Evidence Based Marketing

Evidence Based Marketing— The case for marketing accountability, through measurement, metrics and evidence.

Prepared by Mary M. Malaszek, Principal, Market Directions

Evidence Based Marketing November 2008

Evidence Based Marketing, Prepared by Mary Malaszek, Principal, Market Directions

Appendix with Marketing Metrics

Table of Contents— Part II & III

Table of Contents— Part I

Introduction

1

Marketing Metrics

5

Evidence Based Management

1

Surveys of Marketing Managers

6

Evidence Based Medicine

1

ROI in Marketing

7

Human Element in Decision Making

2

The CMO

7

Input Bias

2

Market Research

7

Evidence

3

Valuing the Firm

8

Evidence in Marketing

4

Conclusions and Sources

8-9

In the Appendix —- Metrics and Measurements in Marketing — Contents Expected Response Rates

2

Market Directions Discover Your Customers

Net Present Value (NPV)

2

To support sales with a unique value proposition for each market segment, you need information.

Internal Rate of Return (IRR)

2

Breakeven Analysis

3

Customer Lifetime Value (CLV)

3

Profitability Index (PI)

3

Market Segmentation Analysis

4

Mean, Median & Mode

5

Standard Deviation

5

Sample Size

5

Market Directions researches customers, consumers, businesses, demographics, and competitors, to reduce the indecisiveness that exists without powerful information.

With information gathered by Market Directions you will be positioned to implement the necessary solutions to profitably define and create customers by communicating and delivering value.— The Result—- More Sales!....

What We Do Market Directions is a full service custom market research and analysis firm that helps companies to identify and clarify distinct marketplace opportunities.

We do this by using a variety of market research tools—from individual interviewing to broad-based electronic data gathering—and present our clients with new, exciting, and profitable ways to create customer experiences.

Our promise to you? That as a result of our work, you will understand your customers and your business in a whole new way. You will see your products and services as your key customers see them, and, equipped with this critical information, that you will save both money and time.

Introduction Within academic, journal publications and business literature a main theme pops up now and then about marketing’s standing. (View Resource Appendix for List of Articles) This controversy goes back to the beginnings of marketing as a organizational function and peaks with McKenna’s Relationship Marketing (1990) Of course, every marketer must read and understand Theodore Levin’s Marketing Myopia (1975), an insightful classic that discusses what marketing is, is not, and should be.

Those that view marketing as an art argue that “the art” is the grounds for why it is so difficult to measure marketing’s performance. Even as markets are beginning to use the resources available with modern technology--- ample data, systems and software --- there is still a perception that marketing lacks credibility and a cco unta bility. In addition, CMO’s (Chief Marketing Officers) are loosing their “seat at the table” with an average tenure of 23 months--- not what was intended when the title emerged giving marketing that seat in the board room.

In an attempt to reconcile the issues facing marketing and marketers, Market Directions has prepared this paper offering research on decision making and management that marketing managers should consider in order to adapt their profession to stan-

Part I— Management, Marketing and Evidence Management and Marketing The phrase, “management is what managers do” is a simplification of the definition of management, and yet highlights the difficulty in defining management.

Management’s, like marketing’s, definition has shifted over time, dependent on the cultural, political and economical environment. Recent marketing authorities do not distinguish differences between marketing and management.--

Marketing’s role, as presented within this paper, is discussed from the point of view that “marketing is what managers do” and getting marketing right defines the success of the organization. And because we come to the conclusion that marketing and management are the same function, we present the case for Evidence Based Management as the basis for practicing marketing, because it is time for marketing to adapt a process in order to standardize the principles that constitute good evidence in support of critical marketing decisions.

Professionals Making Decisions McKenna (1991) argues that because marketing encompasses all factors that influence a company's ability to deliver value to customers, it must be "all-pervasive, part of everyone's job description, from the receptionists to the Board of Directors."

And, Peter Drucker (1993), wrote: "Because the purpose of business is to create a customer, the business enterprise has two--and only these two-basic functions: marketing and innovation.

Evidence Based Medicine Imagine going to your doctor’s, you are the tenth patient of the day, and the doctor diagnoses you with the flu because the nine patients before you had the flu. Later, you find out that it’s not the flu and you were diagnosed incorrectly because your doctor did not listen to you or use the evidence you provided for the correct diagnosis. We all believe our own doctor is the best and part of being the best in (Continued on page 2)

Evidence Based Management The Idea in Brief

COPYRIGHT © 2005 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION.

Managers have tough jobs: Under intense pressure to make decisions with incomplete information, even the best among us make mistakes.

