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Journal of Targeting, Measurement and Analysis for

A summary of thinking on measuring the value of marketing

RECEIVED (IN REVISED FORM): 5 FEBRUARY, 2000 BruceH.Clark Associate Professor, Marketing, Northeastern University, 202 Hayden Hall, Boston MA 02115, USA; Tel: ϩ1 617 373 4783; Fax: ϩ1 617 373 8366; e-mail: [email protected]

Bruce H. Clark ABSTRACT effect of making the marketing spend is an Associate Scholars have been developing and evaluat- a larger portion of the overall company Professor of ing schemes for measuring the performance budget, drawing the attention of Marketing at of marketing activities for the past half- company accountants.1 Simultaneously, Northeastern century. This paper traces the evolution of investors have been demanding more University. A former software research in marketing performance measure- information regarding the marketing 2,3 and direct ment. It discusses the movement from finan- activities of companies. Finally, the marketing cial measurement to non-financial measures, growth of multidimensional perfor- executive, he and examines the marketing asset and mance measurement schemes such as writes and teaches customer-focused approaches to performance the Balanced Scorecard and associated about competitive measurement. Managers desiring a com- strategy maps have led both researchers prehensive picture of marketing performance and practitioners to consider what and marketing should draw on a number of these perspec- marketing performance measures, if performance tives. All measures should be evaluated in any, belong in the mix.4,5 The result of measurement. the context of the organisation’s strategy and all these concerns has led to calls for customer and competitor benchmarks. improved research in both the USA and the UK.6–8 The urgency of current needs some- Understanding the value of marketing times obscures the fact that there to the success of the firm has never is a long history of research on been more important. Firms have been how to measure the performance of demanding more accountability of marketing.9 Over decades the field has marketing and marketers for a number undergone a revolution in philosophy of reasons. and methods, sometimes paralleling First, many firms reached the point evolution of measurement within firms of diminishing returns in achieving themselves. This paper will review the benefits from cost cutting in the first history of research in marketing perfor- half of the 1990s, leading them to look mance measurement with an eye to to marketing to provide more revenue understanding what managers may growth. Cost reductions in manufac- learn from the academic endeavour in turing and administration also had the this area.

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 357 A summary of thinking on measuring the value of marketing

DEFINITIONS as a process, how the firm manages One of the great obstacles to successful the link between its activities and measurement of marketing perfor- customers, regardless of whether this mance is the multidimensional nature work is the province of the marketing of the marketing construct itself. department. The discussion will also be ‘Marketing’ can be conceptualised in a restricted to the evaluation of pan- number of different ways, and what is company marketing and marketing for measured depends on what it is particular divisions. The large litera- thought to be. tures examining the performance of A fundamental and growing marketing subfunctions will generally dichotomy in research and practice is be ignored. the distinction between marketing as an organisational function (eg the marketing department with its budget) MARKETING PRODUCTIVITY and the marketing as a process for the ANALYSIS firm as a whole (eg activities that Historically, many firms did (and some facilitate the link between the still do) no separate evaluation of customer and the firm). The elevation marketing at all. When firms and of customers as a corporate concern has researchers did move beyond this stage, increased attention to the latter view. most focused on attempting to evaluate Indeed, Nigel Piercy observes that the financial impact of marketing marketing is in some sense too activities —‘given our marketing, important to leave to the marketers.10 how much money did we make?’ A second distinction is the organisa- Linking strongly to the account- tional level at which marketing ac- ing and finance literatures, these ap- tivities occur. At the highest level, proaches were typically quantitative one can think of marketing across andorientedtowardfinancial ratios the entire corporation and its im- such as return on sales, return on pact on corporate reputation. Tim investment, and expenditures as a Ambler refers to this as ‘pan-company’ percentage of sales. Work in this area marketing.11 In most companies of any was often called marketing produc- size, one can then look at the activities tivity analysis, as it attempted to show of particular divisions or strategic the efficiency with which marketing business units. Within these units one resources were deployed. might look at the performance of While research and practice con- particular products or services. Finally, tinue, much of the seminal work in one can look at the efficiency and this area occurred in the 1960s and effectiveness of particular marketing 1970s. Writers such as Charles subfunctions such as or Sevin and Sam Goodman wrote . detailed, insightful books on applying This paper will focus on marketing profitability and efficiency analyses to

