Estimated Reading Time: 16 minutes
Many marketing teams struggle to demonstrate their value. Marketing is often judged by executives who have no marketing experience and operate under basic misconceptions concerning the marketing function. Moreover, these biases can affect marketing’s working relationships with other teams. For these reasons it is critical for Marketing to objectively demonstrate its contributions to the business. Creating cool ads and splashy events may be fun, but metrics have a longer-lasting and harder-hitting impact on corporate decision makers.
Heads of marketing need to understand that one of their fundamental responsibilities is to demonstrate to the executive team or the board what these executives are getting for their money. Beware the CFO who perceives marketing essentially as a giant cost center. Truly effective marketing heads use metrics to their advantage by turning the conversation around, demonstrating how additional investments in marketing can grow the top line. These are conversations CFOs can understand, just as they understand the impact of hiring more salespeople or opening a new factory. These conversations must involve numbers, however, because numbers are the language that executives understand. This is why metrics are so important.
In the last chapter we discussed the range of activities that marketing can measure. These measurements are all metrics, but they may not be metrics that a CEO or VP of sales cares about. For example, far too many B2B marketing teams show their CEO monthly Web site traffic stats without exhibiting a discernible connection to revenue generation. Though “marketing” benchmarks are critical to demonstrate the science of the marketing profession, trying to dazzle executives with too much marketing jargon can backfire. Rather than attempting to overwhelm your executives with a impressive aggregations of data, we recommend that you select a few key metrics, or key performance indicators (KPIs), and share them via a dashboard We also recommend that you choose KPIs that are both indicators of marketing’s contribution to the business and data that marketing tracks on behalf of the business.
This chapter will discuss marketing and business metrics that a head of marketing should consider tracking. It will also explain how to use these metrics in dashboards and forecasts to demonstrate marketing’s value to the overall business.
This discussion of metrics is divided into two sections on marketing metrics and business metrics. Marketing metrics measure the effectiveness of marketing efforts on the business. Business metrics are measures of the business collected by Marketing.
Return on marketing investment, or ROMI, is a straightforward metric that directly addresses the question of what marketing is doing to drive the business. Just as return on investment (ROI) is a measure of the profit earned from any investment, ROMI is a measure of the profit earned from marketing investment. ROMI is calculated as:
(Incremental Revenue Attributable to Marketing * Margin – Marketing Investment)
The first variable, Incremental Revenue Attributable to Marketing, is exactly as it sounds. A CMO should take care not to include recurring or guaranteed revenue, since it would come in even if Marketing did nothing. Also, any revenue from opportunities that were not marketing sourced or influenced should not be included.
Multiplying this revenue number by Margin gives you your gross profit. It is important to use gross profit, and not total revenue, because there are other costs involved in generating revenue, such as salespeople, channel margins, and the cost of manufacturing the product. These other costs are known collectively as cost of goods sold, or COGS, and is usually expressed as a percentage. Margin is 100% minus your COGS. You can obtain COGS and Margin from your CFO.
For example, a marketing campaign costing $100,000 that brought in $800,000 for a company with a Margin of 75% would be calculated as follows:
($800,000*.75 – $100,000) = ($600,000 – $100,000) = 500%
The $600,000 represents $800,000 in new revenue less 25% COGS (75% margin).
ROMI needs to be utilized carefully so it does not appear as if Marketing is taking credit for work done by an organization overall. Make sure you can tie a ROMI calculation to a discrete marketing initiative with measurable, incremental revenues, such as a holiday campaign. In general, measuring ROMI for demand generation is more concrete than for other programs.
Some companies prefer to use the customer lifetime value (CLV) instead of gross profit. CLV is the expected revenue a customer will generate during their time as a customer, or “lifetime.” This methodology is well suited for service-oriented businesses that charge an annual subscription, or services that customers typically remain with for a long period of time, such as a credit cards and bank accounts. The formula for calculating ROMI using CLV is:
(Customer Lifetime Value – Marketing Investment)
ROMI is easier to calculate on a per-initiative basis than for the overall marketing spend. That’s because many of the activities paid for in the overall marketing spend are indirect influences on buyer behavior, such as brand advertising. ROMI is obviously a good way to compare one program to another, and measuring ROMI for each program is a good marketing discipline. It may also prove useful to compare year-over-year improvements in ROMI for the marketing function as a whole to indicate its overall effectiveness.
