model, developed by Harvard’s Michael Porter, an organisation concentrates its strategy on

either a cost basis or a differentiation basis. This may be either across a wide industry spectrum

or within a narrow niche. This model assists us to consider whether our prime metrics should

cover costs or differentiation as a priority. We can then make the decision as to which metrics to

consider and track in depth.


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The product life-cycle

Products and services pass through a cycle of development, growth, shake-out, maturity and

decline. At different stages of this cycle, different metrics will be required to reflect the changing

circumstances and marketing focus. For example, in the growth stage the focus may include

awareness in the market, while in the maturity stage it may include market share and retail

penetration.

The marketing value chain

The marketing value chain, examined in Section 4.3, can be used to identify where value is

being created in the chain, and hence key focus areas for metric development. If new product

development is the key focus – or extensive advertising or sales force effectiveness – then metrics

in these areas can receive the most attention.

Unique activities model

Activity-system maps as devised by Michael Porter13 show how a company’s strategic position is

contained in a set of tailored activities designed to deliver that strategy. Higher-order strategic

themes can be highlighted by showing clusters of related and linked activities. From a metric

perspective it will show the key activities and additional ones that link to them. For example,

new product development may be a key activity, while quality market research is a key link in the

cluster together with (possibly) a strong culture of innovation.

Marketing competencies assessment

The marketing function should be considering its skill set in light of its current and future tasks.

It should be asking what competencies are required to defend and leverage existing products/

markets, and what needs to be built to be a player in new markets (which can include overseas).

Companies that have a strong service focus, such as professional service organisations, tend to

measure marketing staff/skills per fee earner compared to that of competitors.

Balanced scorecard

The ‘balanced scorecard’ approach to metrics14 gives a more concerted view of a company’s

progress and links short-run and longer-term metrics. Within the model there can be leading

and lagging measures (eg units sold) and customer loyalty and result and process measures (eg

customer complaints and resolution time for customer complaints). The four perspectives covered

are financial, customer, internal business processes, and innovation & learning.

13 “Towards a dynamic theory of strategy”, M Porter, Strategic Management Journal, 1991, vol 12, pp 95-11714 Kaplan & Norton, “Strategy Maps”, Harvard Business School Publishing Corporation, 2004


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Figure 9. The balanced scorecard

3.5 Underlying tools (key metrics)

While metrics are strategy specific, we can provide a starting point as to the metrics available and

commonly used.

Figure 10 summarises the quantitative information that boards and senior management require

– these are the leading metrics being used in the market place and recommended by academics.

The specific metrics that are commonly used to provide this information are explained in more

detail in Section 4.

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Figure 10. Key metrics for boards and senior management

Note: This information should be presented with comparisons with plan/prior year %, and/or compared with the competition where possible.

Marketing function metrics

Figure 11 details the key metrics being used in the market place for each major marketing

function area. Organisations should tailor these by choosing carefully from the metrics to reflect

their own industry structure, positioning and the importance of key activities being undertaken.

Figure 11. Key operational metrics. A segmented view of the best practice metrics above.

It is important to remember that if strategy changes, the metrics need revisiting. It would be wise

to formally review the metrics on a yearly basis.

3.6 Communicating the new role and the framework

To assist the understanding of the key issues by boards, senior management and practising

marketers, we have prepared easy-reference cards for use by both marketing and non-marketing

personnel. They can be found at the back of this document.

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Summary

• We present an overview of the most common metrics used today. These cover financial, brand

equity, innovation and employee-based activities.

• We also summarise the results of surveys in the UK and Australia, and list those metrics

appropriate to each functional area within the marketing value chain.

In this section we present an overview of some of the most common metrics used by business

today, with a discussion of how/when they are used. This information is intended to help the

profession assess and, if necessary, tailor metrics that might be suitable for their individual needs

– taking into account their specific industry, organisation, and stage of development.

The results of surveys in both the UK and Australia15 throw light on major metrics used. Two relate

to multi-industries and one to professional services markets. From the feedback from AMI and ANAA

members16 we have included additional metrics that are being used in the Australian market place.

A number of the metrics described are clearly strategic in nature; they will be the major drivers of a

business. There are also tactical metrics, which ensure that shorter-term marketing activities and events

are appropriately assessed – for example, advertising campaigns that may involve substantial funds.

4.1 Strategy and operational metrics

In Tim Ambler’s book Marketing and the bottom line17 , the key metrics evolve from the activities

undertaken in Figure 12. Traditionally marketing metrics were limited to financial; then brand

equity metrics were added; and now employee-based (organisation effectiveness and efficiency)

and innovation metrics have been recognised as playing key roles in judging the overall

effectiveness and efficiency of marketing.

Figure 12. Key metrics and the activities they are derived from

4. Some commonly used metrics

15 Ambler.T. and Styles.C. Presentation to AMI National Conference 2001.16 September to March 03/04 to the AMI.17Marketing and the bottom line, T Ambler, Prentice Hall, 2003.

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In the future marketing metrics are likely to evolve further, in line with the need to judge other

stakeholders’ contribution to achieving marketing’s strategies and goals. These stakeholders may

include alliance partners, market analysts and investors.

More metrics are also likely to evolve from deeper consideration of competitor positioning, and

assessment of competitor strategies and key tactics. This would include considering substitute

products/services in the competitive set. In addition, metrics relating to marketing’s own

competencies may be valuable. This type of measurement is already occurring in the professional

services markets, and in situations where an organisation may be entering a new market (overseas

or new product/segment) requiring different skills.

The key metrics explored by Ambler cover the following areas:

financial metrics (the standard financial performance statement)

general brand equity metrics

innovation metrics

employee-based metrics.

Financial metrics General brand equity metrics

Innovation metrics Employee-based metrics

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Other surveys, including from Australia and the UK18 , have identified the following metrics. Many

are similar (eg market share and penetration, and intermediary satisfaction and loyalty).

UK study – Top marketing metrics

Metric% Giving top rating for

assessing marketing effectiveness

Metric% that reach

their top board

Profitability 80.5 Shareholder value 83.8

Shareholder value 79.0 Profitability 73.0

Sales value / volume 71.0 Marketing spend 71.3

Loyalty / Retention 67.0 Percent discount 66.7

Margin of new products 66.3 Sales value/volume 65.0

Percent discount 63.3 Gross margin 58.0

Marketing spend 62.8 Relative customer satisfaction 55.7

Relative perceived quality 61.6 Margin of new products 55.4

Revenue of new products 61.2 Revenue of new products 55.1

Relative customer satisfaction

60.8 Relative perceived quality 52.8

Source: Marketing and the bottom line, Tim Ambler, Prentice Hall, 2003

Australian study – Top marketing metrics

Metric% Giving top rating for

assessing marketing effectiveness

Metric% that reach

their top board

Margins 81 Profit (accounting) 59

Sales value / volume 78 ROI Sales value/volume 58

ROI 73 Profit (economic) 55

Profit (accounting) 71 Margins 46

Perceived quality 62 Market share 33

Customer satisfaction 62 Marketing spend 28

Market share 53 Customer satisfaction 22

Source: Ambler.T and Styles.C. Presentation to AMI National Conference 2001

18 Ambler.T. (2003) “Marketing and the bottom line”. Prentice Hall


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Professional service organisations survey

Metric – no particular order

Marketing staff/fee earner

Marketing expenditure as % of revenue

Marketing expenditure per fee earner

Cross selling ratio

Tender performance win %

Personal business development plans for directors/partners

% of staff with marketing qualification

Brand and staff engagement survey

A Stopgap/B&T survey (August 03)19 , looked at the key measures of staff engagement and

included the following metrics:

vision communicated

objectives understood

values defined

values reflected

confidence in management/management practises the values

effective communication

financial reward

great place to work.

4.2 Feedback from the AMI/AANA 2003 member survey

Feedback from AMI/AANA members suggests increased use of the ‘balanced scorecard’ and the

‘value chain’ for guidance on metrics, and also that marketing metrics have been reviewed in the

last 12 months. The metrics going to the board were unchanged from the previous Australian

survey, though one company’s board was receiving quarterly key metrics on the customer

(satisfaction and experience) as well as financial metrics.

19 An Australian Stopgap/B&T survey (August 03).


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Employee effectiveness and innovation metrics

In addition, responses indicate the marketing function is becoming ‘heavily involved’ (the top

category) in co-ordinating with the human resources or people development functions in

establishing and measuring the metrics for employee internal effectiveness (internal ‘brand

equity’ delivery) and for innovation motivation.

Metrics stated as being used included:

annual staff perspective surveys

monthly staff morale index

climate surveys

extra effort surveys

bonus-based KPIs.

This area of marketing is heavily involved in efforts to ‘live the brand internally’, and encouraging

innovation is an area that would benefit from further research as to the ‘how’ of marketing’s

leadership and role.

Other metrics

Other metrics used (though similar to metrics covered elsewhere in this paper) that might offer

additional insights are:

share of wallet

leads/referrals

factory and store scans to measure $ sales and volumes

channel sales and volumes

household penetration/consumption

changes in spend

churn

brand tracking

brand impacts on related categories (eg marketing ‘fresh food’ in a retail outlet can bring in

other product-related business, with customers buying non-food items).

Clearly, all these metrics have direct input to the amount, speed and volatility of cash flows and

can therefore be incorporated into the shareholder value approach we are proposing.


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4.3 Top 5 metrics for the marketing mix

Figure 13 (as per figure 11) shows the marketing value chain with metrics where appropriate

against each major marketing function area. Again, organisations should choose carefully from

the metrics to reflect their own industry structure, positioning and key activities undertaken. The

cost of data collection and interpretation can be significant; hence the importance of choosing

carefully.

Figure 13. Top metrics for the marketing mix

Other measures received from AMI/AANA members that may offer insights include: sales force feedback

attendance at functions/events

cost per lead/account for direct marketing activities

registrations and % active for e-metrics.

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4.4 Good practice in reporting

Metrics will vary according to the audience, areas covered and degree of detail. Figure 12 offers

some ideas for consideration. Organisations will need to choose their own metrics based on their

industry dynamics, industry maturity, degree of competition and chosen strategy.

Figure 14. Frequency of reporting

Board metric Freq Senior management Freq Division Freq

FinancialsBoard metrics + additional

Tailored

Sales & margins MMargin of new products

MBy key segments and products/services

M

Marketing investment M Percent discount MR&D investments and productivity

M

Bottom line MRevenue from new products

MBy key segments and products/services

M

Shareholder value HY Segment data HY By investment products HY

Brand Equity

FamiliarityY

HY for FMCG

Unprompted and prompted awareness from advt/sales campaigns

HY

Advertising awareness unprompted and prompted. Cost per ‘000. Reach. Purchase intention.

Q

Penetration QSales uplift from promotions/ campaigns

QSales force effectiveness metrics such as cost of sales force vs sales

Q

What they think about the brand

Y HY for FMCG

Brand preference rankings

HYE-metrics such as reach, conversion, page views and visits

What they feel Y HYBrand personality & “vividness’ metrics

Loyalty HYBy targeted segments. Also by distribution channel

HYReferral rates, repurchase rates, lost customer rate

Availability QBy key segments and locations. Also by distribution channel

MCross selling Size/varieties

Innovation

Strategy HY By key BU’s By key div’s

Culture HY By key BU’s By key div’s

Outcomes HY By key BU’s By key div’s

Employee based Y By key BU’s By key div’s

Source: Various surveys and responses. Note: Frequency of reporting: Y = yearly; HY = half-yearly; Q = quarterly; M = monthly


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Summary

• The successful introduction of a common framework for marketing metrics is not without

its challenges. We discuss the areas of most contention and provide some suggestions for

managing the issues involved.

In addition to providing guidelines and a framework to assist organisations in developing

marketing metrics, it is also important to address issues associated with the successful

introduction of a uniform system of performance measurement.

This section presents a discussion of some of the challenges and issues surrounding the subject.

5.1 Cost

The cost of obtaining meaningful information – that reflects what should be measured and that

remains valid in comparisons with past and future periods – is not to be underestimated. There

will also be difficulties in measuring segments and time periods. In addition, metrics that are

inaccurately collected or recorded or that reflect a past strategy will need to be disposed of.

Therefore, before deciding which metrics are appropriate for your organisation, it might be useful

to conduct an audit of marketing metrics with reference to sources and costs.

5.2 Required skill level

Marketing personnel will need to fully understand their new role and processes. These roles

will involve being closer to strategy, finance and human resources functions and will lead to the

development of metrics that have wider implications and interpretations. It would be wise for

marketing personnel to understand in depth some of the approaches described in this paper.

Marketing is becoming increasingly involved in the development of an internal culture that will

support wider brand values. We suggest that it would also be wise for marketing personnel to be

skilled in the ‘softer’ issues of conflict resolution, delegation and leadership.

Leadership skills will be required as the marketing team decides on, and promotes to the rest of

the organisation, metrics that reflect both the organisation’s strategy and also marketing’s role as

the custodian of revenue flows. Marketers need to design an action plan and to invest time and

commitment to demonstrate the impact marketing has on a company’s future.

