Marketing is one of the last “wild frontiers” in American business today where “cowboys” with wild ideas can literally create fortunes out of thin air. Given access to huge corporate budgets, marketing agencies promise to take small investments and bring back huge returns. Through the late 1990s, marketing budgets and the agencies that consumed them spent more and more, promising bigger and bigger market share which would, in theory, generate more cash for the sponsoring corporation. However, just as the “wild west” era of American history came to an end, the dot.com boom signaled the close of the old “marketing frontier” in which marketing experts could get away with promising big results without having any real way to quantify them. Sure, they might point to greater market share and unit profitability to claim success for the marketing campaigns, but how efficiently was that money being spent?
A central problem in business today is that marketing lacks the kind of accountability and metrics common to the rest of the corporation. While manufacturing and service organizations can quantify their costs down to a fraction of a penny and project their return on investments, marketing remains a corporate “dark science,” in which marketing practitioners can generate desirable results, but cannot tell you how they achieved them.
The problem of measuring marketing’s effectiveness and efficiency is profound: unlike other segments of the corporation, in which the language is unequivocally tied to the language of finance, marketing has no common units of measurement. It is not that marketing professionals cannot agree on whether to use yards or meters; they cannot agree on whether they are trying to measure volume, distance, or some other third- or fourth-dimensional characteristic.
Increased Scrutiny of Marketing Projections
As a result, marketing is increasingly being asked to justify its activities and expenditures. With marketing budgets consuming more than 20 percent of some company budgets, it is not unreasonable that marketing projections, and the financial assumptions underlying them, should come under increased scrutiny. Driving this movement from inside corporations are the financial and chief executive officers who must certify the accuracy of their financial statements or risk jail under provisions of Sarbanes-Oxley. As a result, members of the executive suite are requiring increased accuracy and completeness of information regarding marketing campaigns before they begin, with rigorous follow-up to track results against earlier projections. In this new climate, the practice of “guesstimating” marketing outcomes is increasingly under pressure. In essence, managers are no longer being asked: “What did you know?” Today, the question is: “Why didn’t you know?”
The imperative for greater financial accountability of marketing departments co-exists within an environment in which there is little agreement on how to measure marketing’s contributions and outcomes. To date, there is no generally accepted definition of return on marketing investment even within the same firm or among firms known for their marketing prowess. Therefore, it is no surprise that the vast majority of firms are ill prepared to conform to the types of accountability and outcome measures increasingly demanded of the marketing function. Marketing professionals must either develop their own standards against which to measure their efforts or risk having such standards imposed on them from without and thus be reduced to a tactical activity within the firm that is directed by others.
Defining Relevant Metrics for Marketing Accountability
Marketing has a long history of paying attention to measurement and the creation of metrics, especially when it comes to claiming success, but little has been done to standardize the way that marketing defines success. The problem is that most of the metrics used to assess the outcomes of marketing activities are tactical and not directly relevant to the overall financial performance of the firm. Furthermore, while the financial results of many firms depend on marketing, the link between traditional marketing metrics and the financial performance of the firm is seldom explicit. In their 2005 paper, Srivastava and Reibstein note that “…pressure is being placed on marketing [divisions] to justify their expenditures [and] translate them into likely financial outcomes, which is the language used by the rest of the firm.”.
For a very long time, this imprecision has been tolerated as a necessary evil, part of the cost of doing business, and has been excused because marketing is inherently “creative.” Yet, as marketing consumes a larger and larger portion of firms’ budgets, while experiencing diminishing returns from traditional marketing venues such as print and electronic media advertising, the imperative grows to quantify marketing’s direct contribution to the bottom line. Marketing managers would do well to look to the quality movement for a model of how to create and implement standards of accountability.