As covered in previous chapters, share of voice (SoV) is a term used both in public relations and in advertising. It refers to the exposure of your company or product (your share) compared to that of your competitors. In PR, it is the number of stories written or aired about your company or product. These stories can appear in newspapers, trade publications, television, radio, and, increasingly, blogs and other online media. The idea is that you want your voice to stand out among all the other voices flogging products or ideas.
SoV can be measured by your PR or advertising agency for articles and ads, respectively. There are also a number of services that you can subscribe to that will track and measure SoV. The metric is typically illustrated as a pie chart that compares your SoV against your top competitors. Some services also measure cost per thousand (CPM) people reached. You can utilize this metric to evaluate the efficacy of your PR efforts. Figure 1 below is a SoV report for Symantec versus its top three competitors in the data loss prevention market, pulled by our PR team during my tenure there. Based on our majority share, we kept the PR activities steady and worked on beefing up other areas of our marketing mix.
Marketing-sourced and Marketing-influenced Pipeline
Marketing-sourced pipeline measures the percentage of leads in the pipeline that were uniquely created by marketing. Specifically, these are MQLs that turn into SQLs. The average runs from 10%-50% percent, and it depends greatly on company size and industry. Newer, smaller companies with no reputation or large installed base of customers will rely more heavily on Marketing for demand generation. By way of contrast, established companies with sales representatives dedicated to a discrete list of accounts will shoulder more of the new business generation load. Marketing-sourced pipeline is one of the most direct measures of marketing impact, so every head of marketing should track it closely.
In contrast, marketing-influenced pipeline is the percentage of leads touched at least once by marketing during a set period of time; for example, a prospect sourced by a salesperson attends a seminar that furthers the sales process. The average for marketing-influenced pipeline ranges from 25% to more than 75%. An important word of advice: Never show marketing-influenced pipeline without also showing marketing-sourced pipeline. The reason? Marketing-influenced pipeline is a softer metric because it can’t prove the lead was actually sourced by marketing. Consequently, it can call into question marketing’s overall efficacy. Its lack of precision and provability may also turn off some of the more analytical members of the executive staff. The idea is to use marketing-sourced pipeline to demonstrate marketing’s direct contribution and marketing-influenced pipeline to illustrate how marketing is moving deals along. Ideally, a marketing team can indicate some impact on marketing-influenced pipeline, such as shorter time to close, velocity, covered in the previous chapter.
Marketing-sourced and Marketing-influenced Revenue
Taking things a step further, marketing-sourced revenue measures the percentage of closed deals in the pipeline that were uniquely created by marketing. Marketing-influenced revenue, in contrast, is the percentage of closed deals that were touched at least once by marketing. Many marketers prefer to show sourced and influenced pipeline metrics over the equivalent revenue metrics, because they provide direct evidence of marketing’s contribution without the X factor of sales execution. Creating a “closed-loop” reporting on revenue presents a major challenge because there are factors beyond the control of the marketing organization, like proper input and labeling in the CRM system and the inability to track a sales all the way through the channel.
Investment to Revenue
Finally, investment to revenue calculates how many dollars of revenue are generated by every dollar invested in demand generation. Investment to revenue can be more effective than ROMI in executive settings because it presents the return in dollar terms rather than percentages. Like many things in marketing, presentation matters. The industry average ranges from $5-$20 in revenue for every $1 invested in demand creation.
In addition to data on marketing effectiveness, there are other metrics that marketing ideally should track and report for the business. We will call these metrics “business metrics” as opposed to marketing metrics, for lack of a more formal term. We begin with a fundamental — and rather obvious — metric, namely, market share.