Finally, marketing needs to build a reputation for professionalism and trust backed up by a

rigorous approach to accountability. This will require skills in financial analysis techniques such as

discounted cash flow (DCF).

5. Challenges and issues to consider

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5.3 Presenting metrics to the board

Metrics presented to the board should reflect the reality that boards have limited time to review

information.

Board members wish to know key features only, unless there are problems that require closer

attention. Much work has been done on ‘dashboard’ type reporting that makes extensive use of

graphs and highlights, including signs to indicate positive or negative performance to target (eg

‘traffic lights’; a series of arrows).

Such approaches should be understood and used appropriately, as they help to convey a message

effectively.

5.4 Government and not-for-profit organisations (NPOs)

The lines separating public and private sector organisations are blurring. Both investors in

the private sector and clients of government agencies are demanding greater disclosure and

accountability. This leads to both organisation types having the same need for a balanced set of

marketing performance metrics.

For both of these organisation types, metrics can be determined using our proposed framework,

with variations to reflect their unique circumstances.

The starting point for both government agencies and NPOs is the clarity of the mission, strategy

and key objectives. Critical questions need to be answered as to which customer segments are

to be serviced, for example by age, welfare state or geography. In such organisations there is an

argument to be made that customer metrics should come before financial metrics.

Government agencies

In government agencies that are not primarily commercial enterprises, political decisions rather

than the market may prevail. These agencies need to operate in ways acceptable to the political

stakeholders. There are usually constraints on investment capital, and the basis of financing is often

volatile. The political charter may not allow the organisation to specialise in key segments but rather

to serve all. In addition, government agencies may not be able to develop or keep surplus funds.

NPOs

NPOs tend to lack the organisational capacity (people, skills and systems) to develop performance

metrics in all areas of their operation. Stakeholders do not usually want NPOs to have large

overheads or administration costs.

NPOs have customers, users, suppliers and employees. Therefore there is still a need to

demonstrate ‘best value in outputs’. Metrics can assist with this – they can be generated to assess

the delivery of services and compare it to that of similar agencies, locally or internationally. The

NPO can also build an external brand that reflects its values, and live the brand values internally.


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Customer satisfaction is a key measure for this, including satisfaction with timeliness and

accessibility of services. Hence many of the metrics for brand values and delivery will apply to

NPOs, such as campaigns to measure impacts on fundraising, awareness or impact.

Their underlying values and ideology are of strategic significance for NPOs. For such organisations

the sources of funds are usually diverse, and those sources are not the beneficiaries of the

services offered. Competition for funds may be intense at both the government level (grants) and

general public level (sponsors). The principles of competitive strategy hold. Brand development is

necessary, as is competitive revenue collection and the ability to communicate that spending has

delivered benefits.

5.5 Treating intangibles in annual financial statements

Under current Australian accounting rules, assets are defined as the future economic benefits

controlled by an entity as a result of past transactions or past events. This allows brand names

to be called assets and recognised on the balance sheet. This has implications on loans, capital

adequacy and related matters.

But in the new proposed rules to be introduced in 2005, intangible assets cannot be booked into

the accounts unless there is a secondary market for them (so that price and hence value can be

judged). The new proposed rules take the view that because there was no robust methodology

for measuring such assets it was open to abuse.

The issue of placing ‘intangibles’ either in or out of the financial performance statements

may have both good or bad outcomes on the development of brand equity acceptance and

measurement. The alternative views are:

In 2001, the US Securities and Exchange Commission task force recommended that public

companies report intangible assets, such as customers and brands, to give investors and

analysts another way to determine the worth of a company’s shares.

The introduction of global accounting standards in January 2005 has standards applying to

intangible assets. The exposure draft states that assets such as internally generated brands,

mastheads and customer lists will no longer be included in assets due to difficulties in

measuring non-tradeable items.

An initial assessment would suggest that marketing will be better off if intangibles are rigorously

measured and included in the annual financial statements for management, boards, analysts and

investors to judge. Those intangibles then become to some degree tangible and are more readily

accepted as important assets in the business. Marketing would be less likely to be viewed as just a

cost centre.


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5.6 Dealing with the terminology

If marketers are to communicate their message clearly to boards and senior management, everyone

involved in the communication chain needs to have an unambiguous understanding of the terms used.

While the marketing profession has readily accepted language used by the accounting profession,

such as ‘intangible assets’ and ‘shareholder value’, these terms suffer from varying interpretations

and inferences.

Intangible assets

The term ‘intangible asset’ may incorrectly suggest that such assets are without form or are of

little value, and cannot be measured. Our preferred alternative is therefore ‘market-based assets’.

Shareholder value

‘Shareholder value’ suggests only the shareholder has priority, when in reality value flows from

the customers and the employees who deliver it. Michael Porter states “shareholder value is an

outcome, not a goal. The goal should be economic profit (profitability). Shareholder value flows

from that. The use of shareholder value as a goal has turned out to be a nightmare.” 20

Tim Ambler states “in reality, shareholder value (SV) is a useful technique for determining how

best to spend cash flow but it makes little understanding as to where it comes from. Marketing is

the means to achieving shareholder satisfaction through first achieving the goals of customers

and employees.” 21

ROI

The concept of return on investment (ROI) marketing also requires careful consideration. Tim

Ambler states:

“The ROI approach was devised for assessing capital projects where the investment is made

once and the returns flow during the following years. Marketers like to flatter themselves that

marketing is an ‘investment’ in much the same way that politicians refer to any expenditure

favoured by themselves as investments but this is misuse of language. Marketing expenditure

is continuous and, mostly, maintains the brand and the bottom line. ROI does not cope well

with future marketing budgets. Some may be an investment for the future but marketing

expenditure is not all investment and it is misleading to treat it as such.”

Thus discount cash flow (DCF) is a sound tool for comparing alternative ways to spend alternative

spending budgets but ROI is not. A more reliable process is to establish what levels of expenditure seem

to be needed to achieve goals and then fine tune the plan to achieve the same, or at least acceptable,

goals for less cost.

ROI needs to be both long term (vs budget year) in nature, and cash-flow based.

20 Ambler.T. (2004) “Marketing and finance: Do they face two ways?” Thexis No 3 21 Porter.M. Sydney presentation on 1/8/02 (Convention Centre).


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Our conclusion

The AMI recognises these arguments and agrees. Our approach to shareholder value has been

to link the financial outcomes with marketing inputs and market-based outcomes. It is through

this link that marketing metrics will be of real use to marketers and their senior management.

Terminology should not get in the way, but be agreed and used to improve communication

between functions and levels of management.

5.7 Valuing brands

There are a number of ways of valuing brands. Four of them are22 :

1. Cost-based approaches

which consider the costs involved in creating the brand, from R&D and marketing testing to

commercialisation, product improvements, and advertising/promotion costs.

2. Market-based approaches

which estimate the amount for which the brand can be sold. This may involve estimating the total

value of a company and separating this into tangible and intangible assets.

3. Income-based approaches

which involve determining future net revenues directly attributable to the brand and then

discounting, calculating the present value using an appropriate discount rate. This may be done

by examining the price premium vs a generic product, or estimating the annual royalties the firm

would have to pay if it did not have the use of the brand (through a licensing agreement).

4. Formulary approaches

which combine multiple criteria, including financial measures (past and estimates for the future)

as well as various measures of brand strength/equity. Attributes that may be examined include

market stability, leadership, geographic coverage, trends and legal protection.

Each approach has both advantages and disadvantages. The choice of method may depend

on the purpose of the valuation – for example, to sell a brand vs to place a value on a balance

sheet. Marketers wishing to compare specific methods may consider contacting consulting and

marketing services firms that specialise in this area.

22 Based on “Strategic Brand Valuation: A Cross-functional Perspective”, Karen S Cravens and Chris Guilding, Business Horizons, 1999, July/August


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Summary

• We present a number of case studies from different industries where the companies involved

have spent time and energy working out the best metrics for them.

It is very difficult to calculate the return on anything – training, HR practices, marketing,

innovation. How to identify and use the right metrics is neither obvious nor simple. However, if

you undertake a marketing initiative and invest a certain amount of money in it, you need to work

out which portion of your cash flow is generated by that investment.

To develop a meaningful set of metrics, companies must be willing to spend time and energy on

studies or projects that specialise in the issues. In this section we present a number of case studies

from different industries where the companies involved have delved deep to ascertain the best

metrics for them.

The material in this section has been adapted from an article on the Wharton University website

co-written with Booz Allen Hamilton: www.strategy-business.com/sbkwarticle/sbkw031217

Introduction

In general, the marketing discipline has always been more art than science: that is, organisations

spend large amounts on marketing without any exacting way of determining how much the

resulting ‘brand equity’ or ‘consumer awareness’ contributes to the bottom line.

Moreover, while marketers may declare that customer satisfaction is up, the question CEOs really

want answered is “What does an extra point of customer satisfaction do for my shareholders?”

Some companies use metrics well, especially for advertising, reducing prices or issuing coupons.

When they drop the price or put out a coupon, they know how much extra sales revenue is

generated. But what’s not clear is whether ‘extra sales’ represents the right metric to look at in the

first place. Should a company be looking at increased sales, or should they be looking at the profit

impact of the price change on the coupon? They should be asking how many new customers that

marketing campaign brought in, and what their lifetime value is.

In response, a management concept known as ROI marketing is evolving to help executives

better understand how they can spend their dollars to attain the highest possible return on their

marketing investments.

What follows is examples of ROI marketing applications in the automotive, telecommunications,

consumer packaged goods, travel, and entertainment industries. Collectively these examples illustrate

the broad applicability of ROI marketing across industries, how it can overturn common marketing

assumptions, and how it provides new insights into which marketing efforts are most beneficial.

6. Industry case studies

W H A T V A L U E M A R K E T I N G ? I N D U S T R Y C A S E S T U D I E S

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6.1 Automotive industry

Objective: for a major automobile manufacturer to pinpoint the specific marketing tactics that

will bring customers into showrooms and give them strong incentives to buy cars.

The approach

An ROI approach to marketing has allowed this manufacturer to tailor its efforts to specific

objectives and correct weaknesses in the marketing process at different points in the ‘purchase

funnel’ – which starts with the consumer’s awareness of the product, followed by consideration of

the product, the intent to purchase the product and, finally, the actual transaction.

This particular manufacturer (call it European Auto) looks at all its marketing campaigns at the

end of each quarter using the ‘funnel’ perspective to discern what has worked and what could

work better. If consumers are aware of a car but are not considering buying it, European Auto can

make adjustments to a campaign to strengthen its influence on purchasing. If a given campaign

works in Germany, the company can share that experience with its units in other countries, who

will then try the same initiatives and pass along their experience to other parts of the corporation.

Once customers get into a showroom, they are more likely to buy a car if the dealer is willing

to give them incentives that help them defray the cost of owning the vehicle. The deal-closer

might be two years’ worth of free gasoline, an offer by the dealer to pay the value-added tax or

registration tax, or an offer of free car insurance for a period of time. The closer you get to the

bottom of the funnel, when the consumer is in the showroom, it is price that gets him or her to

buy, but price in the broadest sense. Taxes are a big issue. Consumers value things that reduce the

total cost of ownership. Consumers are much less interested in incentives unrelated to the car like

a free holiday or a free bicycle. Undertake detailed tracking at the dealer level. Once you get the

right mechanisms in place, it’s a matter of monitoring the impact various marketing campaigns

have, and making continuous improvements.

All of this is very quantifiable. This company can now say “Last quarter we had 1,000 people going

into showroom X each month. When we ran marketing campaign Y the following quarter, we saw

1,100 people go into the showroom, and those extra 100 people resulted in 20 additional sales”.

6.2 Telecoms

Objective: to improve the profitability of its business customer segment.

The approach

These customers include small-to medium-size businesses with 50 to 200 phone lines. XYZ

Telecom, as one of the smaller players in the market, must seek opportunities to make its profit on

every customer as high as possible through personalised, targeted marketing.

XYZ is conducting an experiment under which some customers are offered specially designed

calling plans with unique pricing arrangements. The goal is to encourage customers to renew


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their contracts so that XYZ does not have to spend large sums to acquire new customers when

existing ones switch to other carriers. To assess the success of the experiment, XYZ is tracking two

metrics – the customer’s ‘change in spend’ and the customer’s ‘churn rate’. Customers participating

in the experiment are being compared to a control group of customers that are continuing to use

existing calling plans.

About 25 per cent of XYZ’s customers switch to other carriers annually. It would be a major

accomplishment if XYZ can reduce the churn rate since it costs at least $500 to acquire each new

customer. Assuming that a customer produces a profit of $1,000 over a 12-month contract, XYZ

nets $500 (the $1,000 profit minus the $500 acquisition cost). If XYZ can get that customer to

sign up for a second year, its net profit on that customer will rise sharply because XYZ incurs no

acquisition cost for the second year. This will hold true even if the new, lower-priced calling plan

results in somewhat less revenue from that customer.

