Good managers know that they can’t manage what they don’t measure. Consequently they develop a set of metrics that describes the key drivers of their revenues and costs, enables them to monitor progress, and adjusts the underlying elements to create improvement. Typically these metrics focus on sales, productivity, material yield, and other costs. Most so-called scorecards, however, do not inform managers about the performance of their marketing efforts.
The Chartered Institute of Marketing defines marketing as “the management process responsible for identifying, anticipating and satisfying customer requirements profitably”. Key tasks of marketing are, first, determining the products and services to offer, second, targeting the customers to be served, and critically, third, establishing how you will attract them to your offering. Obviously these tasks are essential to business health, keeping the cash flowing in.
Equally as critical is managing the expenditure of cash. Sales and marketing expenses can take up to 10 percent of revenues. Not paying attention to the productivity of this spending is an oversight few can afford.
Let’s look at a few examples of marketing-related, customer-focused metrics:
Channel margins: Most companies sell their offerings through multiple distribution channels or customer types. For example, a cabinetmaker may sell direct to builders, through big box retailers, or via kitchen design specialists. Often the cost of servicing these channels differs. You should know the profitability of each channel and allocate your resources accordingly. To do so you must accurately apportion your various costs – selling, marketing, and costs of goods sold – to each channel. The channel margin is its sales less its allocated costs divided by its sales.
Break-even analysis and contribution margin: Your break-even point is the sales revenue or unit volume at which you cover both variable costs, those that change with the number of units produced, and fixed costs, those that remain constant over a range of volume. Profit occurs above the break-even point where your selling price exceeds your variable costs by a margin that is sufficient to cover your fixed costs. This contribution margin is calculated as a unit’s selling price less its variable costs divided by its selling price. Your break-even revenue is your total fixed cost divided by the contribution margin.
Knowledge of your contribution margin is useful for back-of-the-envelope analysis of prospective investments in your marketing effort like the expansion of your sales force. Simply divide the new investment by the contribution margin to yield the additional sales revenue needed to break even on that investment.
Gross margin return on inventory: For many companies the dollars tied up in inventory are often their largest investment. It is therefore critical to assess the return on that investment and determine whether sales of a particular item or group justifies that inventory position. Often called GMROI, this metric is computed by dividing the gross profit margin on product sales for a time period by the inventory at cost averaged over that period. With the resulting percentage for each product or group, you can easily rank its ROI and enable decisions on allocation of inventory dollars.
Product line performance: Pareto’s Law states that 80 percent of results are generated by 20 percent of the causes. Experience shows that companies whose top products drive the vast majority of revenues are the most profitable. These companies understand the principle that unit volume is critical to efficiency and profit. They concentrate on developing products that sell in large quantities and satisfactory unit profits.
Other important insights can be found by drilling down further into sales data using Pareto’s logic. For example, an analysis of your individual customers by sales volume or, better yet, by profitability, will focus you on the vital few that drive your financial performance.
Customer satisfaction and willingness to recommend: The ultimate analytic to use in assessing your marketing effort is customer satisfaction. Business guru Peter Drucker said that the purpose of a business is to create a customer. For many companies retaining that customer is equally as important. Everyone understands that the cost of developing a customer is many times that of keeping an existing one.
Satisfaction is not only a measure of how you have performed but also a leading indicator of the likelihood that your customers will buy from you in the future ie, be loyal to your ‘brand’. A key, especially in small businesses, is to develop evangelists for your offering who can push you past the tipping point. Positive word of mouth creates a powerful advantage over competition and, better yet, is virtually free once you have earned it. Any satisfaction survey should always ask if a customer is willing to recommend you to potential buyers.
A regular survey also shows your work force that you value satisfied buyers and are not paying lip service to the idea of customer focus. That alignment concentrates your employees on the key tasks that make for happy customers.
These five metrics are only a tiny portion of those available for measuring your marketing performance. For others refer to Marketing Metrics from Wharton School Publishing.
Bottom Line: Good managers always avail themselves of the best available information, use it to measure performance against expectations, identify operating strengths, and recognize where improvements are necessary. Those responsibilities are as critical in the offices of a company’s sales and marketing executives as on the plant floor.
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