358 Journal of Targeting, Measurement and Analysis for Marketing Vol. 9, 4, 357–369 ᭧ Henry Stewart Publications 0967-3237 (2001) Clark

marketing.12,13 Later articles and books marketing activities is a necessary step focused on the marketing/accounting to understanding the value of market- interface and insights from finance. ing, it is not sufficient. Stanley Shapiro and V.H. Kirpalani summarised much of this stream in their anthology on marketing MOVING BEYOND PROFIT effectiveness.14 More sophisticated Over the course of the 1980s, non- approaches attempted to look at the financial measures of marketing success long-term cash flow generated by received much attention. Supplements marketing strategies, leading some to to traditional sales and profitability talk about the net present value of analysis, these measures were thought marketing.15 to indicate more strongly the long- Research on managerial practice term prospects of the organisation. suggests that financial measures such as sales and profit are the most common Market share means of measuring the value of Perhaps the most influential measure marketing.16 Managerially, there is advocated at this time was unit market much to commend in this approach. share. Based on research by the Boston Even if crude, attempting to under- Consulting Group and the ProfitIm- stand the profitimpactofmarketing pact of Market Strategies project, and activities is a fundamental first step to fuelled by competition from Japanese understanding marketing performance. firms that emphasised market share as Understanding the real costs and ameasure,firms ferociously competed returns from investments in marketing to achieve high unit market share that is an area in which accountants and would lead to economies of scale and marketers have much to learn from long-run profitability.17,18 one another. In retrospect, emphasis on market The fear in relying upon profitability share as a performance measure has measures, however, is that financial proved problematic. While economies measures are essentially static and of scale in industries such as motor- backward looking. The profits a firm cycles and semiconductors motivated sees today are the result of past the argument, more rigorous research marketing efforts stretching over years, has cast doubt on a universal link if not decades. While the long- between market share and long-term term cash flow approach to measure- profitability.19,20 The spectacular failure ment of marketing performance does of Japan, Inc. in the 1990s has also eliminate the static objection, estimates diminished the lustre of this approach of this kind are still difficult to make. to business. Research on managerial Generally, financial measures may be decision-making now suggests that the poor indicators of the future. While exclusive focus on beating competitors measuring the financial impact of implied by market share measurement

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 359 A summary of thinking on measuring the value of marketing

can actually lead to economically irra- the ability to adapt or innovate has tional behaviour by firms.21 Further, been proposed as one of the cor- market share measures assume the firm nerstones of marketing strategy.24,25 has identified the correct competitive Firms measuring in this area have set, which is a non-trivial task.22 emphasised measures such as percent- Managerially, unit market share is age of sales coming from new products therefore a crude measure that should and number of successful new product be used with caution. It is best used launches in a given time period. as a check on sales growth figures. Note these measures look at Company sales growth should be whether firms have been able to placed in the context of industry sales commercialise their innovations. This is growth: the prognosis for firms what distinguishes measuring the growing faster than their industry marketing innovation process from (rising unit share) differs from the simply measuring the research and prognosis for those growing slower development group in a firm. Having than their industry (falling unit share). a large research and development Another useful way to use market budget is not enough for long-term share is to compare value market share success, and correspondingly measures (eg in Euros) to unit market share. such as R&D spend as a percentage of This allows the firm to understand sales are of limited usefulness. how relative price might be affecting Measuring the innovative capability of unit share.23 Firms with a high the firm in commercialisation terms, value-to-unit share ratio are capturing on the other hand, is highly useful, as their unit sales at a high relative price, it forces the firm to focus on the future while firms with a low value-to-unit product portfolio as well as the present ratio are winning with a low relative one. price. The latter situation may be worrisome, as it can indicate price is the only attribute driving company THE ROLE OF MARKETING sales. INPUTS Virtually all measures reviewed to this Innovative capability point are either measures of output or A more promising non-financial out- crude financial measures of input (ie put has been to examine the health of how much was spent for what was the firm’s ability to innovate. As obtained). One of the frustrations of business environments change, firms marketing managers everywhere is that must have the ability to change with it is often quite difficult to demonstrate them. Marketing’s role in developing a direct causal link between their customer knowledge and new product activities and sales or profit. Further, concepts makes the marketing process as noted previously, the sales or critical in this area. Correspondingly profit impact of current activities lies