One key to the success of the test is having sales representatives approach the customer with

a plan especially developed for them. It’s a two-pronged strategy: there’s a brand message (our

carrier is great for your business); and that is followed up with an individual contact from the sales

reps so that customers feel the company is working for them. The message of this approach is (1)

we care about you, (2) we’re creative, and (3) even though we’re small, we can be innovative in

how we approach business compared to our larger competitors. It’s mostly a price game, but we’re

trying to be creative.

They expect revenue to go down slightly with the new plans but expect churn to go way down.

The strategy is to lower the prices of the calling plans to try to secure the account for another year.

But they won’t lower prices as much as competitors would. They don’t want competitors to take

the initiative with ridiculously low prices and be forced to match it.

Once XYZ determines if the plan is working, it will have to constantly refine the calling plans based

on competitors’ offerings. While the pricing experiment is taking place, XYZ has simultaneously

embarked on media advertising and sponsorship of sporting events to strengthen brand

awareness. But XYZ is not advertising a set pricing structure because it wants to retain flexibility

for its customers and does not want to be perceived as the market’s low-price player.

6.3 Fast moving consumer goods

Objective: to revamp the way the Kellogg Company uses trade promotions in its overall

marketing strategy. In trade promotions, manufacturers make payments to grocers to display,

advertise, and offer reduced prices on certain products at specified times.

The approach

Kellogg launched its Trade Promotion Excellence program (TPE) in the 1990s to increase the

return on the $600 million it was spending annually on trade promotions. Kellogg knew almost

nothing about the effectiveness of the thousands of promotions that took place every year. It

created TPE under pressure, because at that time it was losing market share.


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It found that 59 per cent of Kellogg’s trade-promotion events lost money for the company; the

profit generated by the other 41 per cent was almost entirely eaten away by the events that lost

money. By spending trade promotion money differently, projections suggested Kellogg could save

at least $64 million a year.

TPE was a comprehensive program involving structural changes in the sales and marketing

organisation and business, and the application of new, sophisticated software tools. As a result

of TPE, Kellogg shifted a large amount of money from trade promotions into brand building and

new-product innovations. The company today continually looks to see whether promotion events

truly contribute to sales growth and profitability. Perhaps most importantly, Kellogg’s sales culture

has been transformed. A ‘value mindset’ permeates the organisation. Today, hard financial data

drives Kellogg’s marketing strategy, tactical decisions are decentralised and based on profitable

growth, and compensation is tied to value creation.

6.4 PCs and retailing

Objective: a manufacturer of personal computers was losing market share. The company had

identified two shortcomings that needed to be addressed by fine-tuning its pricing strategy and

by improving the quality of its monitors.

The approach

A study was conducted that showed that the company had made some erroneous assumptions

when it came up with this strategy. What customers really wanted was the ability to buy

computers that were not going to be obsolete in a matter of months; they wanted computers that

had enough features to give the products a longer life. The company responded to consumers’

concerns by, among other things, increasing each computer system’s memory and improving its

software. The result was increased customer loyalty, word-of-mouth praise and improved earnings.

A retailer (call it Big Box Inc) had been using a typical mix of TV, radio and newspaper advertising

as well as in-store promotions (old chestnuts such as “buy one, get one free”). However, it had

never attempted to assess to what extent its advertising dollars were increasing profits. An

analysis found that Big Box obtained more benefits from TV than from radio and newspapers.

That was the good news; the bad news was that none of the advertising venues generated

enough revenue to offset the cost of the ads.

The larger point of the study was about the difficulty of measuring marketing initiatives, especially

for a large company with stores spreading from Connecticut to South Texas, and whose marketing

campaigns were largely regional in nature and overseen by different managers. The company

did piecemeal marketing analysis, but had never done a comprehensive analysis. They had to link

data from separate parts of the organisation on when the company spent money on ads and how

much it spent, and they had to track unit sales for each store after the ads appeared.


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It turned out to be a major task to collect the data at store level and link it to when the advertising

was occurring. People were not sharing data, which made it difficult to make assessments about

the return on marketing investments.

6.5 Entertainment and tourism (a Disney story)

Objective: Understanding and measuring product synergies.

Introduction

Companies trying to measure returns on marketing investments need to be careful they do not

lose their customer focus. Do not measure something just to say it can be done; companies should

always view metrics as a way to generate business insights and to bolster and invigorate their

overall customer-focused strategies.

The approach

A good example of a strategic initiative inspired by marketing analysis occurred during Michael

Eisner’s early years as chief executive at Disney. Instead of asking how a division’s profitability

could be improved, Eisner asked: “How much does a family spend on a vacation and what

percentage of that amount can Disney capture?” To address that question, Disney had to move

from product-centric metrics to customer-centric metrics. It turned out that Disney was not

capturing nearly enough value from vacation spending, even though its theme parks were

quite profitable. Disney’s theme parks were primary destinations for vacationers, who spent an

average of $3,000 on their vacations in Orlando, but Disney was capturing only 25 per cent of that

spending; the rest went to airlines, taxis, hotels and restaurants.

This customer-focused metric, the share of vacationers’ total expenditure, generated some good

business insights that helped Disney to formulate its growth strategies. From then on, Disney

built Disney hotels and Disney stores. Disney teamed up with airlines to offer travel packages to

tourists. People were picked up at the airport by a Disney bus and taken to a Disney hotel where

they could listen to Disney radio, watch Disney TV and shop in Disney stores. By building so many

‘toll booths’, Disney was able to increase its share of vacationers’ spending dramatically.

The result was that vacationers to Orlando began spending about 75 per cent of their money on

Disney to get the full Disney experience.

A customer-focused metric can be important in other contexts, such as retailing. In that business, it

is quite important for companies to distinguish between ‘accounting profits’ and ‘marketing profits’.


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6.6 Retailing

Objective: Measuring the effect of the marketing of one category on the profits of other

categories in the store.

Introduction

Retailers have long known that some product categories are more important than others in

determining the choices that consumers make inside stores. The overall profitability of a store

requires careful category-level merchandising decisions to pull the most desirable customers into

the store. But the traditional accounting measure of category profits – revenue minus costs equals

profit – offers imperfect help in making those decisions because it fails to take into account the

effect of the marketing of one category on the profits of other categories in the store.

The approach

A profit measure which takes into account these important cross-effects is the most relevant

metric for category management, when looking specifically at the effects of a supermarket

company’s shelf-space allocations. It focuses on consumers and their store choice behaviour and

is particularly relevant to marketing decision-making.

The concept of marketing profits is based on a grocery store that sells meat and produce. To

find out how the business is doing, the store’s owner would look at the sales from each category,

subtract the cost, and arrive at a figure for the accounting profits. Assume that the owner finds

that produce is the most profitable category. It would be natural for them to spend more money

to market produce, but that might not be the right decision to make. It could be that most

customers really come to the store because they want to buy meat and just happen to buy a lot

of produce too. Therefore, devoting a lot of money to marketing produce might not result in more

desirable customers coming into the store.

If you measure across categories, as suggested, you have to go beyond relying on brand

managers. Brand managers handle one particular brand and don’t care what happens to other

brands. What’s suggested requires a more comprehensive approach.


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The report does not address in-depth, financial cash-flow analysis techniques or shareholder value

calculations. However we have included a base case working example of a cash flow calculation

from a marketing investment and also a value based budgeting approach to a communication

expenditure, in order to convey the basic principles involved. Those seeking additional insights

and information should consult the references section.

The following material has been substantially adopted from the late Professor Peter Doyle’s “Value

Based Marketing” book.

7.1 Cash flow and shareholder value calculations from a marketing expenditure

Cash flow is the difference between operating cash inflows and outflows. It is often called free

cash flow. Cash flow is the source of corporate value because it determines how much is available

to pay debt holders and shareholders. Cash flows are estimated for each year of the forecast

period and then discounted back to the present using the appropriate cost of capital.

Cash inflows are a function of two elements: sales and the operating profit margin. The operating

profit margin is the ratio of pre-interest, pre-tax operating profit to sales. Operating profit is sales

less the cost of goods, selling and administrative expenses and less depreciation costs. Cash

outflows are a function of three elements: the cash taxes the company actually pays, and the

additional working capital and fixed investment the business will incur in achieving its sales.

To illustrate how these cash flows are calculated consider Alpha Plc with current sales of $100 million,

operating profit margin of 10 per cent and a cash tax rate of 30 per cent (Table 7.1.1). Management

introduce a new marketing strategy to accelerate the company’s growth. They believe that seven

years is the longest period over which it makes sense to attempt detailed forecasts. Over this forecast

period sales are predicted to grow at 12 per cent a year in money terms. The operating profit margin

and tax rate are forecast to remain the same. The net operating profit after tax is usually called NOPAT.

Table 7.1.1 Alpha Plc: Cash Flow Forecasts ($million)

Year Current 1 2 3 4 5 6 7

Sales ($millions)

100.00 112.00 125.44 140.49 157.35 176.23 197.38 221.07

Operating margin (10%)

10.00 11.20 12.54 14.05 15.74 17.62 19.74 22.11

Tax (30%) 3.00 3.36 3.76 4.21 4.72 5.29 5.92 6.63

NOPAT 7.00 7.84 8.78 9.83 11.01 12.34 13.82 15.47

Additional working capital

2.16 2.42 2.71 3.03 3.40 3.81 4.26

Additional fixed capital

2.64 2.96 3.31 3.71 4.15 4.65 5.21

Cash flow 3.04 3.40 3.81 4.27 4.78 5.36 6.00

7. A worked financial example

W H A T V A L U E M A R K E T I N G ? A W O R K E D F I N A N C I A L E X A M P L E

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Growth normally requires additional investment. Management estimates that incremental net

working capital (debtors, cash and stock, less creditors) will grow at 18 per cent of sales. That

is, every additional $100 in sales will require an additional $18 investment of cash in working

capital. Incremental net fixed capital investment is defined as capital expenditures in excess

of depreciation. It is net of depreciation because depreciation was deducted in calculating

the operating profit. (An alternative approach that is often used is to add back depreciation to

NOPAT and deduct gross investment to calculate free cash flow. This produces the identical result

to deducting net investment from NOPAT.) In developing its strategy for the forecast period

management will put in its own estimates for capital spending. In the example, incremental capital

investment is taken to be 22 per cent of sales. The cash flow that results is shown in the table.

We can summarise the determinants of cash flow (or free cash flow), then, as:

CASH IN: determined by:

1. Sales growth

2. Operating profit margin

LESS

CASH OUT: determined by:

3. Cash tax

4. Incremental working capital

5. Incremental fixed investment

Cost of capital

As noted earlier, it is not just the level of cash flow generated by a marketing strategy that counts

but also its timing and the risks involved. To take into account the time value of money and the

risks attached to different strategies, future cash flows have to be discounted by the appropriate

cost of capital. The central concept of finance is that investments yielding returns greater than the

cost of capital will create shareholder value, while those yielding less will decrease it. Calculating

the cost of capital has to take into account that capital to finance the business comes from two

sources-debt and equity. Each has a different cost so the two have to be weighted.

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49

Calculating the cost of the debt component is relatively straightforward. Again, it is based on

the cost of new debt not historic debt. It is also the after-tax cost that is calculated since interest

on debt is tax deductible. If a company has some publicly quoted debt, for example a corporate

bond, the current cost of debt can be obtained directly by looking at market prices and yield

quotes. When this information is not directly available it has to be estimated. One way is to look at

the yield on debt of companies in a related sector and to use a rating agency such as Moody’s or

Standard and Poors to estimate a premium or discount to the published yield figure.

The second component of the cost of capital, the cost of equity, is more difficult to estimate.

The cost of equity is that expected return which will attract investors to purchase or hold the

company’s shares instead of those of other companies. This expected return will vary with the

specific risk attached to the company’s shares. Conceptually, the cost of equity can be divided into

two components: a risk-free rate and an equity risk premium. The risk-free rate is usually taken to

be the return on long-term government bonds.

The equity risk premium that has to be added to this is in two parts. First, there is the general or

market risk premium – the amount by which the average return on shares exceeds the risk-free

rate. This varies considerably over time, but has averaged around 5-6 per cent. Next, there is the

specific risk attached to the shares of a particular company. This is called the beta coefficient. If

the company’s shares are more volatile than the average, the beta coefficient exceeds 1.0. This

means the equity risk premium will be above 5 per cent (e.g. a beta of 1.2 would mean an equity

premium of 5 x 1.2 = 6 per cent). If it is less volatile, then the coefficient is less than 1.0, leading to

a lower premium. Financial service companies regularly calculate these coefficients from data on

past share movements and publish them for interested parties.