The good news? Evidence abounds to help us make the right choices. The bad? Many of us ignore it—relying instead on outdated information or our own experiences to arrive at decisions. Some of us fall victim to hype about “miracle” management cures, or we adopt other companies’ “best practices” without asking whether they’ll work just as well for our organizations. Result? Poor-quality decisions that waste time and money (at best) and risk your company’s future (at worst). Every time someone proposes a change, ask for evidence of its efficacy. Clarify the logic behind that evidence—looking for faulty reasoning. Encourage managers to experiment with new ideas—rewarding those who learn from these efforts, even if an experiment itself fails. And insist that managers stay current in their field—and provide continuing professional education opportunities to help them do. Your reward? You and your colleagues face the hard truths about what works and what doesn’t. You expose the dangerous half-truths that mar much conventional business wisdom. And you make smart decisions on the most pressing issues facing your company.

Prepared by Market Directions

Page 1 Market Directions (C) Copyright (2008) All Rights Reserved

consequences of failed projects and lower financial returns.

(Continued from page 1)

science and medicine, is being current on research. But your doctor missed the recent study on your particular ailment.

This is why the leaders and managers of health care organizations are encouraging clinicians to adopt evidencedbased practices. Evidence based medicine is just what the term implies--EBM is the integration of clinical expertise, patient values, and the best evidence into the decision making process for patient care. The patient brings to the encounter his or her own personal and unique concerns, expectations, and values. The best evidence is usually found in clinically relevant research that has been conducted using sound methodology.

(D. Sackett , 2002)

Evidence Based Management

If a marketing manager’s prime deliverable is a good decision, then, how do busy managers make decisions in the presence of too much information, time pressure, simultaneous choice, personal bias or some other constraint? Pfeffer and Sutton resolve this dilemma, by inferring that an effective manager uses wisdom--- and defines wisdom as —acting with knowledge while doubting what you know.

Knowledge, in this definition is --- all available information--- doubting is useful and necessary in wise decisions because then, the decision is continuously measured, analyzed and evaluated. Managers often cannot or do not admit what they don’t know. Lack of all Pfeffer and Sutton the answers in some organizations may diminish define wisdom as managers formal authority. The authors go on to say that when organizations use opinion in —acting with decisions, a hierarchical importance of the opinions knowledge while emerge. In other words the higher-up the manger is doubting what you in the organization, the more weight his or her know. opinion is valued. This promotes disparity in what evidence is used in making decisions.

Jeffrey Pfeffer, PhD and Robert I. Sutton (HBR, 2005) apply the concept of evidence based medicine to the practice of management. They have studied management decision processes to discover that, managers make decisions based on their own opinions, ideologies, hopes and by copying what other companies are doing and rarely use evidence in support of their decisions.

However, informed decisions based on evidence, not just on opinion and with bias, Pfeffer and Sutton argue enhances the overall performance of the organization.

Pfeffer and Sutton have identified a management decision making practice of -- Evidence Based Management (EBM). EBM combines disciplined, astute use of evidence with individual expertise, and valid data. The authors go to on to say that data, analytics, and experiments are the core of successful EBM. In their subsequent book, Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management (Harvard Business School Press, 2006) Pfeffer and Sutton offer a mixture of anecdotal research and examples where organizations have not used evidencebased management in decisions, and have suffered the

While Pfeffer and Sutton’s principle of EBM is a good standard for organizations to hold managers to, the presentation of the idea does not define or identify what “good” evidence is, rather it makes arguments for what evidence is not. When information is presented in this way it is difficult to implement or put the idea into practice. Other research on decision making helps to close this gap.

The Human Element in Decisions Katherine L. Milkman, Dolly Chugh, and Max H. Bazermanis, organizational development researchers also present the concept of bias in management decisions. Their paper entitled: How Can Decision Making be Improved?, the authors assert that inherent in organizations today are costly consequences to decisions. The authors emphasize a human element as the barrier to good decision making: (Continued on page 3)

5 Principles of Evidence Based Management 1.

…build a culture in which people are encouraged to tell the truth

2.

Be committed to "fact based" decision making

3.

Treat your organization as an unfinished prototype

4.

Look for the risks and drawbacks in what people recommend

5.

Avoid basing decisions on untested beliefs, what you have done in the past, or on "benchmarking" of what winners do

Prepared by Market Directions

Page 2 Market Directions (C) Copyright (2008) All Rights Reserved

(Continued from page 2)

more and more people are being tasked with making decisions that are likely to be biased – because they often lack important information regarding a decision, fail to notice available information, face time and cost constraints, and maintain a relatively small amount of information in their usable memory.