The Standards Imperative
Many historians trace the origin of quality standards to W. Edwards Deming, a bureaucrat working under General Douglas MacArthur in postwar Japan. By establishing manufacturing standards for Japan’s war-ravaged manufacturers, Deming’s quality movement allowed for improved predictability, which in turn enhanced the corporation’s ability to make long-range plans based on realistic assessments of the market. Just as manufacturing executives must be able to predict how many widgets they will sell in the next quarter, marketing professionals must do the same thing with their “product,” the marketing campaign. For the budget conscious executive, establishing tracking and outcome measurements on marketing can potentially (1) optimize resources in such activities as media planning and design of the marketing mix, (2) improve forecasting, including both forward forecasting and the analysis of various “what if” scenarios, and (3) allow assessment of return on investment that informs the optimal allocation of resources to the firm’s portfolio of products and markets.
One impediment to identifying and adopting standard metrics is the perception that marketing activities simply cannot be measured against others because they are idiosyncratic to the market, product or company. For critics of marketing, it is the existence of these idiosyncrasies that reinforces the call for accountability and the development of metrics against which success can be measured. Since the main goal of any marketing effort is to increase cash flow for the corporation, the current approach of “after-action” reports, which try to tease useful information from historical data, lacks the predictive value of forecasts made in other disciplines.
Standards are so common that they are often taken for granted; yet the setting of standards has never been easy. What is clear is that market imperatives often break down barriers to their acceptance of new, “universal” metrics. Marketing is not unique in this respect. Consider the problems that railroads faced at the end of the nineteenth century when time zones did not exist. Until standardization, each town and city along a rail line had a slightly different concept of what constituted “noon,” thereby making a mess of scheduling. Instead of waiting for the government to act, the rail industry imposed “time zones” on the United States (Pacific, Mountain, Central, Eastern) that were later adopted by the government. Standards are important because they provide economic benefits. In the case of railroads, standardization made the concept of “noon” universal across a giant geographic area, thus enhancing rail safety.
The availability of a generally accepted standard relieves the individual firm of the costs of developing and maintaining its own unique internal standards. Absent a standard, whether broadly available or unique to an individual firm, there is no efficient means for assessing quality. If buyers cannot distinguish a high quality seller from a low quality seller, or an effective and efficient marketer from an ineffective and inefficient marketer, the high quality merchant’s costs cannot exceed those of the low quality jobber, or the high quality seller will not survive. This is called adverse selection or the moral hazard problem in economics. This type of problem currently exists in the areas of “black box” marketing measurement, in which consultancies and marketing organizations offer predictions on marketing activities without explaining how their metrics are linked to the bottom line or how they arrived at their conclusions. Today, it is possible to engage the services of three different “black box” consultant groups, give them all the same data, and receive in return three completely different predictions.
There are, or course, potential solutions to the adverse selection problem other than the development of a standard, but these generally shift costs on to the consumer. Buyers can carefully screen the quality of measures and models, but this requires significant investment in developing internal expertise, the expenditure of time and resources on the review of alternatives, and an organizational infrastructure to support such activities. Standards reduce transaction costs because they eliminate the need for buyers to spend time and money evaluating products and services prior to purchase.
Alternatively, sellers can build long-term reputation or can guarantee a certain level of quality, but this increases the seller’s costs and creates a moral hazard problem if the buyer does not accept the representation of higher quality and the seller cannot recoup its higher costs. Thus, the presence of generally accepted standards resolves these problems by creating opportunities for the realization of economies of scale by the standards provider and by lowering costs to buyer through cost sharing.
Proprietary Measurement Tools
One major impediment to the development of standard metrics results from the competitive pressure of the marketplace. The view of some firms is that they may be able to achieve a competitive advantage through the use of a proprietary measurement tool that is better than metrics available to their competitors. This issue is not unique to marketing and has been played out in a broad array of contexts. Any potential competitive advantage gained from proprietary marketing metrics must not only be weighed against the costs of going it alone, but also against the opportunity costs associated with all of the other ways in which a firm can invest its resources. In such a scenario, executives of a firm that is very good at product development need to consider whether money that could be spent developing metrics would produce greater returns if it were spent instead on developing additional products.
The above discussion lays the foundation for examining the characteristics that useful market metrics and standards should possess. Twelve general characteristics are offered below.