360 Journal of Targeting, Measurement and Analysis for Marketing Vol. 9, 4, 357–369 ᭧ Henry Stewart Publications 0967-3237 (2001) Clark

somewhere in the future. Given event of a serious problem or a senior the outcome issues are therefore management change. problematic, can something at least be said about the quality of inputs into the Market orientation marketing productivity equation? The Related to the marketing audit, a assumption underlying this approach is recent substantial research stream has that if there are good marketing inputs, developed around the notion of then eventually the money must market orientation.28 This approach follow. focuses upon three particular market- ing inputs that the disseminators of this Marketing audits concept consider particularly impor- The earliest approach to input assess- tant: generation of intelligence about ment, extending back to the 1950s, customers and competitors, dissemina- was the marketing audit movement.26 tion of this intelligence within the Analogous to an accounting audit, the firm, and organisational responsiveness idea behind this approach was to assess to this information. Researchers in this the health of the marketing activities area argue that a firm successful in within the firm. A well-cited outline in these three areas will, in the long run, this area suggests that a good marketing be successful in innovation and overall audit assesses the following areas:27 business performance. Evidence on the direct link between market orientation – marketing environment and business performance has been – marketing strategy mixed, perhaps partially because of this – marketing organisation implied time lag. – marketing systems An interesting aspect of this ap- – marketing productivity proach is that one can argue that – marketing functions. market orientation is as much an outcome of company culture as it is While this outline is very reasonable, company behaviour. Cultivating this it is less clear that this is a feasible way orientation is therefore a long-term to assess marketing performance. Done proposition for most organisations. well, the process is quite intensive, and Various writers have suggested how to in the absence of regulatory or in- do this,29 and a number of use- vestor demand of the kind that re- ful measurement scales have been quires independent accounting audits it proposed, the best of which comes appears quite unlikely this would be- from Deshpande and Farley.30 come a regular measurement activity of the firm. More likely, firms might do Marketing assets parts of this assessment internally on a While audits and market orienta- regular basis, while only bringing in a tion look at activities, a third input consulting firm to do a full audit in the measurement approach examines what

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 361 A summary of thinking on measuring the value of marketing

are called marketing assets.31,32 In this A REORIENTATION FROM perspective, marketing activities not PRODUCTS TO CUSTOMERS only help create sales and profits, but Without doubt, the strongest measure- also build long-term assets that may be ment trend in the 1990s was a move exploited over time, such as a loyal across a variety of industries from customer base or a powerful distribu- measuring the success of products to tion capability. The power of measuring the strength of customer has attracted particular attention in this relationships, primarily through the area. vehicles of customer satisfaction and In accounting terms, of course, an loyalty. An outgrowth of work in asset is a balance sheet item, whereas relationship marketing and increasing most marketing activities traditionally technological capability, this approach appear on the income statement. How follows the dictum ‘don’tmakesales, to value marketing assets and how to make customers’. The focus on cus- report them to interested parties is the tomers has been realised most clearly in subject of much debate. Discussion trends toward various forms of database in the branding area is the most marketing. These trends are likely to advanced.33 There is first the question continue in the new century. of how the value of assets is realised, which typically returns to the dif- Customer satisfaction ficult measurement issue of long-term A large research and consulting in- cash flows. Secondly, ‘powerful’ assets dustry has developed around customer can be devalued by a change in satisfaction as a performance measure. the competitive market. For example, The initial theorising in this area was Compaq’s strong distribution both elegant and compelling: cus- capability was turned into a liability by tomers are satisfied to the extent that the entry of direct marketers such as their experience with a product ex- Dell and Gateway. ceeds their expectations regarding the Managerially, the best approach to product.34 More recent research has asset measurement is to measure diverged in a number of directions. changes in the health of the asset over Most interesting from a managerial time. For example, changes in standpoint are streams that have looked awareness and attitude toward the at more sophisticated models of satis- brand within the target market can be faction, notably including models that important indicators of future market- separate different forms of satisfaction ing threats or opportunities. Trying to (eg satisfaction with the product versus measure the cash value of the asset, on satisfaction with information regarding the other hand, is likely to be much the product).35 The intuition that more problematic, with the exception satisfied customers are likely to be both of customer base measurement, dis- loyal and profitable has proved power- cussed in the following section. ful, so powerful that mixed empirical

