CIM Level 6 Diploma In Professional Marketing

Mastering Metrics

Session 2 – What to Measure

Learning Outcomes

• This session contributes to the following elements of the assessment criteria:– 1.4 - Understand the major areas of marketing metrics.

– 3.1 - Evaluate the different types of marketing metrics (and how they can be applied) to help inform business strategy and measure performance against strategy

– 2.2 - Outline and analyse metrics associated with brand, margins, profits, sales and business results.

– 2.3 - Outline and analyse metrics associated with customers, products, pricing and channels

– 5.3 Demonstrate knowledge of how different types of metrics can impact one another.

– 6.1 Recommend the most appropriate and effective metrics approach for a range of types of organisation and situations.

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What to Measure

• There are a wide range and variety of different things that an organisation could measure, such as:– Brand strength and equity measures– Financial and business value– Customer profitability and value– Product profitability and value– Sales performance– Marketing activity (including the 4Ps)– Campaign performance– Production levels and efficiency– Customer service and satisfaction levels– Sales funnel and buying process analysis– Channel management and maintenance– External market analysis

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Suitability – does it give the information you need?

Feasibility – can it be activated and used ? Can it be communicated?

Acceptability – to marketing areas and shareholders

e.g. Finance Department

Resources – are you able to do it and is it practical?

Actionable – is it something that can be influenced by your actions

e.g. campaign results, or too dependent on external

factors, e.g. economic conditions?

Focused – are you measuring the most important and critical areas

– Critical Success Factors (CSFs) or

Key Performance Indicators (KSFs)

Choosing Metrics – Questions to Ask

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OLD ECONOMY

NEW ECONOMY

Brand capital

Human capital

Working capital

Physical capital

Sales “push” focus Customer “pull” focus

Production focus Customer focus

High Low

(WIP, finished goods) (direct delivery to customers)

The Changing Nature of Assets

Source, Dalton, 2005

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Measuring Brand Health

• Brand equity – how much an organisation’s brand is worth as an entity on its own.– Imagine you assessed the value of Coca-Cola’s bottling plants

and distribution facilities and subtracted that from the total value of the company - the difference would be the brand equity.

• Brand sentiment – how do people feel about the organisation? – The Coca-Cola brand may be financially worth a lot, as might

McDonald’s or Ryanair, but how do people feel about it? This is linked to their reputation.

• Brand awareness – if people are unaware of the existence of the organisation or not talking about it, it is clearly not a strong brand.– This is the usual instinctive response to ‘brand health’ but it is

not the most valuable measure.

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Where Brand Equity Comes From

Brand Equity

Brand name awareness

Perceived brand quality

Brand loyalty

Brand associations

(Dibb, Simkin, 2000)

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• Capital expenditure

• Cash flow

• Earnings

• Costs

• Market growth Financial performance

Sustainability

Shareholders• Number of shareholder resolutions• Results of shareholder satisfaction

surveyCustomers• Satisfaction survey• Customer complaints• Third-party ratings and awardsEmployees• Employee turnover• Employee profiles (ability, gender,

race)• Employee satisfactionSociety• Boycotts, marches, incidents• License to operate • Direct action• Media reportsPartners

• Quantity of partnerships accepted, sanctioned or rejected on basis of stewardship criteria

• Health and safety records of partnersIndicators of reputational value taken adapted from:

eCFO; C. Read et al, p115, Wiley, 2001

Reputational Indicators

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Net Promoter Score

“On a scale of 0-10, how likely is it that you would recommend a friend or colleague to our company?”

0 1 2 3 4 5 6 7 8 9 10

Detractors Neutral Promoters

The Net Promoter Score (NPS) is the percentage of promoters minus the percentage of detractors.It can be a useful guide to how satisfied customers are – but not necessarily how loyal they are.It can also help to know how many fit into each category to give an indication of the depth of feeling.

