Beware the silver metric: marketing performance measurement has to be multidimensional

Marketing

Centre for Marketing Working Paper

Ambler T;Roberts J H

2005

Since the accountability spotlight fell on marketing, researchers have been seeking a single indicator, or “silver metric”, that can summarize marketing performance in much the way that shareholder value is held by some to be the bottom line for public companies. This paper shows why no silver metric can adequately summarise marketing performance and how firms should best come to terms with the small mix of financial and non-financial indicators that are needed. Firms also need to be wary of the dangers of using forecasts of future uncertain rewards in evaluating the performance of past marketing activity. In this paper, marketing is taken to be what the whole firm does to source and harvest cash flow as distinct from what the specialist marketing department (if any) does. Different firms task their marketing departments with different responsibilities toward the firm’s overall marketing. Marketing performance is essentially multi-dimensional. A firm needs at least as many metrics as it has goals of which short-term survival and long-term growth are the most common. And even for a single goal, progress may need to be assessed in multiple ways. Reducing multiple metrics to a single index denies the multidimensional nature of the market with which the firm is dealing. The greater the potential for these objectives to move in different directions, the greater is the danger of this simplification. Some firms brush theory aside and look nevertheless for a popular silver metric such as Return on Investment (ROI), or one of the Discounted Cash Flow (DCF) metrics such as Customer Equity, Net Present Value and Customer Lifetime Value, or the Peppers and Rogers’ Return on Customer. The paper examines each of these in turn. Six objections are made to the use of ROI, generalised to ROX to include variations like Return on Marketing Expenditure. In practice, these measures fail to take account of the longer-term and, as a ratio of profits to costs, fail to track profit maximization. The DCF metric has been confused by different names being given to essentially the same concept, namely the present value of expected future profits. This metric, by whatever name, is a valuable tool in strategy and planning. Alternative scenarios and plans can be compared and their sensitivities tested. Future plans are compared using future cash flows. Using a DCF metric for performance assessment however, uses future cash flows to assess historical performance. What a firm may be able to do tomorrow is an uncertain guide to how well it did yesterday. On the other hand, firms wish to use the same metrics for planning and for performance assessment for the sake of comparison and continuity. And what the firm can achieve in the future is affected by what it has achieved in the past. The argument against the use of a DCF metric in isolation for performance assessment is not as one-sided as the case against ROI but it seems compelling overall. The third silver metric selected for examination is Return on Customer, namely “a firm’s current-period [net] cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period”. This seems attractive as it brings together the short-term change in cash flow with a long-term indicator namely customer equity (DCF of earnings on a customer by customer basis). Looking at the algebra more closely reveals that ROC confounds the accuracy of last year’s forecast of cash flow in the period just ended, with the firm’s performance during the period. Therefore, its use for either purpose, forecast evaluation or performance assessment, is limited. We do not know if a greater ROC than expected is a function of cautious forecasting or superior performance. The pressure for accountability has spawned a variety of proposed silver metrics of which the above are three. If the search for a single indicator is abandoned, marketers have to persuade their colleagues of a better way to assess the firm’s marketing performance. The first step is to make the firm’s long- and short-term goals explicit. Then the business model, which shows the linkages between inputs, including financial expenditure, competitive activities and expected results, should be formalized. Some of these linkages would not be normally described as “marketing” but of the remainder, some are key steps toward the firm’s goals. Measures of these key steps and/or the goals themselves are the metrics that should be used to monitor performance and, for later comparison, should form part of any plans. Separate research indicates that, for a large firm, eight to ten is usually about the right number. A small firm will need fewer. We would expect one of the DCF metrics to be included, not least because, at the end of the day, marketing is the creation of cash flow.

Centre for Marketing

05-709

Centre for Marketing Working Paper

No