To illustrate, suppose a company’s after-tax cost of debt is 6 per cent and its estimated cost of

equity is 11.7 per cent. It plans to raise future capital, 30 per cent by way of debt and 70 per cent

by new equity. Then the cost of capital is calculated as:

Weight % Cost % Weighted cost %

Debt (after tax) 30 6.0 1.8

Equity 70 11.7 8.2

Cost of capital 10.0

Continuing value

In estimating the value generated by a strategy the calculation is split into two parts. The first part

is the value generated in the initial forecast period, and the second is the present value of cash

flow after the explicit forecast period, called the continuing, terminal or residual value, i.e.

Value = Present value of cash flow + Present value of cash flow during the forecast period after the forecast period


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There are two reasons for dividing it like this. One is that in the majority of industries, a seven or

eight year forecast period is the longest period managers feel that they can sensibly put estimates

of sales, costs and investments. Beyond that, the implications of changes in economic conditions,

competition and technology are too uncertain to forecast, at least with any hope of precision.

The second reason is that seven or eight years is the longest period that any marketing strategy

can normally expect to deliver a differential advantage. For many strategies the period will be

much less. A strategy creates value when it produces returns that exceed the cost of capital and

thereby generates positive net present value. A firm’s ability to generate these above normal

profits depends upon it being able to offer customers something other companies are unable

to match. This ‘monopolistic advantage’ enables it to earn profits above those normally expected

by the capital market. The source of this competitive advantage may be innovation which has

given the business superior products or processes; it may be brand names which customers

trust and value; or it may be the possession of licenses, sunk costs or natural monopolies which

restrict competitors from entry to the market. But such advantages do not last. High profits attract

competitors, substitutes appear, prices fall and above-normal profits fade away. The calculation of

the continuing value captures this change. While in the initial forecasting period the business may

earn returns above the costs of capital, after this they are assumed to fall to the market average.

The continuing value figure is very important in shareholder value analysis because it is usually

larger than the value created in the forecast period. This is especially the case for growth

companies that are likely to generate little or no profit and free cash flow in the early years.

The concept of continuing value is very important for marketing. For companies that have identified

new market opportunities, it usually makes sense to spend heavily on new product development,

developing the brand and opening up new markets. In this way, they pre-empt competition and build

a leading strategic position in the industry. While such strategies create value, they absorb rather than

generate cash in the formative period. Aggressive marketing strategies may well lead to minimal

profits and free cash flow in the early years, but simultaneously be creating enormous value, which is

reflected in the high figure for continuing value and in a rocketing share price. The continuing value

reflects shareholders recognition that in later years, perhaps five or more years ahead, the company

will then start generating high free cash flow. Microsoft, Amazon, Nokia and Dell are examples of

companies that have followed exactly this pattern.

In contrast, companies that create high profits and free cash flow in the forecast period tend to be

mature businesses or businesses where the management believes it does not have opportunities to

invest, perhaps because competition is too strong. In these situations, management will be taking out

costs, minimising fixed investment and reducing working capital. Here the continuing value will be

small, recognising that the business’s competitive position will not be worth much in the future.

Unfortunately, there is no unique method of calculating the continuing value, and different methods

often produce sharply different results. The choice of method depends upon a careful judgment

of the competitive strength of the business and the value of its brands at the end of the forecast or

planning period. The most common method of estimating the continuing value is the perpetuity

method. This assumes that after the forecast period, competition will drive the return the business

earns down to the cost of capital. The effect of this is that further investments, even if they expand the


30597_AMI_V11.indd 50 24/09/2004 3:26:43 PM

51

business, do not change its value. As a result future cash flows, after the forecast period, can be treated

as what finance managers call a ‘perpetuity’ or an infinite stream of identical cash flows.

Using the perpetuity method, the present value (at the end of the forecast period) is calculated by

dividing the net operating profit after tax by the cost of capital:

Perpetuity terminal value = NOPAT

Cost of capital

To calculate the present value of the terminal value this figure has to be discounted back over

the appropriate number of years. For example, if the net operating profit at the end of a seven-

year forecasting period is $8 million and the cost of capital is 10 per cent, then the perpetuity

continuing value is $80 million and the present value of this continuing value $80 million divided

by (1+0.1) or $41 million.

There are a variety of other methods to calculate continuing values. Some companies use the

perpetuity with inflation method. This adapts the standard perpetuity model by assuming

operating profits after the forecast period grows at the rate of inflation. In periods of inflation

this will give a higher estimate of the continuing value. The choice of which of the two to use

depends upon whether managers believe the firm will have the ability to raise prices in the long

term alongside inflation. This will depend upon industry conditions, the business’s position in the

market and the organisation’s ability to maintain its competitiveness over the longer run.

Another common approach to estimating terminal values is the price/earnings (P/E) ratio method.

Here one looks up the average P/E ratio for mature companies in similar types of industry and uses

this to multiply net operating profit in the terminal year. For example, if the net profit was projected

as $8 million in the seventh year and the average P/E was 11, the continuing value would be $88

million and its present value $45 million. An alternative is the market-to-book (M/B) ratio method.

This calculates continuing value by multiplying the projected book value of assets by an average

M/B ratio for similar companies. So if the book value of assets in the terminal year is projected to be

$60 million and the average M/B ratio is 1.5, the continuing value is estimated at $90 million.

Both these methods can be criticised. Book value nowadays is a poor measure of the real value of a

company’s assets. Inflation and intangible assets such as patents and brands mean market values are

often substantially higher. Inflation and arbitrary accounting choices also often bias earnings. Finally,

in choosing ratios, finding a sample of truly similar companies is no simple task. On the other hand,

calculating continuing values always depends on judgment. Essentially the purpose of value analysis

is to estimate market value – to estimate what investors would pay for a business. When you can

observe what they actually pay for similar companies, that is valuable evidence. P/E and M/B ratios

can act as common sense checks to test the validity of more scientific methods of valuation.

Illustration

Now that the key financial components of shareholder value analysis – cash flow from operations,

cost of capital and terminal value – have been reviewed we can demonstrate the complete

methodology. Table 1.2 utilises the information about projected cash flows drawn from the sales


30597_AMI_V11.indd 51 24/09/2004 3:26:43 PM

52

growth, operating margin, tax and capital requirements summarised in Table 1.1. The discount

factor is 1 (1 + r) where r is the weighted cost of capital (10 per cent) and t is the year in question.

Multiplying by this factor discounts future cash flows to their present value. The continuing value

is calculated for each year using the perpetuity method. For example, the continuing value at the

end of year I is computed as follows:

NOPAT =

7.84 = $78.4 million

Cost of capital 0.1

To bring the $78.4 million back to the present value it is multiplied by the appropriate discount

factor, 0.909, to obtain $71.27 million.

The cumulative present value of cash flows for the entire seven-year forecast period is $20.43

million. When the continuing value at the end of the period of $79.41 million is added, the

total value of $99.84 million is obtained. Typically for a growth company, the terminal value is

substantially higher than the value created in the forecast period.

To illustrate the distinction between enterprise and shareholder value, it is assumed that Alpha also

has other investments of $7 million and debt of $25 million. The other investments are added to the

total value to arrive at an enterprise value of $106.84 million. The debt is then deducted to arrive

at the $81.84 million figures for shareholder value. Suppose the company has 20 million shares

outstanding, and that other investments and debt were planned to remain the same over the forecast

period, then the marketing strategy behind Table 7.1.1 (page 47) would lead to a predicted rise in the

implied share price from $2.60 to $4.09 per share – a pretty satisfactory performance.

Table 7.1.2 Calculating Shareholder Value

YearCash Flow

Discount factor

Present value

Cumulative present

value

Present value of

continuing value

Cumulative PV –

Shareholder continuing

Value added

Shareholder Value

Base 70.00 70.00 0.00

1 3.04 0.909 2.76 2.76 71.27 74.04 4.04

2 3.40 0.826 2.81 5.58 72.57 78.15 4.11

3 3.81 0.751 2.87 8.44 73.89 82.33 4.18

4 4.27 0.683 2.92 11.36 75.23 86.59 4.26

5 4.78 0.621 2.97 14.33 76.60 90.93 4.34

6 5.36 0.504 3.02 17.35 77.99 95.35 4.42

7 6.00 0.513 3.08 20.43 79.41 99.84 4.50

Other investments 7.00

Enterprise value 106.84

Value of debt of debt 25.00

Shareholder value 81.84


30597_AMI_V11.indd 52 24/09/2004 3:26:44 PM

53

Shareholder value added (SVA) in Table 7.1.2 (page 52) provides another insight into the success

of the strategy in creating value during the forecast period. Where the shareholder value figure

shows the absolute economic value predicted over the forecast period, economic value added

shows the change in value. An increase in value means that management has succeeded in

making investments that earn returns above the cost of capital required by the capital market. The

value added by this seven-year marketing strategy is $29.8 million. The year-by-year increase in

value is calculated by the annual change in ‘cumulative PV plus continuing value’ totals.

Table 7.1.3 summarises the expected results from the proposed marketing strategy. The first

column summarises the beginning or baseline value of the business-the value of the business

before the marketing strategy is introduced. In the base year the business has a NOPAT of $7

million, which would capitalise it, using the perpetuity method, as worth $70 million. Adding other

investments and deducting the market value of debt leads to an equity value of $52 million. The

new marketing strategy anticipates faster growth and investing at returns that exceed the cost of

capital. Unless there are other strategic options that lead to even higher shareholder value added,

the proposed marketing strategy looks attractive to shareholders.

Table 7.1.3 Shareholder Value Summary

$ millions Before strategy With strategy

Cost of capital (%) 10 10

PV forecast cash flows 0.00 20.43

PV continuing value 70.00 79.41

Total present value 70.00 99.84

Other investments 7.00 7.00

Enterprise value 77.00 106.94

Debt 25.00 25.00

Shareholder value 52.00 81.84

Shareholder value added 0.00 29.84

Shares outstanding (m) 20 20

Implied value per share ($) 2.60 4.09

7.2 Evaluating a communications budget in financial terms

A key role of marketing is to communicate with current and potential customers, either to create

awareness or reinforce loyalty behaviour, or to convey an understanding of the product/service

attributes. There is a continual fight with competitors to win the customer’s ‘share of mind’.

Traditionally, to evaluate spending, marketers have looked at awareness and sales, while accountants

usually have focused on short-term profits. Neither usually has looked at shareholder value impacts.

Investing in marketing and communications increases shareholder value by creating and growing


30597_AMI_V11.indd 53 24/09/2004 3:26:44 PM

54

market-based assets, which in turn enhance an organisation’s core business processes such as

customer relationship management, channel relationships and new product introduction. Even

small expenditures compounded over time add value to the business.

In this section we present an example of how to consider the value of a communications strategy.

This is a basic model only, as other marketing activities such as sales force effectiveness, past and

other current marketing campaigns also have an impact on the buying process.

Value based budgeting

Since the objective of marketing is to maximise shareholder value, the right way to determine the

communications budget is to spend that amount which maximises the net present value of the

brand’s future cash flow. This means considering the trade-off between communications spend

and other investments to increase returns. It also means evaluating the implications of different

levels of spending. The first step is to estimate how sales will vary with communications spend. This

can be done directly or by separating out the components of revenue. For example, net revenue

growth for a mobile phone operator is best estimated by predicting the number of subscribers it

gains, the average spend per subscriber and the number of years an average subscriber is retained.

There are three ways to estimate the sales response function. First, an econometric approach can be

used, which correlates variations in spending with variations in sales. The data can be either historical

or based on differences occurring cross-sectionally in different geographical areas. This method is

most appropriate for mature products and where markets are relatively stable so that conditions

in the future are not going to be too different from the past. Experimental estimates can be used

for new products. This involves varying the levels of spending in different regions and assessing the

response function. The third approach is consensus estimates. This requires members of the brand

team to use their best judgments to make predictions about sales at ‘low’, ‘medium’ and ‘high’ levels of

marketing spend; from these estimates a consensus response curve is developed.

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30597_AMI_V11.indd 54 24/09/2004 3:26:44 PM

Table 7.2.1 Optimum Communications Budget for Aussie Beer

Year 1 Year 2 Year 3 Year 4 Year 5

Sales ($m) 30.0 33.0 35.0 35.0 35.0

Communications budget 10.0 10.0 10.0 10.0 10.0

Operating profit 3.0 3.3 4.2 5.3 7.0

NOPAT (Net Operating Profit After Tax)

3.0 2.6 2.9 3.7 4.9

Net investment 15.0 1.2 0.8 0.0 0.0

Cash flow -12.0 1.4 2.1 3.7 4.9

PV of CF -10.9 1.2 1.6 2.5 3.0

Cumulative present value

-2.6

PV of continuing value

30.4

Shareholder value 27.8

The resulting levels of spend and sales forecasts are input into a shareholder value analysis to

estimate the shareholder value added for the different budgets. Table 7.2.1 illustrates this for the

Aussie Beer showing the shareholder value added with annual communications budgets of $5m,

$10m and $15m. Note that market share is always maximised with maximum communications

budget, but the objective is to maximise value, not sales. The table above shows a calculation in

detail for the optimum communications spend of $10m. Here managers forecast sales reaching

$35m and the brand having a shareholder value of $27.8m.

