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The  Financial  Metrics  –  Part  I   Numbers,  Numbers  and  More  Numbers  

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A  Marke4ng  Balanced  Scorecard  

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When  you  drive,  there  are  a  number   of  informa<on  pieces  available  to   you  in  your  car  

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Looking  through  the  windshield  lets   you  see  the  hazards  ahead  of  you  

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The  dashboard  with  the  speed  and   tachometer  are  metrics  that   complement  what  you  see  and  help   you  to  determine  whether  you  are   driving  too  fast  or  too  slowly  

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The  rearview  mirror  provides   feedback  on  what  is  behind  and  the   side  mirrors  give  a  backward  looking   input  

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The  temperature  and  oil  gauges  are   opera<onal  metrics  that  measure   how  well  the  engine  is  running  and   the  fuel  gauge  provides  informa<on   so  you  don’t  run  out  of  gas    

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In  marke<ng,  measuring  only  sales   revenue  is  like  driving  a  car  by  only   looking  in  the  rearview  mirror,   because  sales  measures  what  has   happened  in  the  past  

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Just  like  driving,  you  need  a   balanced  set  of  metrics,  or  a   scorecard,  as  a  marketer  

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What  Is  The  Takeaway?  

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Since  demand  genera<on,  new   product  launch,  and  loyalty   marke<ng  drive  measurable  sales   revenues,  you  can  use  financial   return  on  marke<ng  investment   calcula<ons  more  than  50%  of  the   <me   h"p://emagine-­‐group.com  

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But  financial  ROMI  is  not  the  answer   for  all  marke<ng  measurement  and   you  have  to  have  a  balanced   approach  with  mul<ple  metrics  

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Finance   Hello  Darkness  My  Old  Friend!  

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Finance  is  the  language  of  business   and  the  sooner  we  learn  to  speak   this  language,  we  gain  respect  in  the   boardroom.  

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The  one  ques<on  that  most  of  you   have  asked  me  over  and  over  is     “How  do  we  get  top  management  to   accept  this  method  of  marke<ng?”  

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Show  them  the  money!  

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I  once  told  a  CEO  that  if  they  did  a   specific  marke<ng  ini<a<ve,  it  would   increase  their  share  price  by  40   cents  a  share  –  it  was  funded  almost   immediately.  

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Now  as  you  might  remember  from   the  early  lectures,  I  explained  that   financial  ROMI  is  applicable  to  more   than  50%  of  marke<ng  ac<vi<es.  

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These  include  trial  and  demand   genera<on  marke<ng,  and  new   product  launch  marke<ng.  

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Now,  we  will  look  at  these  metrics   and  insights  that  are  achieved   through  quan<fying  marke<ng  using   financial  metrics.  

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55%  of  CMOs  report  that  their  staff   does  not  understand  financial   metrics  

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Whether  you  understand  math  and   finance  or  not,  you  need  to   understand  these  rela<onships   otherwise  your  career  in  marke<ng   will  be  over  very  quickly.  

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Metric  -­‐  Profit  

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Revenues   -­‐  Cost   Profit  

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There  is  nothing  special  about  this   metric,  since  we  all  know  the  math   behind  it  

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But  there  are  some  insights  that  you   need  to  keep  in  mind  when  working   the  math….  

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First     The  marke<ng  divide  exists  because   some  firms  choose  to  invest  more  in   demand  genera<on  marke<ng,  running   sales  and  promo<ons,  which  drive  sales   revenues,  but  kill  profits.   h"p://emagine-­‐group.com  

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Top  brands  invest  more  in  brand   and  customer  equity,  and  as  a  result   are  able  to  charge  a  premium  price,   which  means  higher  profits.  

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Compe<ng  on  price  is  a  losing  game   since  it  kills  profitability.  

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A  few  firms,  such  as  Wal-­‐Mart  and   Dell,  have  been  effec<ve  with  this   strategy  because  they  have   excep<onal  supply-­‐chain   management  capabili<es  that  drive   cost  down  to  a  minimum.   h"p://emagine-­‐group.com  

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So  if  opera<onal  efficiency  is  your   core  strategy,  then  by  all  means   consider  compe<ng  on  price  –  but   for  everyone  else,  using  marke<ng   to  drive  profits  is  a  be"er  strategy.  

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Profit   vs.   Market  Share  

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When  you  talk  to  brands,  they  are   most  interested  in  “grabbing”  share   in  the  market.  

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Market  share  is  important,  but  if   you  consistently  lose  profits  to  gain   share,  the  over  <me  –  this  is  a  losing   strategy.  

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There  is  a  conflict  between   marke<ng  and  sales,  since  sales  is   incen<vized  on  volume,  not  profits.  

