Page 1

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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


A Marke4ng  Balanced  Scorecard  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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    

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


What Is  The  Takeaway?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Finance Hello  Darkness  My  Old  Friend!  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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?”  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Show them  the  money!  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Metric -­‐  Profit  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Revenues -­‐  Cost   Profit  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Profit vs.   Market  Share  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


How do  you   change  this?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Result?

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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%!  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


But I  don’t  teach     pricing  methodology!  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Why do  you  think  that  is?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Golf, Marke4ng  &  Finance  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


Why am  I  talking   about  golf  scores?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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.  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


What does  this  mean?  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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..  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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  

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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:  

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

h"p://emagine-­‐group.com

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  


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

Brand Focused,  Socially  Ac<ve,  Digitally  Enabled  

The Financial Metrics - Part I  

The first lecture in the financial metrics series