Standards for Marketing Metrics and Accountability
1. Measures of marketing accountability must be inherently financial constructs. No measure or measurement system is complete without a specific link to financial performance. Marketing has a long history of attention to measurement and the creation of metrics, yet most of the metrics used to assess the outcomes of marketing activities are tactical and not directly linked to the firm’s overall financial performance. It is critical that measures of return on marketing investment be firmly grounded in the firm’s business model in order to provide decision makers with information and direction regarding economic and financial outcomes. The availability of these measures should also be consistent with the timing of the firm’s financial reporting and decision-making processes.
There are several reasons for following a return on investment approach. First and most importantly, if marketing is to be a credible contributor to the strategic success of the firm, it must speak the same financial language as the rest of the firm, and it must translate outcomes into economic metrics comprehensible outside the marketing department. Second, economic metrics, or metrics that can be clearly linked to economic outcomes, are the only measures that provide managers with the information necessary for planning, budgeting and prioritization. Even actions with relatively comparable outcomes, such as scheduling media within the same medium, require a common metric that informs allocation decisions.
Most management decisions involve allocation of limited resources among alternative tactical actions that may have non-comparable outcomes. It is impossible to be confident in any decision involving non-comparable alternatives unless its outcome can be translated to a common scale: the decision to invest more in a firm’s website must be weighed against developing and running more television advertising; the cost for exclusive pouring rights at a particular venue for a soft drink manufacturer must be weighed against the alternative of increased advertising in traditional media. In short, any marketing expenditure must be weighed against alternative non-marketing investments and measured against the potential for increasing profitability as a result of marketing in a given quarter versus not making the expenditure at all.
2. Measures of marketing accountability must reflect the standard financial concepts of return, risk, the time value of money, and the cost of capital. Alternative marketing actions cannot be compared without consideration of their financial risk and return. Investments in marketing differ with respect to expectations they create for return, in both monetary and temporal terms. Managers want to know what return they will get for a dollar invested today and when the firm will realize those results. Measures of return on marketing investment should explicitly recognize these differences.
Marketing investments also differ dramatically from other corporate investments in the level of risk executives are willing to accept. Unlike new vehicles or physical plants, there is a good chance in all marketing investments for outright failure, or zero return on investment. Measures of return on marketing investment should provide a means for assessing risk and for adjusting return on investment for differences in the risk associated with marketing actions. In most circumstances, these risks are business risks affecting the variability in a firm’s sales and its ability to sell its product(s).
3. Measures of marketing accountability must inform future decisions by accurately predicting future economic outcomes as well as by providing retrospective evidence of the impact of marketing actions. There is ample evidence that investment in marketing activities produces positive returns for the firm. Frequently, these returns are substantial. Evidence of such successful marketing campaigns tends to be retrospective, however, explaining why a certain marketing operation was successful without explaining how the same approach could inform future decision-making or predict its financial benefit. Measures of marketing accountability should provide a reliable and robust means for forecasting. Such measures should assist in the decision-making process by examining non-comparable marketing actions (such as a decision between advertising and promotion) and assessing their potential contributions to the firm’s profitability.
4. Measures of marketing accountability must recognize both the immediate, short-term effects of marketing actions and longer-term outcomes, as well as acknowledge that short and long-term effects need not be directionally consistent. Marketing actions may have multiple effects, some immediate while others are more gradual and persistent. To be of any use, measures of return on marketing investment should recognize these multiple effects and provide a means for assessing them.
5. Measures of marketing accountability must recognize the difference between total return on investment and marginal return on investment. Knowledge of the total return on marketing investment, while useful, may be less helpful in many circumstances than knowledge of the return on incremental investment. To be effective, marketing decisions often require an understanding of the return on the last dollar spent, especially when marketing efficacy grows over time. An effective metric would be able to track both this increased return at the margin as well as be able to determine when a marketing campaign reaches a point of diminishing returns (each additional dollar spent produces a lower return on investment than the previous dollar).
Many marketing decisions take the form of determining whether an incremental investment in one action produces a superior return relative to an incremental investment in some other action. Measures of marketing accountability should inform such decisions as well as provide feedback identifying the point at which additional investment in a particular action is no longer justified by the expected return.
