According to a recent survey by the CMO Council (Marketing Outlook 2007, CMO Council, www

Three Rules for Marketing Measurement

by David M. Raab

Curtis Marketwise FIRST

March, 2007

According to a recent survey by the CMO Council (Marketing Outlook 2007, CMO Council, www.cmocouncil.org), marketers’ number one challenge for 2007 is to measure the value of marketing investments. This makes perfect sense: marketing is widely viewed as the last undermanaged area in most organizations, and therefore the best opportunity for improvements in return on investment. Another pair of surveys underscores the urgency of the problem, showing that just 23% of marketers and only 7% of financial executives are satisfied with their company’s ability to measure marketing ROI (Financial Executives International 2006 Survey and 2006 Association of National Advertisers Accountability Study, both sponsored by Marketing Management Analytics, www.mma.com.)

But while the problem is clear, the solution is not. How can marketers convince themselves and others that they really do know what their investments are worth?

The first step is to recognize that perfection is not attainable. Your bank may be able to measure to the penny the savings from a new check scanner or ATM. But marketing investments are inherently uncertain. They depend on future behavior of customers, which can be affected by many things, not all of which are known or predictable. So marketing measures must be held to different, though still rigorous, standard.

This standard encompasses three rules:

1. marketing measures must be accurate. This isn’t the same as perfect. But the measure does have to capture the approximate impact of a marketing investment on business value. That means it has to measure the long-term results of the investment, not just its immediate effect. This extends in two dimensions: across all customers (and prospects), and over time. For example, a high promotional savings rate may attract many new customers—a good immediate impact. But if it also draws funds from more profitable existing deposits, that’s not so good. And if both the new and existing customers leave when rates drop, the over-all effect is likely to be negative.

2. marketing measures must be relevant. This means they have to provide financial, not merely operational or functional, information. The number of customers added by a new campaign is interesting, but the value of those customers is what’s important. Of course, relevance is in the eye of the beholder. Since our target audience is senior management—the CEO, CFO, and others outside of marketing who control company resources—their eyes are the ones that count. Those eyes are focused on financial measures because those are the only measures that can meaningfully compare investments in different parts of the organization. So even though marketers may look at a wide range of internal metrics to judge departmental operations and results, these must be translated into conventional financial values when presenting to outsiders.

3. marketing measures must be credible. Obviously the measures must be believed to be of use. The challenge lies in reconciling this rule with the other two. Marketing measures start with operational information (number of inquiries received, number of new accounts opened, etc.) because that’s what available. Turning these into financial measures is not simple, and extending those measures to long term business value is frankly quite difficult. The only way to ensure credible results is to work with the CFO and others outside of marketing to develop measurement techniques that everyone agrees are as accurate and relevant as possible given real-world constraints. This implies a loss of control that many marketers will find uncomfortable: instead of being able to choose how they present results, with considerable leeway to use whatever methods suitable to their purpose of the moment, they will have to apply consistent approaches that are approved, and possibly even audited, by outsiders. Of course, managers in other departments have lived with this discipline for years, so marketers will find little sympathy for any complaints.

There is one more rule, although, like the Pirate Code in the movie Pirates of the Caribbean, it’s really more of a guideline. This is that marketing measures must be actionable. That is, the measures should either identify problems to be corrected or opportunities to be used. Many gurus argue that “actionability” is indeed a firm rule: if a measure isn’t actionable, they ask, why bother to look at it? The answer, quite simply, is that you need to know the return on investment for its own sake. Return on investment is what businesses use to decide whether to make similar investments in the future. It matters because the business always has options to deploy those resources elsewhere. ROI is not actionable—it’s neither a problem nor an opportunity–but it’s a very important fact. And that’s reason enough.

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David M. Raab is president of Client X Client (www.clientxclient.com), a consulting and technology firm that helps companies understand and improve their customer relationships. He can be reached at draab@clientxclient.com and publishes a blog at http://customerexperiencematrix.blogspot.com/.