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Article Notes 3
Bendle, N. T., & Bagga, C. K. (2016). The metrics that marketers muddle. MIT Sloan Management Review, 57(3), 73-82.
Despite their widely acknowledged importance, some popular marketing metrics are regularly misunderstood and misused. One major reason for marketings diminishing role is the difficulty of meaning its impact: The value marketers generate is often difficult to quantify. The main goals of this article are to understand how these marketing metrics are used and understood and to develop ideas to help marketers unmuddle their metrics. The authors conducted surveys from managers from all functions across the business-to-business and business-to-consumer industries.
5 Best Known Marketing Metrics:
– Market share
– Net Promoter Score (NPS)
– The Value of a Like
– Consumer Lifetime Value (CLV)
– Return on Investment (ROI)
Market Share
Market share is a popular marketing metric. One reason for why manager value market share is that research from the 1970s suggested a link between market share and ROI; however, the linkage may be less clear: the studies have found it is often correlational rather than causal. The survey found that there were two ways managers used market share: as an ultimate objective or as an intermediate measure of success. Increasing market share is not a meaningful ultimate objective for maximizing shareholder value and stakeholder management: If the aim is to maximize the returns to shareholders, increased market share offers no benefits unless it eventually generates profits. In some markets, bigger can be better; however, economies of scale do not automatically apply all markets.
Unmuddling Market Share:
The authors suggest a simple set of rules for the appropriate use of the market share metric:
– Managers should not consider market share as the ultimate objective or as a proxy for absolute size.
– Managers should evaluate it from the competitors and consumers point of view. If an increase in market share is not going to get positive feedback from competitors and consumers, then an increase in market share will not lead to a productive result.
– Managers should analyze whether market share drives profitability in your industry. Companies with superior products tend to have high market share and high profitability because product superiority causes both.
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This means that the two metrics are correlated, BUT it does not necessarily mean that increasing market share will increase profits.
Net Promoter Score (NPS)
This metric is used to measure customer loyalty to a firm. Companies among diverse industries have embraced NPS as a way to monitor their customer service operations while NPS also has been seen as a system that allows managers to use the scores to shape managerial actions.
One of the advantages of NPS is its simplicity: It is easy for managers and employees to understand the goal of having more promoters and fewer detractors. However, there are weaknesses: E.g., in the net promoter literature, a customers worth to Apple has been described as the customers spending, ignoring the costs associated with serving the customer. It is also easy to imagine how to increase the net promoter score (such as making customers happier) while destroying even to-line growth (by slashing prices). Another problem with NPS as a metric is the classification system: The boundaries between scores of 6 and 7 (detractors and passives) and 8 and 9 (passive and promoters) seem somewhat arbitrary and culturally specific.
Unmuddling NPS:
The value of NPS depends on whether a manager sees it as a metric or as a system. The authors suggest that the NPS metric cannot change the marketing performance. However, they advise using this metric as a part of a system employed in evaluating the performance which might lead to a cultural shift within the organization.
The Value of a Like
This metric is used for measuring the social media capital of the company. New approaches are being developed all the time and they have the potential to aid understanding of how social media creates value. It is measured as the difference between the average value of customers endorsing the company and the average value of the customers who are not endorsing the company. The majority of managers link between their social media spending the value of a like. However, it does not mean that the cause of the differences in users value is attributable to a companys social media strategy. And the reason that social media strategy shouldnt be seen as the driver of value difference between fans and nonfans is because customers who are social media fans will differ from nonfans for reasons unrelated to the companys social media strategy.
Unmuddling the Value of a Like:
This difference between two groups of consumers does not suggest an effect of online marketing activity or lack thereof. It should be investigated thoroughly by the managers. If the management is using the revenue to measure customer value, then this marketing metric does not give a good estimate. However, if the company does want to understand the impact of social media marketing, they should use randomized control experiments to derive causal answers.
Consumer Lifetime Value (CLV)
Consumer lifetime value (CLV), which is the present value of cash flows from a customer relationship, can help managers in decision making related to investment in developing customer relationships, as it is used to measure the value of the current customer base. If the management is using the customer value in their decision-making process, then CLV is a useful tool for them.
Unmuddling CLV:
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The authors suggest that CLV calculations should not include the customer acquisition cost and the estimated CLV should be compared to the estimated acquisition cost to derive conclusions. The bigger the difference between the estimated CLV and the estimated acquisition cost, the better the acquisition campaign.
Return on Investment (ROI)
Return on investment is a popular and potentially important metric allowing for the comparison of disparate investments. A critical requirement for calculating ROI is knowing the net profit generated by a specific investment decision. According to the authors, there is confusion within management over the use of ROI. However, as ROI is understood across disciplines, it is a powerful metric to communicate across the organization.
Unmuddling ROI:
The authors advise that if a manager is assessing the financial return on an investment, then ROI is an appropriate metric and can be calculated by dividing the incremental profits by the investments. Agribusiness marketing managers who are passionate about establishing the credibility of the value created through marketing should be thorough in their use of metrics. Most importantly, they should be able to understand the metric, its use and what it represents.