The busier people are, the more they have on their minds, and the more time constraints they face, the more likely they will be to rely on fast, automatic, effortless, implicit, and emotional decisions.

quality.”

It is important to be aware of this input bias when beginning to implement a decision management practice based on evidence.

That the abundance of evidence does not constitute good evidence and does not always support the best decision.

This type of bias may also contribute to a phenomenon that often occurs in marketing in the area of product management.

The creation of the advocate or evangelist. The advocate’s enthusiasm and dedication to his or her product is often rewarded by an organization launching the product and This human element in biasing decisions corresponds allocating resources for its endorsement. After all if with Pfeffer’s and Sutton’s research on how the product manager has put all those hours managers make decisions based upon; obsolete Every field has delivering a final product— their behavior should slightly different knowledge derived from the past; personal be acknowledged. requirements for experience; specialist skills; ideology: or acceptable evidenceThis behavior, while admirable in a mimicking top performers.

- legal, scientific, academic and product manager, should not influence upper medicine. But what Presented by the authors, Milkman, et. managers in prioritizing, evaluating and ranking, rules of evidence do al is the view implicating humans as flawed in which products will produce profitable results. A businesses adhere to? decision making --- due to being human. decision maker should disregard prior costs and Given that this ‘flaw’ cannot be resolved behaviors and look at future costs and benefits to supports a system where managers (and humans) must practice influence final decisions. a formal process in decision making. Milkman, et al.

There is a psychological mechanism at work in uncovered Stanovich and West’s (2000) System 1 and System decision making— that goes beyond the depths of this paper.

2 cognitive functioning as an effective theory for However, by identifying and exploring the elements that understanding decision making. System 1 refers to people’s contribute to poor decisions, a decision maker should make intuitive system, which is typically fast, automatic, effortless, note and attempt to alter behaviors. implicit, and emotional. System 2 refers to reasoning that is slower, conscious, effortful, explicit, and logical. There is evidence that indicates that better decisions are made using System 2 thinking.

Input Bias To make a purchasing decision, a consumer needs to assess value relative to alternatives. Despite the frequency and often importance of this judgment process, unbiased assessments are often very difficult to make.

Maurice Schweitzer and Karen R. Chinander published a paper in the July 2003 titled “The Input Bias: The Misuse of Input Information in Judgments of Outcomes,” the authors report on the results of four experiments looking at the link between input information and judgments. They define input bias as “the systematic misuse of input information in judgments of outcome quality.” The authors found using four convincing experiments that the quality of a decision is often “positively related” to the quantity of the inputs used to make that decision, “the relationship between input quantity and output quality is not automatic. In many cases inputs are misused, misrepresented or even negatively related to outcome Prepared by Market Directions

These four viewpoints— Evidence Based Medicine, Evidence Based Management and Decision Theory’s— System 1 and 2 and Input Bias should be used— and indeed we do— to formulate a professional business discipline open and ready to focus on improvement strategies for decisions and especially for decisions in marketing. This research complements the basis for our argument that marketing must develop metrics and disciplined practices to substantiate marketing decisions and to enhance marketing‘s image. To begin; evidence is defined, characterized and classified.

Evidence Evidence is a term used by the authors of EBM, however, it is not clearly defined what constitutes acceptable, reliable evidence in business decisions. An assessment of evidence, begins with a clear definition of the term in from the practical to the legal.

Defined Some word’s meanings may appear obvious and evidence should certainly fall into the obvious category, but (Continued on page 4)

Page 3 Market Directions (C) Copyright (2008) All Rights Reserved

(Continued from page 3)

just in case: The dictionary definition states; noun 1. that which tends to prove or disprove something; ground for belief; proof. 2. something that makes plain or clear; an indication or sign.

Legal Definition-- evidence n. every type of proof legally presented at trial which is intended to convince the judge and/or jury of alleged facts material to the case.

Includes oral testimony of witnesses, including experts on technical matters, documents, public records, objects, photographs, and depositions "circumstantial evidence" is intended to create belief by showing surrounding circumstances which logically lead to a conclusion of fact.

Charts, maps and models which are used to demonstrate or explain matters are not evidence themselves, but testimony based upon such items and marks on such material may be evidence.

Evidence must survive objections of opposing attorneys that it is irrelevant, immaterial, violates rules against "hearsay", and/or other technicalities.

Using Evidence in Marketing As highlighted in the definitions above, evidence

to your argument for the next marketing project and providing reasoning which is sufficient to persuade or convince the CFO or CEO is a way in which marketing managers gain credibility.