As the name suggests, market share is the percentage of an industry or market’s total sales that a particular company earns over a specified time period. Although market share is not exclusively a measurement of the marketing organizations overall effectiveness, it does reflect the how well a company is executing against the Four P’s of marketing. It is also a great tool for sparking executive-level discussions and — in some cases —for increasing your marketing budget if, say, your company is falling behind or sees an opportunity to take share from a competitor.
Large companies in established markets can usually turn to an industry analyst for market share numbers. These data usually come out annually. In smaller industries, marketing can create market share estimates by piecing together the competition’s estimated revenue or customer count. Marketers can obtain a great deal of relevant information by examining SEC filings, by polling salespeople who may have recently come over from a competitor, and by talking to partners and consultants who sell or recommend products. A more detailed discussion of market share calculation can be found in Chapter 3.
Look-to-Book and Other Industry Specific Metrics
A look-to-book ratio is the number of people who visit a travel website compared with the number who actually make a purchase. This is really a conversion rate that is phrased specifically for the travel industry. Look-to-book is a valuable metric because it ties so closely to the business. For similar reasons, effective marketers in any business should utilize any industry-specific metrics in their reporting that are available to them.
Customer Satisfaction and Net Promoter Score
Chapter 7 covered customer satisfaction and net promoter score (NPS). Because these metrics are so important to the marketing plan, the question arises: Should marketing own the tracking and reporting these data? There are other functions in an organization, like customer service, that may be directly tied to these metrics, and perhaps compensated on them. These observations notwithstanding, these data are an overall indicator of the company’s strength, and someone needs to own them across the company.
Given the chance, a head of marketing should jump at the opportunity to track and report on customer satisfaction, for a couple of reasons. First, it is great indicator that Marketing is tied directly to the business. Second, satisfied customers are the most powerful advocates a company or brand can have. It is in Marketing’s interest, therefore, to have as many net promoters in the market as possible. Including these metrics in a dashboard makes sense as a measurement of both the customer’s pulse and the likelihood of referrals, renewals, or repeat purchases. Figure 2 shows NPS reporting for a company overall and individually for its four business units: BU A, BU B, BU C and BU C. The results for the current quarter are in gold, and the previous quarter in blue. BU B has a good overall NPS and is improving. BU D does not look so good.
Share of Wallet
Share of wallet is the measurement of a customer’s spend within a category that is captured by a given product, brand, or company. Increasing the share of a customer’s wallet a company receives can be a more economical strategy for boosting revenue than increasing market share by selling to new customers. Share of wallet is also more insightful than customer satisfaction or net promoter score because it reflects actual customer purchases. Remember, customers can be very satisfied with a company’s product but ultimately select their competitors’ products instead. Companies can utilize share of wallet percentage to assess their competitive position; that is, the relative importance of their product or company within their industry. Based on these assessments, they might undertake initiatives to capture a larger share.
Although share of wallet data are extremely valuable, accurate data may be hard to come by. The best method for calculating share of wallet is to survey your customers directly. Unfortunately, not all customers will share this information. In these cases, companies can utilize the services of analysts who provide annual spending information for industry segments. These numbers may not be perfect but companies can estimate customer spending on their products against them.
A recent study in Harvard Business Review identified another, simpler method for calculating share of wallet.  The study discovered that the rank customers assign to a brand, product, or company relative to competitors in the category strongly correlates to that brand, product or company’s share of wallet. Known as the wallet allocation rule, this method enables a company to predict its share of wallet based on customer rankings.
Shown in Figure 3 below, calculating share of wallet using the wallet allocation rule can be done in three steps. First, determine how many companies/brands are competing for share of wallet. The example below shows three brands: Acme, Summit and Pinnacle. Highly fragmented markets will likely have more than three. Next, survey customers, or obtain satisfaction surveys from third parties, and convert the scores into a rank. Collecting this information might be difficult, and may warrant hiring an outside firm to conduct the survey. However, asking a customer to rank a vendor is more palatable to them than asking how much money they are spending with each. The example below shows rankings of three customers: Tom, Dick and Harry. Once the rankings are collected, use the wallet allocation rule formula, which will result in a percentage. This is the percent share of wallet for customer. Finally, simply average each customer’s share of wallet for an overall share for each company/brand. As can be seen, Acme has 17%, Summit has 44% and Pinnacle has 39%.