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evidence regarding the impact of to be more valuable over time, customer satisfaction on overall busi- through some combination of in- ness performance has to some extent creased usage of current products, been ignored. purchase of other products from the Managerially, customer satisfaction firm, or higher prices paid per product. surveys have become a growth Reichheld and his colleagues have industry. The trade publication of provided the most widely cited the American Marketing Association, evidence in this regard,37 but an Marketing News, routinely lists dozens important article by Reinartz and of firms specialising in Kumar questions whether loyalty is satisfaction measurement. Best practice desirable across all contexts.38 in this area looks at satisfaction both at The most desirable customer loyalty an overall level and on particular measures are behavioural. How long is attributes that are important to the customer relationship, how fre- customers. It also reaches out to survey quently does the customer buy, how consumers who are not current recently has he or she bought, what customers of the firm, and surveys types of products were purchased? This customers regarding satisfaction with requires that the firm has a well- competing products. developed database on customers. Not surprisingly, the greatest users of cus- Customer loyalty tomer loyalty data are industries that Customer loyalty research has been are both transaction- and technology- tied more closely to the relationship intensive enough to support this kind literature, database marketing, and the of database, notably airlines and finan- cash flow view point. Just as one might cial services firms. Secondary measures assess the long-term cash flow aris- of loyalty look at repurchase intention ing from a marketing strategy, the or surveys of repeat purchase rate. loyalty perspective claims that one Practically speaking, firms should should assess the cash flow arising strive to have the best database possible from customer retention, usually called regarding customers. Software and lifetime customer value.36 Popularised expertise in this area are increas- by the airline industry, promotional ingly available. Even if calculations of loyalty programmes have proliferated lifetime customer value are difficult to across a large variety of industries. estimate, the sheer value of segmenting As with customer satisfaction, a and profiling one’s customer base along compelling logic drives the loyalty the behavioural measures in the pre- perspective. Customers who are loyal vious paragraph is enormous. Further, areassumedtobemoreprofitable. more direct relationships enabled by First, there is no acquisition cost for a the Internet make it increasingly likely current customer. Secondly, it is that firms across a broad spectrum of assumed that loyal customers are likely industries will be able to compile such

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 363 A summary of thinking on measuring the value of marketing

Table 1

SUGGESTED MEASURES OF MARKETING PERFORMANCE

Measurement area Sample measures

Sales and profitability analysis Unit sales Va lue sa le s Profit/contribution Health of brand or company reputation45 Awareness Strength of image Favourability of image Uniqueness of image Health of customer base Size, growth, profitability Relative customer satisfaction Retention rate Frequency, recency, amount and type of purchases Penetration of target market Quality of marketing inputs Strategic activities specifictofirm Employee surveys regarding market orientation46 % of sales from new products data. Companies that fall behind in this of both immediate financial results and area may find themselves at a sig- the health of marketing assets. Table nificant competitive disadvantage. 1 notes suggested measures in each of these areas. Measures should be used both to assess the overall business WHAT TO DO? SUMMARY and to examine the health of par- ADVICE FOR MANAGERS ticular products, markets, or distribu- The critical issues for managers are tion channels. (1) what to measure and (2) the Sales and profitability analyses are a benchmarks against which to compare critical first step. Ultimately, market- these measures. ing activities must contribute to the financial health of the organisation. What to measure Demonstration of the financial im- Fundamentally, companies should be pact of marketing activities also es- examining their performance in terms tablishes political credibility with the

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Figure 1: A sample product leadership strategy map

organisation’s finance, accounting and organisation that has it. Conversely, a budgeting arms. Any marketing plan weak reputation is a constant drag on that is missing a pro forma income corporate potential. This affects not statement is incomplete. only relations with customers, but also Monitor the health of marketing assets. with the investor and employee com- The two most critical assets to examine munity. are the firm or brand’s reputation and Understanding the customer satisfac- the customer base. Both of these re- tion and customer loyalty profile of the quire market research regarding cur- customer base is a very positive step for rent, potential and former customers. most companies; the 1990s reorienta- The intangible value of a strong tion toward customers is generally a reputation is a powerful asset for the healthy trend. Unlike sales and profit