Every field has slightly different requirements for acceptable evidence-- the legal profession, scientific community, academic research and medicine. But what rules of evidence do businesses adhere to? Even successful portfolio and investment managers use different data to assess profitability and sound ventures. If marketers follow the example of the legal classifications of evidence than, certain and clear marketing guidelines emerge.

Part II Metrics for Marketing Managers Recent surveys conducted by four separate sponsors, the CMO Council, the ANA, (Association of National Advertisers), the Lenskold Group, and SAS et.al. (Links to the surveys are provided.) have uncovered that marketing is beginning to acknowledge that it must use financial measurements in order to gain credibility within organizations.

It may be deduced from these survey results along with other popular articles about marketing’s accountability, that its time for marketing to acknowledge that--- the “quants’ have won.

In other words, at some point its decided--- marketing is a science rather than art.

Survey Findings Classifications of Evidence

Best Evidence

Legal

Marketing

convince judge/jury of facts

convince board, CEO, CFO of value of marketing investment— must be profitable

testimony

surveys; focus groups, customer satisfaction measurements

models which are used to demonstrate or explain matters are not evidence themselves

analytics— marketing management interpretation forecast models

circumstantial

consider all possible/probable, practical outcomes based upon the case presented— trends— sales —- voice of the customer

relevant, material and not “hearsay”

cannot consider view of product manager or other advocate to move project forward

includes that which is relevant— including testimony and logical conclusions. It is used as confirmation that the facts are true and reliable and is support for or against a claim. What turns a fact or piece of information into evidence is the connection it has with a larger claim. Connecting the evidence Prepared by Market Directions

The surveys cited indicate in one way or another (the surveys did not ask the exact questions in the same way) that over 70 percent of senior marketers use some sort of Marketing Accountability (or Performance) Metric and out of these marketers, over 70 percent are satisfied with their organization’s metrics and/or the progress towards marketing metrics. The surveys did not indicate how long the marketing managers have been using metrics nor why they chose to begin using metrics. However, the surveys did indicate that overall, only 37 percent use ROI measurement and only 50 percent use metrics for resource allocation at budget time. Only 17% of surveyed companies have formal MPM (marketing performance metrics) systems despite spending up to 25% of their revenue on marketing.

Study or Press Release atwww.cmocouncil.orgnews/ pr/2008/011408.asp

Summaries of the surveys are provided in the table on the next page and links to the website are in the space to the left.

www.ana.net/news/content/1282 www.lenskold.com/trendstudy

Marketers must step up to the plate and shake off the image---(Continued on page 5)

Page 4 Market Directions (C) Copyright (2008) All Rights Reserved

imitating or simulating past behavior or top performers; along with, those that view marketing as simply advertising and promotion. (Omitting the other elements of marketing: product, price, place, and people, exposing the marketing manager to the most costly marketing decisions,--- advertising and marketing communications.) Contemporary marketers instead, must use a decision approach based on analytics which can be used as facts in evidence in support of marketing projects.

(Continued from page 4)

Marketers are faddish, irresponsible,… don’t think like business people…

McKinsey CEO/CMO Survey, 2005

Market Directions applies the model of Evidence Based Management to marketing management because marketing is in search of something that gives it credibility and standards in decision making. The search, to some, comes to an end with analytics. However, evidence as defined, is more than the data derived from the results of analytical measurements. The appropriateness of the term Evidence Based…….(Medicine, Management, Marketing) rather than, Fact-based, Databased or Information-based is fitting because “...its time for marketing to evidence encompasses both qualitative and acknowledge that--- the “quants’ have won. In other quantitative measurements, two important words, its decided--marketing elements in support of marketing decisions.

Included with this paper is an appendix with detailed descriptions of metrics and resources indicating when and how they should be used. While there are volumes of resources on the topic of metrics, we recommend two, Competing on Analytics, The New Science of Winning, Thomas H. Davenport and Jeanne G. Harries and Marketing ROI, James D. Lenskold.

Marketing Managers who are committed to practicing evidence-based marketing should use metrics that reflect the same standard financial concepts as: return, risk time value of money, cost of capital, breakeven, unit costs, LTV…. marketers gain credibility and will be noticed by C level executives focused on growth. To be successful, and creditable marketing must be practiced like any other investment activity: it must be based on research, planned carefully, monitored constantly, and measured and evaluated based on its alignment with organizational objectives and financial forecasts.

is a science rather than art.”

Identifying Marketing Metrics Marketing metrics are measurements that quantify the estimates and results of creative, strategic, and tactical marketing efforts. Marketing’s past reputation suggests that decisions have been guided by best guess scenarios, gut instinct, or following the leader. Instead, the accountable marketer must gather evidence to support marketing programs/ projects. One way for marketers to produce evidence is through metrics, quantitative metrics, that follow the same rules and practice as financial metrics.