Source; Reichheld, 2004

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Company Accounts

• A set of company accounts can have a number of different elements to it, such as:– Profit and Loss statement – shows how much the organisation made or

lost during a specified period– Cash Flow statement – illustrates how the organisation received and

spent its money during the period. Sometimes called a ‘Consolidated Funds Statement’

– Balance Sheet – statement of how much the organisation was worth at a specified point in time

– Chairman’s Letter – normally there will be statements from senior members of staff giving their view on performance and the future

– Auditor’s Report – accounts for organisations valued at, or earning over, a certain amount need to be independently audited and this is the ‘certificate’ from the auditor.

• There are strict standards on how the financial elements are calculated and presented, known as FRS (Financial Reporting Standards).

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Balance Sheets

Shows the assets of the organisation (things it owns) minus its liabilities (things it owes), as follows;

Previous Year

Long term assets (e.g. property and long term investments)

Short term assets (e.g. work-in progress, debtors - money owed - and cash in bank)

TOTAL ASSETS

Current liabilities(due in less than 12 months, e.g. money owed, overdrafts)

Long term liabilities(due in more than 12 months, e.g. mortgage, pension liability)

TOTAL LIABILITIES

TOTAL NET WORTH

Current Year

£x £x

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Financial Ratio Analysis

• Ratio analysis is a technique to help in interpreting financial statements - traditional view of a company’s health.

• Useful benchmarking tool, allowing comparison of different size companies and internal divisions.

• The Profit and Loss, Balance Sheet and Cash Flow statements can be studied using ratios.

• Can highlight potential problems before they happen.

• Comparisons and trends are the key, rather than absolute figures.

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Ratio Analysis

There are five key areas where ratio analysis can help:

1. The rate of profitability

2. Liquidity – i.e. cash flow

3. Gearing – the proportion of borrowings to shareholders investments

4. How efficiently assets are utilised

5. The return to shareholders

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Use of Ratio Analysis

Overview

Profitability Liquidity Performance

TrendsMovementsCrises

Competitors External environment

SWOT

MarketMajor differences

ACTION

Management Marketing Finance

Accounting measures

Comparisons

Analysis

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Profitability Measures

• Profit Margin is a ratio of Profit Before Interest and Taxation (PBIT or gross profit) to turnover.

• So, if turnover was £100,000 and costs were £80,000, the profit (PBIT) is £20,000.

• The profit margin would be Profit/Revenue = £20,000/£100,000 = 20%.

• This is not the mark-up. A ‘mark-up’ is how much is added to costs to give the selling price, e.g. price £1, cost 80p, mark-up 20p – or 25% (20p/80p).

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Profitability Definitions

• Gross Profit = Sales - Cost of goods sold. (Note; Gross profit is also called Profit Before Interest

and Taxation, or PBIT) • Operating Profit = Gross Profit - Total

operating expenses • Net Profit = Operating Profit – Tax –

Interest (note; also called Net Income)• Profitability can be assessed from the

Profit and Loss statement of the accounts.

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Profitability & Liquidity Ratios

• Profitability Ratios;– Return on shareholders’ investment - ROI– Return on capital employed - ROCE– Operating profit/sales– Gross profit/sales

• Liquidity Ratios;– Answer the question; Can I pay my debts…

• Now? This is known as 'liquidity'• In the long run? This is its ‘solvency'.

– Liquidity is about cash to pay debts.– Solvency answers whether the long term value of

assets is enough to cover long-term debt.

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Liquidity & Gearing Ratios

Liquidity Acid Test; (current assets – stock) current liabilities

Greater than 1 = good, Less than 1 = can’t pay debts if called in

Gearing ratio:long term debt

Shareholders funds+ long term debt

The more long term debt for a given share value (capitalisation), the greater the risk if economic conditions change.

Gearing can impact on marketing when funding is raised for a major development.

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Financial Activity/Efficiency Ratios

Asset turnover = sales/total assetsThis is the return made on the assets a company has, i.e. how much the assets generate or return.