Additional material of interest


55

30597_AMI_V11.indd 55 24/09/2004 3:26:45 PM


ContentsAdditional material of interest

56

W H A T V A L U E M A R K E T I N G ?

30597_AMI_V11.indd 56 24/09/2004 3:26:45 PM


A. Easy-reference cards

57


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30597_AMI_V11.indd 59 24/09/2004 3:26:46 PM

60

This paper was prepared for the AMI by the Centre for Applied Marketing (CAM), a joint

arrangement between the AGSM and the UNSW Faculty of Commerce.

The author

Michael Withford, BEc, MA Marketing (UK) and formerly Lead Partner Strategy and Marketing for

Price Waterhouse Consulting and a member of the visiting advisory board of CAM, wrote the

paper in consultation with Associate Professor Chris Styles of the University of New South Wales

(now Professor of Marketing, University of Sydney).

Michael’s expertise is in strategy formulation and development. His experience includes assisting

leading organisations in the Asia Pacific region, reviewing organisations’ board reporting formats,

performance measures and strategic planning processes, and lecturing at the MBA level in

business strategy, international business and marketing.

Michael is a Fellow of the Australian Marketing Institute, a Certified Practising Marketer, a graduate

member of the Australian Institute of Company Directors (AICD), professional mentor and a board

director.

Industry and academia

The metrics illustrated in the report have substantial academic rigour, evolving from recent

surveys in the UK, USA, Europe and Australia. Direct input into this study has come from Professor

Tim Ambler in the UK as well as from the Boston Consulting Group and the advertising agency

and brand company McCann Erickson.

The seminal works of Professors Tim Ambler and Peter Doyle are acknowledged 23. Paul Niven’s work

on the balanced scorecard for government and non-profit agencies offered additional insights24.

A number of the case study metrics are from Wharton University and Booz Allen Hamilton25. Many

members of the AMI and the AANA also made contributions which were most welcomed.

Other opinions and comments reflect the writer’s experience and knowledge.

PricewaterhouseCoopers

We would like to acknowledge the contribution of PricewaterhouseCoopers to this report. In

order to ensure that the content was in a crisp and reader-friendly style the firm’s specialist

communications professionals assisted in providing a “plain English” review of the proposed

contents of this report. We especially appreciate that PricewaterhouseCoopers provided this work

to the Australian Marketing Institute on a pro bono basis.

B. Acknowledgements

23 Marketing and the bottom line, T Ambler, Prentice Hall, 2003; Value Based Marketing, P Doyle, Wiley, 2000.24 Balanced Scorecard Step by step for Government and Non-profit Agencies, P Niven, Wiley, 2003.25 When art meets science: The challenge of ROI Marketing, Wharton University and Booz Allen Hamilton, 2003.

W H A T V A L U E M A R K E T I N G ? A C K N O W L E D G E M E N T S

30597_AMI_V11.indd 60 24/09/2004 3:26:47 PM

61

AMI Advisory Board

Iggy Pintado (Advisory Board Chair)

Director of Marketing, Australia / New Zealand

& Location Executive, IBM Australia

Peter Challender

Director of Marketing

Dulux Australia (Orica)

Bill Elsy

Immediate Past National President


James Galloway

General Manager Customer Experience

Westpac

Cheryl Hayman

Marketing Director

George Weston Foods

Roger James

National President


Holly Kramer

Director Wireless and Mobility

Telstra Technology, Innovation and Products

Gary Lee

Group Manager Letters

Australia Post

Keith Stanley

Global Marketing Manager

Flight Centre

Mark Veyret

Director

PricewaterhouseCoopers

George Zoghbi

General Manager - Retail

Bonland Dairies

Michael Beckerleg

Managing Partner

Rubberband

* as at 20 August 2004


Strategic Advisors

Tim Ambler

Senior Fellow

London Business School

Professor Chris Styles

Discipline of Marketing

School of Business

University of Sydney

Chief Executive Officer

Mark Crowe

30597_AMI_V11.indd 61 24/09/2004 3:26:47 PM

62

Australian Association of National Advertisers

The AANA was formed in 1928 by a group of 12 concerned advertisers with the same aim and

objective – to promote and safeguard the advertising interests of its members.

The AANA membership has grown to include Australia’s major advertisers, and represents the

interests of companies responsible for 85 per cent of Australia’s annual expenditure on national

main media advertising.

The AANA represents the advertising community’s rights to commercial freedom of speech. Its

purpose is to assist members to maximise marketing communication effectiveness and efficiency

through responsible free speech, fair competition and best practice.


30597_AMI_V11.indd 62 24/09/2004 3:26:47 PM

63

Ambler.T. (2003) “Marketing and the bottom line”. Prentice Hall .

Ambler.T. (2004) “Marketing and finance: Do they face two ways?”

Thexis No 3.

Ambler.T and Styles.C. Presentation to AMI National Conference 2001.

Boston Consulting Report. “Darwin plays a visit to advertising”, 2003.

Cravens. K.S. and Guilding. C. , “Strategic Brand Valuation: A Cross-functional Perspective”, Business

Horizons, 1999, July/August.

Doyle. P. (2000) “Value Based Marketing”. Wiley.

Gronroos. C. (1984) “A service quality model and its marketing implications”. European Journal of

Marketing, 18 (4), 36-44.

Gruca.T.S. and Rogo.L.L. “Customer Satisfaction, Cash Flow, and Shareholder Value”, Marketing Science

Institute Report No 03-106.

Kaplan & Norton, “Strategy Maps”, Harvard Business School Publishing Corporation, 2004.

Niven.P. “Balanced Scorecard (2003). Step by step for Government and Nonprofit Agencies”. Wiley.

Oliver. R. L Satisfaction: “A Behavioral Perspective on the Consumer”, McGraw-Hill, 1997.

Porter. M. (1991) “Towards a dynamic theory of strategy”. Strategic Management Journal. 12, 95-117.

Porter. M. Sydney presentation on 1/8/02 (Convention Centre).

Srivastava, R.K/Shervani,T.A/Fahey,L. 1998.

“Market-Based Assets and Shareholder Value”. Journal of Marketing, Vol 62, No 1 pp2-18.

Wharton University and Booze Allen Hamilton. “When art meets science: The challenge of ROI

Marketing” 2003.

www.strategy-business.com/sbkwarticle/sbkw031217

C. References

W H A T V A L U E M A R K E T I N G ? R E F E R E N C E S

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This word glossary has been provided from Tim Amblers’ book “Marketing and the bottom

line” 2003. Prentice Hall

above-the-line Media advertising [expenditure] in distinction from other activities like sales

promotion and public relations which are `below the line’. It originated in the nineteenth century

on the basis of whether commission to the ad agency was paid by the media or by the client.

Typical metric: share of voice.

advertising spend The cost of media space usually including production and agency fees.

Sometimes expressed as percentage of revenue and/or percentage of marketing investment.

affinity group An analyzable set of customers with common interests. Smaller than a segment,

the difference also lies in how the marketer treats the consumer group. If the marketer recognizes

the special common needs of some customers, e.g. mothers with small children, and makes

provision for them, that’s an affinity group. If the subject of a separate marketing programme, the

term segment is better.

affinity marketing Allowing a commercial business to use the membership list of a not-for-profit

(NFP) organization for a promotional offer which provides some benefit for the NFP organization,

e.g. a charity or a sports club.

after-sales service Provided by a manufacturer or retailer to customer some time after

completing the sale. Likely to be perceived as a cost by transactional but as an investment by

relationship marketers.

ARPU See Average revenue per user.

aspirational brand Usage of such a brand is intended to convey social status or provide a target

for the upwardly mobile.

attitude State of mind reflecting a negative or positive personal view about an object or

concept, measured to provide a link between marketing actions and consumer behaviour. May

be emotional and/or cognitive and is a composite of a number of intermediate metrics. Typical

metrics: rating on `my kind of brand’, intention to purchase. Counterpart of attribute.

attribute, brand/product The characteristics that are important to consumers. For example,

aroma, flavour, caffeine content, and price are the main attributes of instant coffee. Usually limited

to measurable physical (functional and economic) factors, i.e. not psychological or emotional.

See attitude.

audience Group of people, or market segment, to whom marketing communications are

specifically addressed. Also used: target market.

average revenue per user (ARPU) Performance metric used especially by mobile and other

telecom operators.

D. Glossary

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awareness Consciousness either spontaneously or when prompted. An intermediate metric

generally linked to a brand or its advertising. Ad awareness does not imply brand awareness

nor vice versa. Typical metrics are: aided/prompted - the respondent is given a list of brands to

prompt recognition; spontaneous/unaided - the respondent is asked to name one or more brands

in a category. Top-of-mind usually means the first of those named. Illogical as it may seem, total

awareness is the sum of aided and unaided awareness.

baseline Used in estimating the additional sales or profits due to a promotion. Baseline is what

the sales or profits would have been had there been no promotion.

below-the-line Any marketing activity except media advertising. Opposite of above-the-line.

benefit Additive, improvement or other advantage which makes a product more desirable.

brand Can be either: a name, term, symbol or design (or a combination of them) which identifies

one or more products (mostly used in the USA); the identification plus the product itself and its

packaging, i.e. the gestalt (mostly used in the UK). For example, a product is something that is

made, in a factory; a brand is something that is bought, by a customer. A product can be copied by

a competitor; a brand is unique. ‘A product can be quickly outdated; a successful brand is timeless’

(Stephen King). Not the same as brand equity.

brand consistency Correspondence between the brand’s message and associated promotion

and advertising activities and between internal (employee) and external (customer) marketing.

Continuity of the brand’s development over time. Inconsistency is generally held to have an

adverse effect on brand equity and customer loyalty.

brand consolidation Strategy of reducing the number of brands to facilitate management and

communications, e.g. British Caledonian was merged into British Airways following acquisition.

brand equity An important intangible asset for the company, it can be seen as the reservoir of

results gained by good marketing but not yet delivered to the profit and loss account. Awareness,

attitudes, associations, memories and habits, which cause people to choose/recommend the

brand more often and/or in larger quantities and/or at higher prices than would otherwise be the

case. Also trade availability and brand information stored in IT systems. `Customer brand equity’

is the part of total brand equity in the minds of customers as distinct from other stakeholders,

e.g. employee brand equity which is the reputation of their employer in the minds of employees.

Similar to reputation which is often used for corporate brand equity but excludes product

availability. Can also be described as goodwill. The financial value of brand equity cannot (in the

UK) be included on a balance sheet although the cost of acquired brands may be, so long as the

cost is not more than their financial value.

brand equity evaluation Distinguished from brand valuation, this assesses all key aspects of

brand equity financially, non-financially and qualitatively.

brand essence The smallest compression (six words or less) of what is special about the brand.

Derived from `interrogate the brand until it confesses its essence’ (David Ogilvy).

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brand experience What the consumer learns and senses from using or contact with the brand.

Not the same as an experience brand.

brand extension Launch of one or more new products under the same brand name but in a new

category, unlike line extension which is in the same category.

brand identity Individuality of the brand perceived from its product form, name, packaging

and communications. Its unique characteristics. Important for brand consistency and similar to

corporate identity since the company can be seen as a brand.

brand image Perceived impressions of a brand by its audience. A multidimensional concept

that is hard to measure precisely but can be defined by its associations, e.g. Martell cognac is

associated with expensive sporting activities. The various ways of measuring brand image, e.g.

whether it has relatively high status, are intermediate metrics. Closely related to attitude.

brand leader(ship), or market leader Brand with largest share of market.

brand management Sometimes known as product management. A management system

developed in the 1930s by Procter & Gamble, it has grown into a widely accepted method of

managing individual brands in multi-product companies. A brand manager is given responsibility

for a single brand and becomes the champion for that brand and its underlying products.

Responsible for planning, implementation and coordination of marketing activities although the

remit of `marketing’ differs across companies.

brand market unit or combination A market unit defined by one brand in one market (country).

brand perception Same as brand image.

brand personality Brands are often anthropomorphized and this refers to the individual

character of the brand that (uniquely) identifies it. The consumer perception of the brand as

distinct from its underlying products.

brand preference (preferred brand) Usually the brand the customer expects to purchase next

time. Implies that the attitude is relative to other brands in the consideration set. May vary by

occasion for use or price considerations. Same as customer preference.

brand ranking The rank order of brands by market share, i.e. the brand with the largest share is

number one.

brand reformulation Changing the products and/or their qualities that make up the brand.

brand reinforcement Insofar as brand equity is a set of brand memories, this is marketing

activity, typically advertising, designed to strengthen those memories rather than persuade or

change them. Used mainly for mature brands.

brand revitalization Strategic invigoration of a mature brand, e.g. Lucozade. May include

repositioning or relaunch and/or a much larger marketing investment.