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 365 A summary of thinking on measuring the value of marketing

analysis, it can provide early warning propositions proposed by Treacy and of both threats and opportunities in the Wiersema:41 customer intimacy, opera- marketplace. tional excellence, or product leader- Track the quality of marketing activities ship. The critical activities required to that lead to these outcomes. While this is deliver these value propositions differ. the most difficult measurement area, it These activities should be measured. is clear that the quality of marketing A strategy map may be very helpful activities is a long-term concern for in this regard.42,43 This anchors upon many firms. This has been a primary the overall goal of the organisation force behind the movement to discuss (eg maximise shareholder value) and market-oriented behaviours and cul- then outlines the underlying activities tures. Formal marketing audits are needed to reach this goal. Marketing probably too elaborate a tool for activities (should) fitintooverallcom- regular monitoring, but each company pany goals, and can be mapped as has critical activities that lead to both leading to this goal through execution short-term sales and long-term market- of the marketing strategy. A typical ing assets. These will vary across map shows a set of activities and industry and organisation. One can also outcomes linked by arrows indicat- assess the general market orientation of ing which activities cause which out- the firm through internal surveys and comes. A sample marketing strategy assess the health of the firm’s innova- map for a product leadership strategy tion capability. is presented in Figure 1. Track performance relative to competitors. What to benchmark One of the pervasive moderating vari- As important as specificmeasures ables proposed and documented across is the context in which these a variety of marketing performance measures are compared. Research measures is the competitive context. suggests that managerial performance is For example, high customer satisfac- usually evaluated relative to some tion is clearly a positive sign, but the benchmark.39,40 Numbers are only payoff from satisfaction only occurs if powerful to the extent they can be the satisfaction level is higher than compared to some baseline that satisfaction with competing products. indicates developing threats and On a regular basis, measures should be opportunities. Choosing the right compared to a relatively small num- benchmark therefore becomes critical. ber of key competitors for the target Measure performance relative to strategy. market(s). At less frequent intervals, it Performance should be measured rela- is important to step back strategically tive to the target market and value and look at a broader competitive proposition the organisation wishes set. to pursue. At a basic level, one Track performance relative to customers. might consider the three generic value Strategically, tracking against customers

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involves two concerns. First, com- CONCLUSION panies must be sure that they are Marketing performance measurement tracking elements of market activities has evolved from measures of that actually drive customer behaviour. marketing accounting and efficiency to For example, a brand might have complementary non-financial measures high favourability ratings on particular oriented around customer value. A benefits, but if these are not benefits comprehensive picture of marketing that drive behaviour they are not good performance is best achieved by a measures. Competitive advantage only combination of these measures used in occurs when a company is superior the context of the organisation’s at delivering benefits customers care strategy and customer and competitor about. benchmarks. At a higher level, it is important to assess the health of the target markets in REFERENCES which the firm competes. This is critical 1 Sheth, J. N. and Sisodia, R. S. (1995) to establishing whether the company is ‘Feeling the heat’, Marketing Manage- pursuing the right target markets for ment,Vol.4,No.2,pp.8–23. long-term success. A strong customer 2 Mavrinac, S. and Siesfeld, T. (1997) base in a declining target market repre- ‘Measures that matter: An exploratory sents a very different situation than a investigation of investors’ information strong base in a growing one. needs and value priorities’, working Track performance over time.All paper, Ivey School of Business, Univer- measures should be tracked over time sity of Western Ontario. as a forecasting device. Kokkinaki and 3 Davidson, J. H. (1999) ‘Transforming Ambler44 point out the need for the value of company reports through examining not only changes but also marketing measurement,’ Journal of changes in the rate of change to ,Vol.15,No.8, forecast where the market is headed. pp. 757–778. Model performance.Afinal step once 4 Kaplan, R. S. and Norton, D. P. (1992) a firm has developed adequate data is ‘The balanced scorecard — measures to model the relationship among per- that drive performance’, Harvard Busi- formance measures. This is particularly ness Review,Vol.70,No.1,pp.71–79. useful in informing or challenging ele- 5 Neely, A. (1998) ‘Measuring business ments of the strategy map. It might performance’, The Economist Books, be believed, for example, that brand London. awareness is a critical driver of product 6 Ambler, T. (2000) ‘Marketing metrics’, sales. Do the data support this assump- Business Strategy Review,Vol.11,No.2, tion? Modelling is particularly useful pp. 59–66. for assessing the impact of repetitive 7 Marketing Science Institute (1998) activities such as promotional schedul- ‘1998–2000 research priorities: A guide ing or advertising exposures. to MSI research programs and proce-

᭧ Henry Stewart Publications 0967-3237 (2001) Vol. 9, 4, 357–369 Journal of Targeting, Measurement and Analysis for Marketing 367 A summary of thinking on measuring the value of marketing

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