Debtors collections - Debts to sales, i.e. how long before purchasers pay

Creditors payments - Creditors to sales, i.e. how long before purchases are paid for

(Note; If the Debtor ratio is lower than the Creditor ratio, the company holds on to money longer – it becomes an asset which can be used) Stock turnover – how often the organisation’s stock takes to clear – often measured in days

Note; These measures in themselves may have little meaning – trends and comparisons can provide more useful information.

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Shareholder Return Measures

1. Dividend per share Dividend paidNumber of shares

2. Dividend payout ratio Dividend paidProfit after tax

3. Dividend yield Dividend paid per shareMarket value per share

4. Earnings per share Profit after tax Number of shares

5. Price earnings ratio (P/E) Market value per shareEarnings per share

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Value Based Management

• Business performance has traditionally been measured through accounting ratios – ROCE, ROI, earnings per share and so on.

• However, this is largely historical - they vary between companies depending on different accounting methods.

• Value Based Management emphasises shareholder value – and assumes this is the goal of every business.

• VBM approaches include: – Total Shareholder Return (TSR)- Market Value Added (MVA)- Shareholder Value Added (SVA)- Economic Value Added (EVA)

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Investors are generally most interested in what will generate cash in the future

Investors focus 80% of their decision on

cash beyond 4 years

Today +10 years

Total shareholder return (TSR)TSR = dividends + share price growth

Shareholder Value and TSR

Source; Adapted from Pike and Neale (2000)

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Value Based Management - Criticisms• An emphasis on shareholder value may lead to a

continuous focus on short term financial performance at the expense of longer term strategy.

• Managers need to be aware of the differences between maximising profitability and maximising shareholder value.

• Maximising profitability is short term and is about cutting costs and shedding assets to produce quick improvements to earnings.

• Maximising shareholder value means a focus on identifying growth opportunities and building sustainable competitive advantage

• VBM should not be thought of as financial technique. It is about developing knowledge and skills within the firm.

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Shareholder Value Analysis Framework

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Organisational Measures and NFPs

• Most financial organisational theory focuses on commercial organisations designed to make a profit for their owners (e.g. shareholders, individuals or groups).

• It can appear inappropriate to not-for-profit organisations (NFPs) but this isn’t true.

• NFPs still need to raise finance to deliver their purpose and ensure they balance income and outgoings.

• The difference is in measurement of the primary purpose - a commercial organisation’s primary purpose is profit, hence why success is measured in its ability to do this.

• But a museum or university may view visitors or degrees as the primary measurement method, with balancing the books as a requirement, rather than profit as the primary driver.

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Market size, growth, share, number of competitors Market share, revenue or gross profit as a % of salesCustomer acquisitions / ratesCustomer lifetime valueNumber of new products launched in last 5 years% revenue from new services / productsCompany / brand awareness amongst target groupPerceptions / image of company /brand

Market trends

Return on marketing investment

Innovation

Branding / Corporate Identity

Examples of how we can measureWhat do we want to measure?

Examples of Marketing Activities Measurements

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Example - Potential Online Measurements

Activity

Brand-building•Whether ad seen•Number of times seen•Attitudinal changes•Awareness levels•Feelings towards company

Email•Number opened•Click-throughs•Undelivered•Unsubscribes•Acquisition costs

Direct Marketing•Enquiries•Web site visits•Purchases•Average order values•Acquisition costs

Internet•Visitors•Pages visited•Pages exited from•Entry pages•Successful keywords•Visitor sources•Purchases•Abandoned sales

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The Funnel of Activity

Visitors/Browsers

Enquirers

Leads

SalesCross-Sales Up-Sales

Ex-customers

Customer Lifetime Value

• This is how much customers are worth to an organisation over the period for which they are which a customer.

• So a supermarket could take the value of an average weekly shop and multiply that by the number of weeks / years – that the customer purchases for.

• A family of four may spend £150 per week for 25-30 years until the children leave home.

• Then they may continue to buy at a lower amount for another 20-30 years.

• It is not unusual for this to work out at more than £500,000 over the lifetime of the family.