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brand value(s)/valuation Brand value is usually the same as brand valuation, i.e. the financial

worth of the brand equity, whereas brand values refers to the principles the brand is perceived

to stand for (derived from personal values). What the brand equity is financially worth depends

on the purpose for which it is being valued, e.g. sale or purchase. Usually the present value of

expected cash flows attributable to the brand equity. Note that the definition of brand is critical

here, i.e. whether the profits attributed to the branding have to be separated from the profits

attributed to the underlying product(s).

brand building Building the brand asset (brand equity) as distinct from harvesting or going for

short-term profit. Image advertising is typically seen as brand building whereas discounting or

price promotions are not.

buyer’s market A market characterized by low or falling prices, occurring when supply is greater

than demand and buyers tend to set the prices and terms of sale. Also known as a `soft market’.

Opposite of seller’s market.

buying cycle The frequency with which a product in a particular category is purchased.

buying power Consumer’s income after commitments have been met, and therefore applicable

to buying in this category. Not the same as buyer’s power, i.e. the buyer’s strength of bargaining

position relative to the seller, e.g. ability to demand discount. See share of wallet.

call centre Central or contracted out facility for dealing with customers, prospects and other

contacts by telephone. May be linked with CRM technology. Can be inbound (customer calls) and/

or outbound (call centre initiated).

cannibalization Sales gained from the company’s other products, i.e. reducing the net increase.

cash cow A brand with no further investment and being harvested.

catchment area The district, territory, etc. from which a shopping centre and/or individual shop

draws its custom. It is also sometimes known as the trade area or hinterland.

category All the brands and products which directly compete, i.e. they are sufficiently alike for

customers to choose one or the other. Sometimes, imprecisely, called `market’ or `sector’ which is

better seen as a collection of related categories.

category management The internal marketing process that uses the category as the

management unit rather than individual brands. Especially used by some multi-brand companies

when selling to retailers to help both parties maximize profit from the category.

cause related marketing Commercial activity in partnership with a charity or other good cause

for mutual benefit, e.g. publicity and funding for the charity and goodwill for the company.

channels Chain through which products move from manufacture or source to end user, i.e. the

distribution system. Companies may use multiple (complementary) channels to market, i.e. a

network, or a single sole distributor. See customer and distribution.

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churn rate Customer retention metric, i.e. percentage of customers lost during the year or other

period. Useful measure of customer satisfaction, or lack of it, and behavioural loyalty.

CLV See customer lifetime value.

co-branding Joint venture marketing under more than one brand name and possibly from

different companies, e.g. Intel and Dell computers, Haagen Dazs and Baileys. See cross-branding.

commercial communications Any method (e.g. advertising, direct mail, other media paid for by

the marketer, and public relations) used to communicate with its commercial audiences. Similar to

marcoms.

Commitment One of the key measures of brand equity, it expresses the probability of consistent

repeat purchase and usage. Typical metrics are purchase intent, switchability (or some similar

measure of retention, loyalty, purchase intent, or bonding) and emotional attachment to the brand.

commodity A basic product which is capable of little or no differentiation and so generally sold on

the basis of price in accordance with the theory of perfect competition, i.e. unbranded. Farm produce,

raw materials and a number of fabricated products such as steel qualify as commodities and call for

the addition of value added services if the supplier is to avoid straight price competition.

comparable sales Same as like for-like sales or same store sales.

competitive advantage A unique, or at least distinctive, benefit or value provided by a product

or company and which is attractive to some or all customers. Alternatively, the advantage may

arise directly from the types of customers served and the relationships with them.

consideration set The small set of brands in any category from which the customer selects.

consumer behaviour The ways in which consumers buy and use products. Typical metrics: purchase

frequency, loyalty/retention, assortment/range of different products purchased from company.

consumer confidence End-user’s trust in and certainty about the product purchased. Brand

equity metric in, for example, a financial services company.

consumer patronage Established consumers purchasing regularly. Same as consumer franchise.

consumer uptake Rate of the adoption by consumers of a new service/product. Also called

consumer take-up.

contribution, net brand contribution (NBC) A measure of brand profitability before overhead

costs but usually after marketing expenditure has been allocated.

conversion rate Measure of translation of enquiries or replies or prospects to an advertising

or mailing shot into customers. Some identify potential prospects as `suspects’ and track the

conversion of suspects to prospects.

core brands/categories The brands and categories seen by the board as essential to the business

and therefore not available for disposal or harvesting.

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core competencies The particular skills and expertise that make a firm successful and, by

inference, distinguish it from competitors. In theory, establishing core competencies, or

competence, is fundamental to a firm selecting the appropriate strategy (`know thyself’). Sceptics

allege that this self-analysis becomes circular or, like visions and missions, woolly.

core values From all the brand or corporate values that apply, these are the most central. Related

to brand essence. See also brand values.

corporate identity The individuality of the company and its unique characteristics. Represented,

albeit in a limited way, by its logo and communications, but also the way it does business

externally and internally. See brand identity.

cost leader Lowest cost marketer (producer or other vendor). Usually implies price leadership, i.e.

the firm also sells at the lowest price. Some advocate becoming the lowest cost producer as the

start of the path to becoming cost leader and thereby market leader.

cost per contact Cost of sales call.

cost per enquiry The amount of money spent on a promotional activity divided by the number

of enquiries received as a direct result.

cost per mille (CPM)/ cost per thousand (CPT) Basic approach to media costs: cost per thousand

audience. CPM is American and CPT is the British equivalent.

coupon A certificate that gives the consumer a price reduction on a specific product.

cover price Normal retail price of magazine or newspaper or magazine.

CPM/CPT See cost per mille.

critical mass The minimum market size, or share, for cost-effective marketing or some element of

the marketing mix.

CRM, eCRM See customer relationship management/marketing.

cross-sales ratio The proportion of sales resulting from the sales of other products from the

same company.

cross-branding Brand promotion by utilizing the strength of another brand. See co-branding.

cross-merchandising, promotion or selling The presentation/selling of two or more distinct but

associated product classes, e.g. cheese with wine, swimwear with sunglasses, suntan products and

beach towels. Sometimes the two items taken together may attract a discount or other benefit.

cross-referrals Introduction of new business by existing customers. Also called cross-selling.

customer acquisition (cost) Marketing schemes designed to recruit new customers are classed

as customer acquisition activity. Typical metric: prospecting costs/number of new customers.

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customer behavioural scoring System examining customer’s relationship with the service

provider (e.g. a bank) to determine his level of risk. More generally, the likelihood of responding to

an appeal.

customer footfall The number of customers visiting one or all retail units.

customer lifetime value (CLV) May also be called customer value or customer equity. CLV is the

net present value of either one or all customers, that is, the discounted value of the cash flow

generated over the life of their relationship with the company.

customer preference Same as brand preference.

customer profitability Current profit contribution from customer. This is projected into the

future and then discounted to give the customer lifetime value (CLV).

customer proposition The main benefit of the product for a potential customer. For example,

Seven-Up’s proposition to its customers is `Drink me up and you’ll feel fresh and clean’. Pedigree

dogfood says to its customers: `Buy me and you’ll have a bouncy, energetic dog’. Often confused

with the positioning statement of which it is part.

customer relations An aspect of relationship marketing, this seeks to build positive customer

attitudes, e.g. through complaint handling, publicity, persuasion and aligning customer and

company goals. Similar concept to public relations but with a different target.

customer relationship management/marketing (CRM) Activity undertaken by companies

to develop and manage relationships with their customers. May be technically (call centre or

IT) or marketing driven, or both. Often linked with database marketing. eCRM is the web-based

equivalent.

customer retention Usually measured as percentage previous period’s customers buying in

current period. Converse of churn.

customer retention cost Keeping existing customers may involve formal customer relationship

management (CRM) or loyalty programmes. Typical metrics: relationship marketing costs/number

of customers retained, churn, loyalty. Retention marketing is widely believed to be less expensive

and more productive than acquisition if examined as the profit from and cost of the incremental

customer.

customer service The services supplied before, with or after the sale of products.

customer value management The marketing approach of seeking to maximize customer

lifetime value by concentrating costs on high value customers and ignoring or culling low value

customers. See customer lifetime value.

customer-facing Staff, or business units, who deal directly with customers, e.g. sales people,

service engineers.

customer-focused Where all the operations of a company are carried out with the customer in

mind; not just marketing activities but also logistics, R&D and finance.

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customization Adapting standard goods and services to suit individual consumers, especially

through the use of information technology. See mass customization.

cycle time The time from concept to launch, i.e. time-to-market, is a performance measure

for new product development. The metric used especially by those who consider first mover

advantage key.

database marketing Customer information, stored in an electronic database, used for targeting

marketing activities. Information can be what is collected from previous customer interactions

and what is available from outside sources. Databases are now regulated, e.g. customer

permissions are required. See also customer relationship management marketing (CRM).

demand management Controlling the requirements for company products in terms of quantity,

quality, price and timing. Hugh Davidson proposed this as a better term for `marketing’.

demographics Analyzing consumers by sex, age, income, social class, family size and where they

live as distinct from psychographics.

derived demand A term from economics. Without direct access to end users, the supplier has to

deduce, or derive, demand from sales to intermediate customers, i.e. channels.

de-stocking Reduction in channels’ inventory(ies) often used as an explanation for reason for

lower sales not reflecting lower demand.

diagnostics Some firms distinguish between metrics, i.e. high-level performance measures or key

performance indicators, seen by top managers, and explanatory measures, i.e. diagnostics, that

account for variances in metrics, e.g. sales by channel. Diagnostics would normally be reviewed by

the managers specializing in that area.

differentiation Extent to which a product/brand is not interchangeable with others in the

same category. Differentiation may be real (some product characteristic) or perceived (image or

perceived quality).

diffusion Process whereby a new product is taken up, or adopted, by a broader user base.

direct mail(ing) Posting promotional material to sales prospects. If carefully targeted and

monitored, it may be highly productive. Not to be confused with direct marketing.

direct marketing Dealing directly with end users and bypassing retail outlets. May include, but

is not limited to, the internet, direct mail, phone selling, mail order and advertising where a direct

response mechanism is included. Direct Marketing Association definition is: `Communications

where data are used systematically to achieve quantifiable marketing objectives and where direct

contact is made, or invited, between its existing or prospective customer.’

direct product profitability Profit contribution before overheads and other indirect costs. Used

in retail and often applied to space occupied by those products.

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discount Reduction on the quoted or list price of a product either to all customers or, more

typically, for specific reasons such as prompt payment, large quantities, bulk deliveries, special

sizes and deliveries in off-peak times. Should be treated as a reduction in revenue, not as

marketing expenditure.

discount brand A rare entity, this is a brand, such as a discount warehouse, where its equity

depends on perceived low price, i.e. good value.

distribution The term has two different meanings: the logistics involved in making the products

available to end users, i.e. the physical supply through channels; availability to the end user. A

typical metric is the percentage of relevant outlets that carry the brand, often weighted by the

turnover of the outlets concerned.

distribution platform A media term for the ways of disseminating information, content via

different media: e.g. TV, web, telephony, interactive TV. Equivalent to channels for disseminating

products.

downmarket Lower priced segment of the market or products purchased in less expensive

areas or by lower income or socio-economic status people. May be called `downscale’ in the USA.

Opposite of upmarket.

dynamic pricing Using different prices for the same product according to the date of sale or location

or other conditions, e.g. theatre seats sold late or standby airline prices. Similar to variable pricing.

economies of scale Reduction in unit cost from overheads being divided over a larger volume.

efficient consumer response (ECR) Co-operation along all stages of the supply chain to improve

responsiveness and eliminate waste. Promoted as a win-win-win for supplier-retailer-consumer on

the basis that it improves service and reduces cost all along the channel. In some people’s opinion

there is some doubt about that. Usually driven by strong retailers, e.g. Sainsbury, Walmart.

elasticity Broadly, the ratio of the relative change in the dependent variable (demand) to the

relative change in an independent variable (price, consumer income). Inelastic sales have elasticity

equal to zero. From economics, this term is not as simple or precise as it sounds. Elasticity differs

not only according to where you are on the demand curve, but also according to the size of the

adjustment. The exception is the demand curve y = axb which has constant point elasticities.

Furthermore, short and long-term elasticity are not usually the same and, especially in the short

term, there may be a `zone of indifference’ where demand does not seem to change. Elasticity is

not necessarily symmetric, i.e. decreases may not reflect increases.

e-marketplace Internet-based enabled marketplace, where e-commerce takes place. Largely

follows general market rules.

endorsement Public support for the brand by one or more [typically famous] alleged users.

end-user Usually the same as the consumer. Should be distinguished from intermediary

customers (channels) and, where significant, from the final purchaser (e.g. the final purchaser of

baby clothes is not usually the end user).