Product Portfolio Owned
Most companies sell more than one product. However, rarely do customers buy all of a company’s products at the same time, if ever. The average number of products that a customer or customer segment owns is valuable information.
The opportunity to sell additional products to existing customers is significant to any business. When a company already has a relationship with the customer – assuming the customer is satisfied – then opportunities, whether in the form of meetings or direct marketing, exist to sell more. Recall that selling additional products is a cost-effective strategy for increasing share of wallet.
Salespeople often use the term white space to describe the opportunity to increase sales within the installed based. Marketers refer to a product’s attach rate, which is the number of complementary products the company sells for each primary product. Marketing teams use white space and the attach rate as inputs to what is known as installed base marketing. They frequently design promotions to sell additional products, either by allowing sales reps to cross-sell or by allowing customers to upgrade to more advanced or feature-rich products. The latter strategy is known as an upsell. Some business even set annual goals for the average number of products they want their customers to own.
Using Marketing Benchmarks
How would your CEO answer this question: So, how is your marketing team doing? What would he or she use as the basis for answering the question? Will the answer be subjective, based on certain assumptions concerning what marketing is supposed to do? Or, even worse, will it be based an unfair comparison to a company with a huge advertising budget that the CEO sees in the Wall Street Journal? Hopefully, at the very least, the CEO’s opinion will be informed by the pipeline contributions that you have been showing him. The best way to answer that question, however, would be to evaluate marketing’s contributions to the business and to the industry overall.
Fortunately for marketers, benchmarks are available for all kinds of marketing metrics. Demonstrating that your averages for pipeline contribution, revenue contribution, and investment to revenue are higher than the industry average will give the CEO confidence in the output of the marketing team. Combined with a good market share and market share growth, as well as a positive SoV, these numbers will make him or her smile. Good sources of marketing benchmarks are Marketing Sherpa and Sirius Decisions.
Communicating the effectiveness of marketing programs, whether to your CEO or to the rest of the organization, is a critical skill that any head of marketing needs. Dashboards simplify the task by visually displaying what marketing is doing and how well they are doing it. In addition, the marketing department can use dashboards to facilitate communication across different marketing teams.
A well-designed marketing dashboard starts with an agreement on the key functions of marketing within the organization. Does marketing drive innovation? Customer retention? Brand awareness? Demand? A combination of the above? Sometimes arriving at the answer is an interesting exercise in itself, part cross-functional education on what marketing does, part discussion on what the business requires from marketing. Both activities are positive outcomes in and of themselves, even before the dashboard is created.
After the company achieves a consensus regarding marketing priorities, the next step is to identify KPIs that measure these priorities. A effective dashboard displays these KPIs in a format that is easy to understand. Figure 4 presents a sample dashboard for an organization that sells to other businesses. It combines both marketing and business metrics.
This dashboard has several important design characteristics. First, it includes only seven KPIs. These are the metrics that the company has decided are most important for assessing both marketing’s performance and the overall state of the business. Second, the KPIs are clearly categorized by marketing program: awareness (reputation), demand generation (demand), and share and satisfaction (market intelligence). Finally, to reduce clutter the dashboard employs graphs only where necessary to indicate relative share.
An executive team could use this dashboard as the basis for a productive discussion. Both PR share of voice and website visits — a metric this company values because their customers research their purchases online — seem healthy and are trending upward from the previous month. Demand generation also seems healthy, with the chief marketing officer targeting more opportunities actually he or she actually needs to hit the revenue target. Going further, the positive NPS score suggests that the company’s customers are satisfied. Despite these positive indicators, however, market share and share of wallet are decreasing. What can account for this discrepancy? Perhaps it is a delay in production. Or, a competitor could be undercutting their price or selling via more distributors. Another possible explanation is that the revenue plan was set too low, enabling competitors to outpace (take more market share) the company’s sales teams. Overall, however, Figure 4 reflects well on marketing’s performance, and it provides information to help the executive team diagnose marketing- and sales-related problems.