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Lifetime Value

Year 1 Year 2 Year 3 Year 4

No of custs. 500 375 281 211

Sales Value £40,000 £30,000 £22,480 £16,880

Equiv Value £40,000 £25,500 £19,108 £14,348

Total Sales £40,000 £65,500 £84,608 £98,956

Equiv LTV £80 £131 £169 £198

If a customer purchases 4 times per year, with a profit of £20 per sale, one year’s LTV is £80. Imagine 500 customers, 75% of whom stay with you each year.

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Assume your product costs £100 and you make £20 profit per sale.

If a campaign generates 50 sales and costs you £1,000, your Acquisition Cost (or cost-per-sale) is £20

If the customer buys once per quarter you will make £80 per year from that customer. If they stay with you for 5 years you would make £400 profit.

Is it a successful campaign?

Would you now consider it a successful campaign?

Key LessonIdentify the maximum allowable Acquisition Cost for your product based on the LifeTime Value. This is a more useful measure than overall cost or number of sales/responses. Use it to measure campaign success.

Acquisition Costs

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Accounting for Costs

Absorption costing• Assumes all costs are

derived as outcome of production

• Sum the total costs and divide by the number made– Ensures each unit carries

some profit• Profit per item is dependent

on volume• Also called ‘full costing’

Marginal costing• Considers costs of

producing one extra unit • Marginal/incremental cost

per unit is the variable cost• The profit from each sale

(after deducting the variable cost) is the ‘contribution’

• The contribution covers fixed costs first, then becomes organisation profit

• Also called ‘direct costing’

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Cost Accounting Example

Fixed Costs & Overheads- £50,000Variable costs - £100 per itemSelling price - £200 per item Number of items sold – 1,000Total profit = revenue – costs = £200,000-£150,000 = £50,000

Absorption costing example;Total Relevant Costs; £50,000+(£100x1,000) = £150,000Equivalent cost per item = £150,000/1,000 = £150Therefore, profit per item = £50

Marginal costing example;Equivalent cost per item = £100 (equivalent to variable cost per item)Therefore, contribution per item = £100

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Basic Website KPIs

•There are some basic website KPIs which usually represent the starting point for most analytics journeys, such as:1.Visits

2.Bounce rate

3.Page views & Page/Visit

4.Average time on site

5.Percentage of new visits

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Online Measurement Terms

• CPR – Cost-per-response. – A statement of how much an individual visit or response cost.

Calculated by dividing the cost of the campaign by the number of responses.

– Associated measures include CPS (cost-per-sale) and CPC (cost-per-click) - it is equivalent to the acquisition cost discussed earlier.

• CPM – Cost-per-thousand impressions (M comes from the Latin word for thousand – mille). – A banner advert would be priced by the number of times it would

be displayed to viewers, known as impressions.• CTR – Click through-rate.

– The percentage of viewers who clicked a link from a banner advert or email.

– Technically, it is the percentage of impressions from which there was a click on a link – which may or may not be a person choosing to visit a web site !!

Next Learning Steps........

• There are chapter references from the core textbook plus a pre-recorded webinar covering financial areas and several videos to watch.

• There are also podcasts available for you to listen to.• Then look at the Additional Resources section to deepen

your knowledge. There may be other sources you can use to enhance your knowledge such as those in the General Information section of the course or from CIM's Click and Learn facility.

• When you feel you understand the topics, attempt the Activities. You will know you are ready to move on when you can confidently answer the questions given.

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References List

• Dalton, J. (2005) Reputation Management: A Holistic Business Tool. Presentation by LSPR Worldwide

• Dibb, S., Simkin, L. (2000) Marketing concepts and Strategies. Andover, Cengage.

• Pike, R., Neale, B. (2000) Corporate Finance and Investment: Decisions and Strategies. London, FT/Prentice-Hall

• PriceWaterhouseCoopers Finance Team (2001) eCFO. London, John Wiley & Sons.

• Reichheld, F.F. (2003) The one number you need to grow, Harvard Business Review, Vol. 81, No. 12.

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