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experience brand An experience brand implies that its equity or perceived quality depends on

usage, i.e. experience, as distinct from inspection or advertising. Also refers to a way of marketing/

advertising to consumers. Not the same as brand experience.

familiarity Similar to awareness but implies some direct or indirect experience of the brand and

not just knowing the name.

features in store Very visibly displayed in a retail environment, a feature is a promotion

without necessarily a price discount. The metric is usually a count of the times the brand was

merchandised specially during the period.

first-price-right-price policy Used to reduce need for later price reductions. See markdown.

flagship Brand, business or outlet for which the business is best known or which best presents its

proposition.

fast moving consumer goods (FMCG) Frequently purchased consumer products, usually known

as packaged goods in the USA, e.g. food brands, beverages, toiletries and tobacco.

four Ps Shorthand term for the classic elements of marketing: product, price, place and

promotion. `Place’ refers to sales and distribution and `promotion’ here includes all forms of

marketing communications. For services, the mix is sometimes extended to seven Ps: people,

process and physical evidence. Also known as the marketing mix.

franchise There are two different meanings: a licence to use someone else’s brand subject to

contractual conditions; existing loyal end users or customers, i.e. consumer patronage.

frequency Used as a measure of media performance. Number of times an advertising message is

delivered within a set period of time to the average target consumer. See reach.

frequency of return visits/purchases Used as a measure of customer satisfaction for retail (visits)

or products (purchases). The weighted average frequency of repeat purchases plus frequency of

first-time purchases equals total purchase frequency, but separating the metrics may yield more

information. See repeat customer and customer retention.

front-of-mind High unaided awareness or salience.

generics Commodity, i.e. unbranded products. Sometimes, albeit incorrectly, used for retailer own

label, private label or own brands.

grey market See parallel trade (unauthorised reselling) but the term is also used to describe the

over 55-year-old demographic group.

gross rating points (GRP) The number of exposures of a broadcast ad multiplied by the size of

each audience. A single GRP represents 1 per cent of the total or target audience in a given region.

The total weight of the campaign.

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harvesting Extracting cash flow from brand equity without rebuilding it. Typically done before a

brand or product is withdrawn from the market. See cash cow.

high value customers The segment of most profitable customers, typically in financial services.

high-end The most expensive items in a category. Also known as ‘high-tier’.

high involvement In relation to brand or product where consumers take time and trouble to

reach a purchasing decision and may shop around, comparing prices or financing arrangements.

High involvement may be due to economic (high price, performance, value) and/or emotional

(self-image, items we care about) factors. Cars, homes, fitted kitchens, hi-fi systems and package-

tour holidays are examples of high-involvement products. Opposite of low involvement.

IMC See integrated marketing communications.

impact Force with which an advertising or promotional message registers in a person’s mind;

may be positive or adverse.

impulse sales Also impulse product, impulse buy(ing), impulse purchase, impulse volumes.

Instantaneous decisions to buy products such as magazines and sweets. Impulse products are

often merchandised beside the checkout.

innovation Usually applies to new product development but may be any form of new market-

changing activity. Usually has three distinct phases: creation, development and implementation

requiring different skills.

integrated marketing communications (IMC) As communications media diversified each with

its own specialists, consumers began to hear different messages from the same brands. IMC was

created to manage communications more consistently from the consumer’s perspective, e.g. a

single creative brief for all media.

interactive marketing Marketing where neither buyer(s) nor seller(s) are passive but both

active and reactive in their dealings, particularly in business-to-business sectors. See relationship

marketing.

intermediate metric Metrics can be grouped into at least four categories: inputs (e.g.

expenditure), intermediate (what the consumer has in her head, e.g. awareness, purchasing

intention), behaviour and other. Thus intermediate, in theory, provides the link between inputs

and behaviour.

leads generated/enquiries Number of new prospects, the first stage in building customer

relationships.

life cycle In marketing, the product or brand life cycle. Analogous to organic life, some believe

that products go through a natural cycle: birth, growth, maturity, decline and death. Whilst there

is substance in the early stages, decline is not certain but usually caused by the arrival of better

substitutes. The brand life cycle theory is less valid as brands can be refreshed by marketing

activities such as new product development.

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life stage Demographic age group [of consumers].

like-for-like sales Sales compared to the previous period sales at the same retail space, not

taking into consideration the newly opened or acquired or closed stores. See organic growth and

same store sales.

likelihood to recommend Percentage of respondents who would suggest or advocate the brand

to their peers.

line extension Additional product within the brand and in the same category, e.g. new flavours of

crisps; not the same as brand extension.

logistics The parts of the business concerned with getting the goods and services to the point of

sale (or front line in its military sense), i.e. purchasing, production and distribution.

logo A symbol and/or group of letters in a particular font or style that identifies a company or brand.

loss-leader Pricing a particular product at a loss in order to `lead’ customers to buy other

products. Subject to fair trade legislation.

low-involvement A product that is purchased without much consideration. Also applies to

advertising that barely engages the mind. The strength of product involvement usually turns on

the user’s interest in the category rather than the brand. Opposite of high-involvement.

loyalty A key concept in customer retention but measured in quite different ways; (snapshot)

the share of category requirements (SCR) held by the brand in a given time period; (longitudinal)

of those who bought in the last period, the percentage who bought again in this one or the

proportion of repeat (versus first-time) purchasers; (attitudinal) either snapshot or longitudinal

but measured as something like purchase intention rather than behaviourally.

loyalty programme Part or all of a marketing campaign designed to retain customers by

rewarding them for continuing business, e.g. by giving air miles.

marcoms Abbreviation for marketing communications; similar to commercial communications.

margin Difference between sales and direct costs, i.e. gross profit, but gross is distinguished

from net (after discounts and rebates). Terminology differs between companies but net margin

is usually struck before marketing costs and net (brand) contribution signifies they have been

deducted. May be expressed as percentage of revenue. Not the same as net income or net profit.

markdown A reduction of an established retail price.

market growth An increase in the total annual market revenue by the attraction of new

customers and increased expenditure by current customers.

market price Arm’s length price between a willing buyer and willing seller based on prices

prevailing in the marketplace.

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market(ing) metric Quantified marketing performance measure regularly reviewed by top

management. Lower level measures that explain variances in metrics are diagnostics. Can be

classified into six categories: (1) `Consumer intermediate’, for example, consumer awareness

and attitudes. The word `intermediate’ is used because these measures lie between inputs (like

advertising spend) and behaviour (such as sales). (2) Consumer behaviour, for example quarterly

penetration. (3) Direct trade customer, for example, distribution availability. (4) Competitive

market measures, for example, market share, measured relative to a competitor or the whole

market. (5) Innovation, for example, share of turnover due to new products. (6) Financial measures,

for example, advertising expenditure or brand valuation.

market(ing)-led Distinguishes the orientation of the firm from e.g. finance or production-

led where top management primarily considers the financial numbers or production issues

respectively. Market(ing)-led organizations empathise with customers and focus primarily on how

[more] customers can be satisfied [more] profitably.

marketing As noted in the preface to this glossary, the many definitions of marketing may be

confusing. Ted Levitt referred to `getting and keeping customers’ but it is more than that. The AMA

version below captures the classic 4Ps and the second set describes the main alternatives. The

third is for those hooked on cash flow. (1) The process of planning and executing the conception,

pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy

individual and organizational objectives (American Marketing Association, 1985). (2) Three main

meanings: (a) A company-wide business philosophy, which gives priority to satisfying customers’

wants and needs as a means to achieving the company’s goals. In this sense, marketing as a

customer-orientated culture can be applicable to non-profit organizations as well as businesses.

(b) What the company’s marketers do, typically developing and launching products, packaging,

branding, pricing, advertising, promotion, and distribution. The CIM definition is close to this:

`Marketing is the management process responsible for identifying, anticipating and satisfying

customer requirements profitably.’ (c) The activities covered by the marketing budget, usually just

advertising and promotion. This is what people typically mean when they talk of the `return’ on

marketing. (3) The sourcing and harvesting of inward cash flow.

marketing investment Marketing expenditure that builds brand equity as distinct from achieving

short-term gains, such as sales discounts, and price promotions, and other expenditures such as

market research. Image advertising is typically seen as an investment.

marketing mix The variety of marketing activities, see four Ps, which has been put together to

form the marketing campaign. For services, the mix is sometimes extended to seven Ps: people,

process and physical evidence.

mark-up pricing The (retail) sales price is calculated by adding a fixed percentage to cost.

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mass customization The provision of customization to the mass market through modern

technology, e.g. allowing the end user to specify the ideal configuration of a car or computer

she wishes to buy. The production system automatically includes that specification in the next

available schedule.

merchandising No longer used in the traditional sense of being a synonym for `marketing’, it

now means product display, usually with added material, at point of purchase and elsewhere, e.g.

on T-shirts. Essentially it means exposing products to the risk of purchase.

multi-brand Where a company is marketing several brands within a single product category, e.g.

Unilever or Procter & Gamble, and their various washing detergents.

NBC See contribution.

new product development (NPD) New product development is the creation or reformulation of

products usually under existing brand names, as distinct from new brand development (NBD). See

innovation. Generally a crucial part of ensuring the longevity of a brand or business. It may include

the launch of the new product.

off-trade Consumption takes place at home or otherwise outside the retail [food/drink sales]

premises.

one-stop shop(ping) Purchasing a variety of goods and/or services from a single location,

originally from a shopping mall or the equivalent. Multi-skilled marketing services companies,

within groups such as WPP, seek to cross-sell the work of other subsidiaries although this is not

strictly `one stop’.

on-time delivery Market metric, measuring percentage of deliveries on schedule, a customer

satisfaction or service quality measure. Whether punctuality is defined by when the customer

expected it or when the firm intended to deliver it can make a big difference to the metrics.

on-trade Consumption takes place on the retail (food/drink sales) premises.

opinion leader Someone who influences the attitudes and especially purchase intent of others,

often by word of mouth or example. May or may not be an early adopter.

organic growth Increase in like-for-like sales and/or profits excluding acquired brands and

businesses; similar to like-for-like sales.

orientation Market orientation is used in contrast with financial or production orientation

where management is focused on the financial [profit] figures or logistics, respectively. Market

orientation can be further divided into competitor or customer or end-user orientation. See

market(ing)-led.

OTC See over-the-counter.

out-of-home (1) In relation to advertising: advertising media viewed outside the household,

which are not available in the home, such as displays on shopping carts, advertising subway.

(2) On-trade or other consumption away from home.

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outsourcing Subcontracting internal, usually non-core, operations.

over-the-counter (OTC) OTC is used primarily in pharmaceuticals to indicate products that can

be sold by a pharmacy, or other retailer, direct to consumers, without a doctor’s prescription. The

category further divides into restricted, where a pharmacist has to be present when the sale is

made, and non-restricted.

parallel trade In addition to the official route through which a brand is exported to the exclusive

distributor in a given territory, the brand is being imported separately and, typically, sold at lower

prices. May be expressed as parallel exports or imports and also known as the grey market.

payment by results (PBR) Form of agency remuneration normally used in conjunction with

fees or commission. Increasingly used for advertising where three types of measures are used:

consumer behaviour (e.g. sales or share); intermediate (e.g. intention to buy); client service. Can be

used for all marketing services suppliers provided the objectives are quantified and agreed.

peer group People or companies who see themselves as having similar status or expertise. So

P2P (peer to peer) marketing is largely word of mouth. See also viral marketing.

penetration percentage of target market that purchased the brand at least once during the period.

penetration pricing Strategy for quickly gaining share on market entry with low prices. Opposite

of skimming.

personalized About products, services solutions. Same as customized. See customization.

pipeline Two different meanings: (1) new product development (NPD) - the number of new

products or re-formulations that have been created but not yet launched. (2) Inventory - goods

stocked in channels, usually measured by the number of days it will take to sell through.

point-of-sale (POS) Usually referring to retail sales outlet and also known as point-of-purchase

(POP). Place at which a sale is completed, e.g. checkout or shop. Now checkouts provide a major

source of customer behaviour data.

positioning Brief description of the unique identification of the brand in the consumer’s mind.

Similar to brand essence.

positioning statement Brief summary of strategy that describes the (unique) customer need that

the brand fulfils. Also defines target end user, competitor, why it is different and better (competitive

advantage) and possibly the pricing strategy.

premium brand Goods and services selling at about 10-80 per cent above the average price.

Products still more highly priced are usually called `super-premium’.

price deflation Price reduction due to economic conditions as distinct from discounting.

price point A price considered critical for consumer purchasing volumes, e.g. $1.99 compared to $2.