6. Measures of marketing accountability must recognize that different products and markets produce different rates of return. Products and markets differ with respect to their size, rate of growth, profit margins, and relative positions among competing firms. Measures of marketing accountability should make recognizable these differences and calculate their implications into a financial performance matrix for the purposes of forecasting.
7. Measures of marketing accountability must distinguish between outcomes and effort. Many measures employed in marketing are measures of effort (e.g., number of sales calls, reach and frequency). Still other measures focus on efficiency (e.g., CPM) or productivity (average cost per sale). While such measures are useful and help inform decision-making, they are incomplete when considered alone. Measures of marketing accountability should include indications of outcome(s) and effectiveness as well as efficiency and productivity. Measures of effectiveness and outcome(s) should include a direct or indirect link to financial performance.
8. Measures of marketing accountability must provide information that is meaningful and comparable across products, markets, and firms. Firms operate in a global economy and often manage complex portfolios of products. For this reason, measures of return on marketing investment must be comparable for executives working anywhere the organization does business, across geographic and political boundaries. Only in this way can firms make decisions that maximize return on investment across a firm’s portfolio of products and markets. It is also important that shareholders and other constituents be able to meaningfully compare the marketing performance of the firm in all of the markets in which the firm competes.
9. Measures of marketing accountability must clearly identify the purpose, form, and scope of measurement. Just as there is no single best way to measure a firm’s financial performance, there is no single best metric for return on marketing investment. Financial metrics based on a cash, accrual, or percentage-of-completion method of accounting yield different results from the same numbers, and each is appropriate for particular types of business. As with financial metrics, there is also a role for multiple measures of return on marketing investment. Such measures should be clearly identified in terms of their purpose, form, and scope. Measures may provide indications of immediate or longer-term effects and of the effects of a single marketing action or the combined effects of multiple actions.
Measures may also be of different forms. Some measures, such as market share and incremental sales, provide a direct link to economic performance, while other measures, such as gauging brand equity and customer loyalty, may be more indirect. The functional relationship of indirect and derived measures to financial performance should be defined and validated through appropriate processes. While useful, metrics based on historical data are not substitutes for forward validation.
10. Measures of marketing accountability must be documented in sufficient detail to allow a knowledgeable user to understand their utility and to make comparisons among alternative measures. Third party commercial information providers offer numerous measures and metrics designed to measure marketing actions and their return on marketing investment. Claims of the utility and validity of such measures should be transparent and subject to independent audit. At a minimum, providers of marketing metrics should provide information about how metrics were developed and provide a reasonable basis for comparison of alternative measures with respect to their cost, timeliness, and predictive validity.
11. Measures of marketing accountability must be assessed relative to generally accepted standards of measurement development and validation. There are well-established standards for the conduct of marketing research. Measures of return on marketing investment should reinforce these standards and exhibit characteristics that reflect best practices in measurement development and validation. Providers of such measures should clearly identify the processes by which individual measures are developed and verified.
12. Measures of marketing accountability should be recognized as a necessary investment for assuring sound decision-making, accountability, continuous improvement, and transparency for all stakeholders. Marketing information is a necessary element in the management of the firm, so the costs of marketing should be considered a part of the management and control function rather than simply as marketing expense. The marketing function should not be placed in the position of making trade-offs between expenditures on marketing actions and expenditures on marketing information and controls.
What each of these foregoing characteristics implies is that marketing needs to develop an independent audit process for its activities. In many ways, the systems needed to make marketing more efficient and cost effective are already available. By discussing, evaluating, and making marketing decisions using the language of finance, marketing can develop an audit process to track its activities in the same manner that the firm measures manufacturing inputs and outputs. The system may not be perfect, but it is better than basing decisions on metrics with no link to financial performance.
Summary and Conclusions
Serious attention to marketing accountability is long overdue. Pressures from senior management, boards of directors, and regulatory agencies arising from Sarbanes-Oxley will force marketers to become more accountable to executives and shareholders, or the marketing department will be reduced to the role of executing tactics decided by other functions within the firm. In an era of financial austerity, it behooves marketing professionals to develop defensible measures of marketing’s contributions and the return on investment in their activities. As Gil observed in 2003:
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