Marketing Elasticity
Marketing Sources of Volume
Profit Margin
Marketing ROI/Payback
Customer Lifetime Value
Effectiveness
Cost & Efficiency Metrics
Reach, Frequency &Awareness
 

Marketing Elasticity: Elasticity is the ratio of the percentage change in response to a 1 percent change in stimulus. The response is typically demand for a product or a service and the stimulus can be any one of the factors that impact demand, starting with Price to Distribution or Advertising.

Marketing Elasticity=%∆Demand/%∆Marketing

Elasticity enables Marketers to optimize Marketing's impact on sales by identifying Marketing levers that drive the greatest impact.

Marketing Sources of Volume: Marketing Sources of Volume  or  "SOV" (a.k.a. Marketing Contribution) is a measure of what proportion of demand or volume is driven by each Marketing lever.

Marketing SOV or Contribution=[Sales or Volume Driven By Marketing]/[Total Sales or Volume]

Similar to marketing elasticity, this metric also helps determine the relative importance of each Marketing lever to demand or sales.

Comparing Marketing Sources of Volume year over year provides another metric- Marketing Sources of Volume Change or "SOVC" (a.k.a "Marketing Due-To").

Marketing SOVC or Due-To=[Year 2 SOV-Year 1 SOV]/[Year 1 SOV]

Marketing SOV and SOVC can be measured at the Total Marketing level and for individual levers (Advertising, Promotions etc).

Profit Margin: Profit Margins are not directly a Marketing metric, they are a Corporate Financial metric that are an input to several Marketing metrics. Marketing enhances Shareholder value by enabling corporations to sell more than what they normally would without Marketing- this is measured by Marketing Contribution. Combining  Marketing Contribution with Profit Margin provides the Profit impact of Marketing.

Profit Margin=[Revenues - Total Variable Costs-Total Fixed Costs]/[Revenues]

Marketing ROI/Payback: Marketing Contribution alone is not a holistic measure of Marketing Performance as it looks only at the incremental sales driven by Marketing, not at the cost at which these incremental sales are obtained. Marketing ROI (a.k.a ROMI or Return on Marketing Investment) or Payback combines Marketing Contribution with Profit Margin and compares it to the amount spent on Marketing to yield a more complete picture of how Marketing drives profitable growth.

ROI=(Marketing Volume*Profit Margin)/(Marketing Spend)

Similar to Contribution, this measure can be evaluated both at the Total Marketing level and for individual marketing levers.

Customer Lifetime Value: Customer Lifetime Value (CLV or CLTV) is a metric that attempts to develop a longer term perspective of profitability of Marketing actions. It is generally defined as the Net Present Value (NPV) of all Future profits attributable to a customer (individual customer or customer segment or even retail channel). Profits are of course net of marketing costs. Below is a formulation based on Gupta et al (2006)¹.

CLV=[Profits Generated By a Customer  at each time-period over their Life-time relationship with the Firm Present Valued to the current time]- [Marketing Costs of Acquiring the Customer]

Present Values are calculated by dividing each cash-flow by one plus the discount rate exponentiated to the number of time-periods to the present time. The discount rate is usually the cost of capital of the firm.

In today's day and age, marketing activity is highly customizable to target to specific segments and individuals and this metric enables focusing Marketing  spend on only those customers that are likely to be the most profitable. Conceptually, probably one of the most holistic measures of Marketing performance, but not as easy to operationalize for all industries, especially ones where detailed customer level marketing and revenue information is not available. The availability of CRM databases makes it easier to implement this metric.

 
Effectiveness: Effectiveness is a measure of how well a unit of Marketing exposure drives incrmental sales. For example advertising is measured in Gross Ratings Points (GRP), so Advertising Effectiveness is measured as Volume Sales Per GRP. This measure cannot be compared across different Marketing levers as they are all measured on different unit scales.

Cost & Efficiency Metrics: Marketing cost for a lever is the total amount of dollars spent on that lever. It can be measured in aggregate or for a unit of Marketing. For Traditional Advertising (TV, Radio, Print) this can be expressed as Cost per GRP or Cost Per Point (CPP). For Online advertising there are additional metrics like Cost Per Click (CPC), Cost Per Impression (CPI).

Efficiency on the other hand measures how costly a Marketing lever is and is usually defined as the cost of a Marketing lever to drive a dollar of Sales.

Reach, Frequency & Awareness: Reach is the ability of a Marketing lever to disseminate marketing communication to the target consumer audience. This is more specifically a metric that is related to Mass Media Advertising. The success of Mass Media is dependent on it's ability to deliver Marketing Communication- the more of the Target market that is "reached" by the lever, the more successful the lever. This is usually measured in terms of "Percent of Target Market". For instance if the target market is young adults and the advertising was estimated to have reached 60% of this Target, the Reach is 60%.

Frequency on the other hand is the number of times the Marketing communication reached the Target audience.

Gross Rating Point (GRP), the metric used to quantify advertising is typically defined as Reach times Frequency- so if 60% of the Target was reached 2 times, GRP equals 120.

Awareness is more specifically Branding measure and attempts to quantify how well are consumers aware of the firm's brands. This metric is usually tracked on a regular basis for the firm's brands along with competitive brands to provided a relative measure that can indicate how well Marketing is helping drive differentiation for the firm's products or services, which ultimately enables them to enhance their margin premium.

1 Journal of Service Research, Volume 9, No. 2, November 2006 139-155

 © Copyright 2010 Joy V Joseph. All Rights Reserved.