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If  you  analyze  your  sales  forces,  you   will  see  the  the  top  performers,   those  who  get  regular  rewards,  are   ocen  the  least  profitable  and  may   even  by  nega<ve  in  profitability.  

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How  do  you   change  this?  

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When  Mark  Hurd  became  CEO  of   HP,  he  changed  the  incen<ve   packages  for  all  the  HP  Enterprise   Sales  team.  

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He  incen<vized  the  sales  people   based  on  the  profits  of  the  products   they  sell,  not  the  volume.  

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Result?  

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HP’s  overall  revenues  grew  by  20%   between  2005  and  2007,  but  the  net   income  grew  from  $2.3  billion  to   $7.3  billion  –  increasing  the  stock   price  by  243%!  

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Solving  for  the  “right”  price  point  to   maximize  profits  and  sales  revenue   is  a  pricing  exercise  and,  if  you  are   interested,  there  are  many  books  to   teach  you  how  to  do  that  

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But  at  the  end  of  the  day,  price  is  set   by  what  the  market  is  willing  to  pay   for  the  value  of  the  products/ services  you  provide.  

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One  approach  is  to  use  a  brute  force   method  and  increase  prices  by  5  -­‐   10%  a  month  and  see  where  sales   start  to  drop  off  –  this  is  what  we   call  the  op<mal  price  maximizing   sales  and  profits.   h"p://emagine-­‐group.com  

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But  I  don’t  teach     pricing  methodology!  

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The  intelligence  behind  the  whole   discussion  is  that  facing  difficult   <mes  and  compe<<ve  pressures,   the  first  thought  is  to  compete  by   cuing  price,  at  the  cost  of   profitability.   h"p://emagine-­‐group.com  

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This  will  lead  you  to  a  death  spiral  of   losing  money  in  the  majority  of   marke<ng  ac<vi<es.  

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A  be"er  strategy  is  to  build  brand  and   customer  equity  so  that  you  compete  on   value,  instead  of  price.  This  is  what  we   call  Value-­‐Based  Marke<ng.  

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Value  Based  Marke4ng   Marke<ng  Based  on  the  Value  of  the  Customer  

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Value-­‐Based  Marke<ng  drives  significant   performance  gains  and  firms  that  bridge   the  marke<ng  divide  focus  on  customer   value  in  all  marke<ng  ac<vi<es.  

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An  Example  of  Direct  Mail  Offers   Low  to  Medium  CLTV  +   Low  to  Medium  Response   Rates  are  not  sent  a   mailing     From  a  ROMI  point  of   view,  these  customers  are   slow  on  the  take  rate,  so   why  waste  marke<ng   dollars  here?  

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An  Example  of  Direct  Mail  Offers   High  CLTV  +  Low  Response   Rates  are  also  not  sent  a   mailing     The  cost  of  the  mailing  is   not  jus<fied     Our  focus,  as  marketers,   must  be  on  the  medium  to   high  CLTV  +  Medium  to   High  Response  Rate   customers  

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An  Example  of  Direct  Mail  Offers   No4ce     Highest  Expected   Response  Rate  +  the   Highest  CLTV  get  the  2nd   most  expensive  offer     Highest  Expected   Response  Rate  +  Medium   CLTV  get  the  3rd  most   expensive  offer     While  the  Lowest  CLTV   don’t  get  an  offer  at  all  

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Why  do  you  think  that  is?  

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Those  that  have  the  lowest  CLTV  are   coming  anyway  so  they  get  the  lowest,   most  cost  effec<ve  offer.  They  are   coming  because  they  value  your  product   but  don’t  respond  to  the  “offers”;  so  it   would  be  a  waste  targe<ng  them.  

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By  focusing  this  single  strategy  on  a   value-­‐basis,  we  cut  our  marke<ng  costs   in  half  –  since  we  now  focus  on  less  than   50%  of  the  poten<al  customer  base,  but   the  impact  is  significantly  higher   because  we  are  focusing  on  profitability.  

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Golf,  Marke4ng  &  Finance  

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Ask  someone  with  a  golf  handicap  if   they  keep  score  and  they  will   laugh…  

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“Of  course,  how  else  do  I  know  if  I   am  improving  or  not?”  

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A  golf  handicap  is  calculated  by   taking  the  average  golf  score  over   the  last  10  rounds  of  golf  played.   The  handicap  is  the  average  number   of  shots  over  par.  

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For  those  who  have  never  been  on  a   golf  course,  there  are  18  holes  –   some  with  a  par  of  3,  some  with  a   par  of  4  and  some  with  a  par  of  5.   Par  is  the  number  of  strokes  (shots)   expected  for  the  “expert”  golfer.   h"p://emagine-­‐group.com  

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Adding  up  the  18  holes,  par  for   playing  a  golf  course  is  typically  72   strokes.  