Notice that Figure 4 does not itself contain all of the underlying data, nor does it display the historical data. These numbers can be provided as needed. Also, share of voice and website visits are marketing metrics, but the table presents them in the context of the business, in a sequence that maps to a typical prospective customer journey (starting with awareness, moving through demand to measuring the satisfaction of customers). Finally, investment to revenue is included to inform the other executives that marketing is performing efficiently and is generating business rather than simply spending money.
There is a reason why the sales department often has the most prominent role at executive staff and board meetings. The most important topic, regardless of the company’s size, is the sales forecast. However exciting the new brand strategy, Web site, or advertising campaign, sales are a company’s lifeline.
Forecasts matter, and accurate forecasting is what executives look for. Sales leaders live and die by the accuracy of their forecasts. Sales leaders are, however, limited in their ability to predict beyond the current quarter. This presents an opportunity for a CMO to step in and present a longer range forecast. A marketing forecast is a multi-quarter prediction of opportunities marketing expects to add to the pipeline. In contrast, a sales forecast is prediction of opportunities that will close in the current quarter (And don’t confuse marketing forecast with market forecast, which is a long term prediction of the growth of a market, usually done by a third party analyst.) .
Table 1 presents an example of a marketing forecast. This format shows forecasted opportunities for the current month (Cur) and the next three months, shown as +1, +2 and +3. The table also shows the previous four months (-1, -2, -3 and -4) for comparison purposes. The forecast tracks the following:
Commit – Shown in the top row, the number of opportunities a CMO feels certain he or she can achieve.
Target – Shown in the second row, a higher total than the commit that he or she will drive the marketing team toward. The target is also a hedge: If the marketing team misses the target, they should still hit the commit
Forecast – The CMO’s best estimate, based on current information, about the number of opportunities in the current and next three quarters. The forecast will float either higher or lower than the target and the commit. A CMO would, for example shift resources if the forecast in any of the next three quarters slips below the commit.
Actual – The actual results allow for evaluation of performance. For example, in the previous month (-1) this CMO’s team generated 86 opportunities against a commit of 82. Actuals are not shown for the next three months, as they are not yet known.
Table 1 projects forward using the same calculations the CMO used to calculate how many leads he or she needed: the average MQL to SAL and SAL to SQL conversion rates. (You might want to review the discussion of leads in Chapter 12.) In the current month, the CMO beat the commit of 85 and hit the target of 91. For the next month, shown as +1 across the top, the CMO has a commit of 88, a target of 94, and is forecasting 90. This format can be extended to show revenue in the pipeline by multiplying the opportunities by the average selling price or deal size.
In sum, then, better forecasting by marketing will help any business, regardless of the industry in which it operates. It will also help the marketing department to better justify its budget, particularly when marketing requests additional funding in mid-year to help drive the business. Going further, other departments will have more respect for marketing if it provides long-range forecasts. By framing marketing in terms of outputs – i.e., revenue – rather than inputs – i.e., the marketing budget – marketing can position itself as a revenue center, and not a cost center to be cut.
- Marketing by the Dashboard Light, Patrick LaPointe, 2005
- Marketing Metrics: 50+ Metrics Every Executive Should Master, Paul W. Farris, Neil T. Bendle, Phillip E. Pfeifer, David J. Reibstein, Wharton School Publishing, 2007
- MarketingNPV Journal (www.marketingnpv.com)
 There are many ways to calculate CLV, and the math can get a bit hairy, so I will spare you the details. Basically, CLV is and average expected revenue for the first year, minus some attrition for the second year and beyond, plus any increase in purchase behavior for the average remaining customer. You can segment customers based on their CLV as well, say by grouping big spenders and average Joes. Building a CLV model with your CFO and VP Sales is a good idea.
 “Customer Loyalty Isn’t Enough,” Keningham, Aksoy, Buoye, Cooil; Harvard Business Review, October 2011