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price sensitive A product is said to be `highly price sensitive’ if a small change in price results in a

large change in sales. See elasticity.

procurement Obtaining supplies by various means including purchasing which implies payment.

product The physical goods and/or services intended for sale and to which branding may be applied.

product management Temporarily a successor term to brand management, and still used in the

USA, to signify that the focus was on the fundamental product and its attributes rather than the

branding or emotional aspects. In practice it is functionally similar.

product mix The variety or assortment of products offered for sale: (a) width – the total number

of product lines; (b) length – the average number of brands of each category; (c) depth – the

average number of products under each brand name; (d) consistency – the closeness with which

the products are related.

product placement Persuading the producer to use the brand or product service within

entertainment media programmes or publications, e.g. TV, radio, or film, such as the James Bond

movies.

products per consumer A metric which describes the number of different products the end user

buys from the range.

psychographics Consumer lifestyle, personality and psychological characteristics as distinct from

demographics.

public relations First formalized to persuade US citizens to support their country joining World

War I, Edward Bernays defined it as: `(1) information given to the public, (2) persuasion directed

at the public to modify attitudes and actions, and (3) efforts to integrate attitudes and actions of

an institution with its publics and of publics with that institution.’ Similar concept to customer

relations but with a different target.

pull One of the two main distribution strategies. Pull relies on creating demand directly with the

end user, e.g. through advertising, so that calls are made on the retailer. The opposite of push.

purchase intent(ion) A measure of the buyer’s claimed likelihood of purchasing the brand either

next time or sometime in the future (the difference may be important).

purchasing on promotion Key metric for assessing robustness of pricing, it measures the

percentage of sales linked with special (usually price) promotion.

purchasing power Same as buying power.

push One of the two main product distribution strategies. Push implies the sales force loading

the immediate trade customer thereby exerting pressure for onward sales. The opposite of pull.

quality A crucial component of brand equity, actual quality needs to be distinguished from

perceived. Actual is given by objective measure(s) of the product’s performance compared to

some benchmark, e.g. the main competitor, based on a set of physical attributes. Perceived quality

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refers to the consumer’s impression, i.e. it is attitudinal. Metrics are usually relative to the same

benchmark. Perceived quality may be more influential than actual in the short term, but the two

usually converge over time. Perceived quality is widely thought to be a key driver of market share

and profitability.

reach The percentage of the target market who (will) see any ad of a campaign. A companion

measure for frequency. Also used in distribution to indicate coverage.

rebranding Changing the brand name, e.g. Andersen Consulting to Accenture, Jif to Cif, or

Marathon to Snickers.

recall Aided recall measures the percentage of the target market who remember an

advertisement when prompted with a set of ads including the one being tested. Unaided recall is

the same except without the stimuli.

recognition Similar to aided recall but requires prompting with actual object, not just the name.

redemption rate Percentage of distributed coupons, or money-off vouchers or other incentives,

used by customers in exchange or towards a purchase in a promotional activity.

relationship marketing Introduced in the 1990s to put the emphasis on long-term customer

interaction, as distinct from concluding with the sale. Seen as a third perspective of marketing

after economic (also known as four Ps or `transactional’) and competitive (indicated by market

share being the priority metric).

relationship pricing From relationship marketing, it is a pricing system based on long- rather than

short-term considerations.

relative price A key brand equity metric, although in some sectors, e.g. financial services, it can be

hard to measure. The brand’s average selling price relative to competitors, i.e. share of market by

value divided by share of market by volume.

relaunch The reintroduction of an existing brand on to the market after changes have been

made to it, or attempted revivification of a tired brand. Difficult to do successfully but easier if a

new target market or use can be found, e.g. baking soda as a deodorizer.

relevance A brand equity metric that indicates the consumer’s empathy with the brand. `My kind of

brand’ but also a brand that solves the problems I have, e.g. crash helmets are relevant to bike users.

reliability Product attribute if, functionally, it will do the job punctually and not break down.

Perceived reliability, i.e. trustworthiness, is a consumer attitude. Usually correlated with quality, but

not necessarily, e.g. airlines.

repeat customers An important measure for new product launches, it distinguishes first-time

sales from customers returning for more.

repositioning A strategic change for the brand, possibly in the consumer’s perception of the

brand.

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reputation Corporate brand equity. Often used as a term for brand equity, in businesses without

physical distribution, e.g. professional and financial services.

response curve The graphical or mathematical expression of the relationship between an input

and an output variable, e.g. between advertising and sales. The two main forms are diminishing

returns, which is also a special case of the `S-shaped’ curve in which the output is slow to take off,

accelerates and then levels off again in the diminishing returns stage.

rolling launch Introducing a new product market by market. Can reduce risk and cost and

progressively build learning. Against that it will take longer and may expose product to pre-

emptive responses by competitors.

roll-out Two meanings: (1) Progressive expansion of distribution for a (new) brand or product (2)

In direct mail, the largest mailing in a campaign.

route to market Strategy and staging posts for a brand/product launch. Provides a step-by-step

programme for evaluation.

sales mix The variety of products sold to one, a group, or all customers. As the word `mix’ means

`analysis’, it may also be an analysis of the customers to whom the products are sold.

sales on deal Same as purchasing on promotion.

sales promotion Activity to increase short-term sales, typically through a price reduction or

increased quantity, e.g. two products for the price of one. Promotions may use inducements or

rewards of all kinds, e.g. air miles.

salience Prominence, standout. A typical metric is the brand’s familiarity as a percentage of the

average of other brands in the category or consideration set.

same store sales Same as like-for-like sales or comparable sales.

sampling Two meanings: (1) Small quantities of the product given, usually free, to prospective

buyers. Perhaps the oldest and most effective introductory marketing tool. (2) The use of a

statistically representative subset as a proxy for an entire population, for example, in order to

facilitate quantitative market research.

satisfaction The degree to which a person’s expectations of a product, brand or employment

are met by their perception of reality. Used for customers, end users and staff. Some believe that

relative (to competitor) satisfaction is a more reliable indicator of brand equity.

scaleable The ability to increase a small sized market or marketing activity to the full size. May

be the incremental cost of increasing size. If this is small, then the market or activity is highly

scaleable.

seasonality Variation of sales according to the time of the year, e.g. ice cream sells more in

summer.

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sector Collective noun for an associated group of categories, e.g. butter and margarine are part of

the yellow fats category, but both are just part of the food sector.

segment Used loosely to mean any subset of the total customer base or an affinity group.

More precisely, a group of sufficient importance and distinction to justify a separate marketing

campaign, e.g. high value customers. In theory, within segment customers are more like each

other than outsiders. In practice, implementing multiple track marketing campaigns is difficult

and expensive.

segmentation A means for analyzing a total market, typically demographic, geographic,

psychographic or by product usage so that marketing can be more efficiently and/or effectively

targeted at one or more subsets of customers. Each such subset is a segment.

seller’s market A market characterized by a shortage of supply or unexpectedly high demand.

Seller dictates terms. Opposite of buyer’s market.

share a widely used ratio to express sales (share of market or brand share), advertising (share

of voice), consumer usage (e.g. share of throat, used in drinks), retail space (share of shelf ), or

consumer spending (share of wallet). May be either value or volume. It is what the company/brand

achieves as a percentage of the total market (category).

skimming Market entry strategy relying on an initially high price for enthusiasts and then

gradually lowering the price to expand the market. Opposite of penetration pricing.

SKU See stock-keeping unit.

sourcing Identifying and choosing original suppliers - may include the supply itself.

spend per transaction Metric used in retail on-premises business to indicate average bill for

each customer.

stock cover Inventory expressed as number of days’ sales. See stock-turn.

stock-keeping unit (SKU) The atomic product level for which separate store-keeping records are

needed, i.e. the unique package, colour, size, etc. which defines the single unit the consumer could buy.

stock-turn Number of times (usually per annum) that inventory is sold and restocked. This is a

financial calculation, not actual physical clearance. See stock cover.

supply chain management Logistical process designed to get goods from source to end user as

efficiently and effectively as possible. Linked with `value chain management’ which additionally

seeks to build end-user value at each stage. Criticized by some marketers for working in wrong

direction, i.e. it should be `demand chain’ (work back from end user).

synergy Originally just `working together’ but now taken to imply that the total (output, value or

efficiency) will be greater than the sum of the parts. Often used to justify acquisition.

tactical pricing Short-term variations, usually reductions, to stimulate sales and/or discomfort

competitors.

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target market The particular segment of customers for whom the brand and its marketing are

primarily intended. See audience.

target market fit The match between the actual and intended consumer profile (demo/

psychographics).

telemarketing A wider term than telesales, it may also include use of telephone for publicity and

research.

telesales Short for telephone selling, i.e. a selling operation in which potential customers are

contacted by phone, or incoming sales enquiries are handled by phone. Now usually undertaken

by call centres.

test market A small-scale version of the full market used to launch a new product or experiment

with different marketing variables. It may aid the decision whether to roll out the product but also

learn how best to operate in the larger market. The main problems are finding representative test

markets and preventing competitors from also learning the test and responding pre-emptively.

throughput Measurement of volume of product, information, etc. Implication will differ

depending on the industry. Network throughput is the capacity for data transferral. High

throughput screening is simultaneous screening of large numbers of potential drug candidates.

through-the-line Where above-the-line and below-the-line activities are integrated in the

marketing programme. See integrated marketing communications (IMC).

top-of-mind High unprompted awareness as signified by being the first brand to be named.

See salience.

trade-in The return of an object in exchange for a discount against the purchase. Frequently

found in markets for industrial machinery and consumer durables.

trademark The legally owned device that can protect the use of the brand name and

presentation. Not to be confused with the brand itself.

transactions per customer Average purchase frequency, often used in on-premise business.

Number of customers x transactions per customer x spend per transaction = sales revenue.

transfer price The price charged by one business unit to another unit of the same firm. It may be

market price or some adjustment to cost.

transition customers Those that are in the process of adopting a new stage product/service

from their provider (e.g. analogue customers transitioning to digital).

transparent pricing Pricing so that the customer can see the cost components, e.g. ad agency

charges to some clients.

trend How a metric is changing (e.g. year-on-year percentage increase in revenue if that is

consistent with the immediate past). Short and long-term trends need to be distinguished in

assessing metrics.

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umbrella brand Sometimes a corporate brand, e.g. Ford, but always a broadly based brand

under which, in this brand `architecture’ sub-brands, such as Falcon, shelter so that advertising, for

example, can be more efficiently spent.

unique selling proposition (USP) The USP is based on the idea that advertising should

communicate the logical reason to buy which also differentiates the brand from competitors (Rosser

Reeves). As substantive physical differences have diminished, so has the following for this advice.

unit pricing Expressing a retail price (typically on the supermarket shelf ) per each unit of weight

or volume to facilitate price comparison.

uplift Increase in sales over the previous period.

upmarket Higher priced segment of the market or products purchased in more expensive

areas or by higher income or socio-economic status people. May be called `upscale’ in the USA.

Opposite of downmarket.

value added The incremental features of the brand beyond the bare functional necessities to do

the job and which increase customer satisfaction.

value-for-money In principle it is quality divided by price but in practice it may be a synonym for

cheap.

variable pricing Using different prices for the same product according to the date of sale or location

or other conditions, e.g. theatre seats sold late or standby airline prices. Similar to dynamic pricing.

venture market Exploratory market to determine its future strategic importance.

vertical integration Company operating at more than one level in the channels of distribution,

typically as both manufacturer and distributor.

viral marketing Originally word of mouth, the term is now used for electronic communications

between peer consumers (e.g. e-mail). The metaphor arises from plotting the spread of awareness

and usership on a map. The pattern that emerges is similar to that of a virus epidemic. Since the

activity is primarily between consumers, the marketer has limited powers of intervention.

weight ratio The proportion of heavy (frequent or large volume) users to light users. Calculated

as market share divided by penetration x loyalty (share of category requirements).

wholesaler An intermediary linking manufacturers and retailers. The bulk-breaking part of the

channel or distribution chain. Increasingly taking the form of cash and carries.

word of mouth Advocacy or discussion of the brand between users. If a brand has high

involvement these consumer interactions can have a powerful effect on brand equity, whether

positive or negative. See viral marketing.

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E. Financial Glossary

This financial glossary has been provided from Peter Doyle (2000) “Value Based Marketing”

book equity The value of shareholders’ funds as recorded in the published accounts of the

business. It contrasts with the ‘market value’ of equity, which is its actual value as reflected in the

market price of the business.

cost of capital This is the opportunity cost, or expected return, that investors forgo by investing

in the company rather than in other comparable shares.

discounted cash flow (DCF) Future cash flows multiplied by the discount factor to obtain the

present value of the cash flows.

discount Factors Present value of £1 received at a stated future date. It is calculated as 1/(1+r)t

where “r” is the discount rate and “t” is the year.

discount rate Rate used to calculate the present value of future cash flows.

intangible asset Non-material asset such as technical expertise, brand or patent.

market-to-book ratio The market value of the business divided by the book equity value.

net present value The net contribution of a strategy to the wealth of shareholders: present value

of cash flows minus initial investment.

option Option to buy an asset at a specified exercise price on or before a specified date.

perpetuity Investment offering a level stream of cash flow in perpetuity.

present value method The technique for comparing alternative strategies in terms of the

present value of their cash flows discounted by the cost of capital.

price/earnings ratio (P/E) Market price of the share divided by earnings per share.

return on investment (ROI) Generally, book profits as a proportion of net book value.

return on equity (ROE) Generally, equity earnings as a proportion of the book value of equity.

risk premium Expected additional return for making a risky investment rather than a safe one.

tangible asset Physical asset such as plant, machinery and offices.

working capital Net current assets, i.e. current assets less current liabilities.

yield The percentage which earnings per share bears to the share price.

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