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Understand  that  golf  is  an  incredibly   difficult  sport  where  you  have  to   account  for  wind  speeds,  water   hazards,  and  trees.  

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Why  am  I  talking   about  golf  scores?  

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Golf  and  marke<ng  are  very  similar   and  it’s  very  easy  to  demonstrate   finance’s  role  in  a  simple  story.  

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Let’s  assume  that  you  have  a  golf   handicap  of  10.  This  means  that  you   rou<nely  keep  score  and  on  average   shoot  82  –  or  10  strokes  over  par.  

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But  today,  you  get  the  opportunity   to  play  at  Pebble  Beach,  one  of  the   world’s  top  golf  courses.  Will  you   shoot  exactly  82  again?  

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Doubsul.  Most  likely,  you  will  shoot   more  –  let’s  say  90.  Exactly  90?  

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Well,  no  –  let’s  say  there  is  a  range   from  82  to  100.  

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What  does  this  mean?  

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First     Good  golfers  keep  score  so  that  they   know  how  well  they  played  

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Second     They  keep  score  mul<ple  <mes  to   had  a  handicap.  

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The  handicap  is  trend  data  that   helps  them  predict  the  future,  but   when  playing  a  new  course  for  the   first  <me,  there  is  a  risk..  

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Third     Because  of  risk,  it  is  not  possible  to   predict  the  future  exactly  –  there  is   a  range  of  possible  outcomes.  

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For  financial  ROMI,  these  are  the   three  major  takeaways  that  you   must  remember.  

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Every  year  in  February,  there  is  a   pro-­‐am  tournament  at  Pebble  Beach   that  bring  great  golfers  and   celebri<es  together.  Let’s  assume   that  you  enter  this  tournament  and   win!   h"p://emagine-­‐group.com  

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Very  excited,  you  get  the  large   trophy  and  a  check  from  $  1  million,   but  there  is  fine  print  on  the  bo"om   of  the  check  -­‐  

h"p://emagine-­‐group.com  

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You  must  chose  $100,000/year  for   20  years  or  $520,000  today.  You   have  to  decide  –  which  would  you   chose?  

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Being  a  financial  decision,  it  would   be  helpful  to  know  how  much  the   $100,000  per  year  is  actually  worth   today.  

h"p://emagine-­‐group.com  

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Basic  educa<on  tells  us  that  a  dollar   today  is  not  worth  a  dollar  a  year   from  now,  but  how  much  is  it   worth?  

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If  I  invested  $1  today,  what  would  it   be  worth  next  year  –     $1  x  (1  +  r)     r  =  rate  of  return  we  expect  to  get   h"p://emagine-­‐group.com  

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So  the  $1  today  should  grow  to     (1  +  r)  dollars  with  interest  next  year  

h"p://emagine-­‐group.com  

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To  make  this  easier,  you  can  divide   both  sides  by  (1  +  r)  meaning  that:     $1/(1  +  r)  =  today’s  dollar  

h"p://emagine-­‐group.com  

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h"p://emagine-­‐group.com  

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So  if  r  =  10%,  then  a  dollar  received   a  year  from  now  would  be  worth  91   cents  today.     $1/(1  +  10%)  =  $1/1.1  =  .909  

h"p://emagine-­‐group.com  

Brand  Focused,  Socially  Ac<ve,  Digitally  Enabled  


So  let’s  go  back  to  Pebble  Beach  

h"p://emagine-­‐group.com  

Brand  Focused,  Socially  Ac<ve,  Digitally  Enabled  


If  we  had  $  100,000/year  for  10   years,  with  payments  at  the  end  of   each  year,  the  value  today  is:  

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PV  =     $100K/(1+r)  +  $100K/(1+r)2  +   $100K/(1+r)3  +  ……  +  $100K/(1+r)10  

h"p://emagine-­‐group.com  

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h"p://emagine-­‐group.com  

Brand  Focused,  Socially  Ac<ve,  Digitally  Enabled  


So,  the  value  of  $100K  per  year  for  10  years  in  today’s  dollars,  assuming  a   discount  rate  of  10%.  You  would  have  $614,000  instead  of  the  $520,000  today.  

h"p://emagine-­‐group.com  

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This  example  highlights  that   calcula<ng  the  metric  is  only  the   first  step  in  management  decision   making.  

h"p://emagine-­‐group.com  

Brand  Focused,  Socially  Ac<ve,  Digitally  Enabled  


In  management,  one  can  argue  that   there  are  no  wrong  answers.  But   with  metrics,  there  are  “be"er”   answers.  

h"p://emagine-­‐group.com  

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The Financial Metrics - Part I