Marketers must STOP advocating for their product or service in order to get the buy-in and resources required for implementation. Marketing advocates must become a thing of the past. That is, those who demand that marketing act and react to changes in the market and competitor moves by

Not all customers are equally profitable, nor do they all have the potential to become your most profitable customers. This section hopes to help you identify your most (Continued on page 6)

Summary of the Marketing Metrics Surveys Study Sponsor

CMO Council, Deloitte,

2008 ANA/MMA Marketing

and Marketo

Kneebone

Accountability Survey

Question

Lenskold 2008 Marketing ROI Study Weighted

N=825

N=128

N=712

Q. Use Marketing Accountability Metrics

87 percent

53 percent

57 percent

72%

Q. Use Marketing ROI

47 percent

40 percent

26 percent

37%

Q. Satisfied with Metrics and/or progress

79 percent

77 percent

71 percent

72%

7 percent

33 percent

32 percent

23%

Number of Respondents:

Q. Use Metrics to Budget Prepared by Market Directions

Page 5 Market Directions (C) Copyright (2008) All Rights Reserved

(Continued from page 5)

profitable customers and gives you tools to help you measure your marketing success. Covered are methodologies for categorizing customers and focusing on those who make the largest contributions to your bottom line; and how to analyze a marketing campaign. Additionally, provided, is some unique customer segmentation attributes— some you probably never thought of.

ROI—Marketing ROI?

finance-- not accounting, (many confuse finance and accounting in the same way some confuse marketing and sales), we ran models to calculate ROI, cashflows and consumer behavior 30 years out. Financial modelers, for years, before mini computers, have been factoring in all of the infinite numbers of variables into their forecasts to determine the effects on financial decisions, returns and risks. Variables used within any good financial model include: utility (the action of the individual); interest rate risk (how a portfolio changes as interest rates change); market risk (change in the economic environment); and operations risk (the risk associated with how the organization functions.)

In addition to marketing’s credibility gap as the result of absence of metrics and measurements, marketing also has The way financial modelers do this is with lots of amongst its ranks those that believe an effective, efficient and data, lots of input, lots of analysis, lots of scenarios and lots of accurate marketing measure, such as ROI, (or marketing ROI expertise in interpreting the results. And, like economists and as some label) is next to impossible to measure because of all marketers, they are not always right. The skepticism towards of the variables and inconsistencies in the metrics, measurement, analysis and expertise may be ROI involves looking consumer, economic and competitive at the cost of a especially suspect in today’s economic environments. The author of Marketing ROI, marketing campaign environment, and cannot be ignored in this paper James D. Lenskold, an American Marketing relative to the profit that campaigns for more analytics to make a generated. This is a Association Publication, states: calculation for profession and organization credible. So how determining whether To understand how marketing ROI is does someone new to implementing marketing campaign is a success. different from ROI analysis….. page 33 metrics within an organization make a case, when an industry (banking, financial services) … marketing investment alternatives… which has some of the best quantitative analysts create an incredible number of decisionmaking possibilities, while capital and modelers who have recently messed up so investments are typically limited to infrequent, badly? To answer this all you need to do is a brief search of large-scale investments. Also, the assumptions financial and investment literature and you will find numerous that go into marketing ROI measurements are experts who predicted the housing market collapse and other subject to change on a regular basis…. economic conditions. Meaning that numbers, data can tell a There is no difference between “marketing ROI” and ROI. story, but the interruption, credibility and the ability to get the point across of the story is paramount to successful decision and implementing the best solutions.

The CMO’s Place in the Organization Every organization, firm, association, department however, does have its own unique inputs and assumptions into providing the data for calculation. “Marketing ROI,” is simply a buzz word attracting attention to the importance it has in marketing. And Lenskold presents some good guidelines for gathering the information necessary to apply ROI methods to marketing. There are no secrets to reveal and no easy way to determine the variables that will give you a bottom line ROI number you can rely on. It takes trial and error, time and good technical skills It is possible to quantify the elements that go into the calculation including customer behavior, economic, political and environment changes. Having worked in banking

Prepared by Market Directions

Becoming more effective, accountable and credible as marketers requires fact-driven evaluations and recommendations that provide insight to quantify key customer drivers--- marketing must deliver the tangible--- that which can be measured. With tangible evidence marketing can then be at the center of the sales forecast, a function according to surveys is currently provided by finance. A July 2008 article in Advertising Age, reveals: "six in 10 financial executives believe their companies' marketing departments have an inadequate understanding of financial controls, and seven in 10 said their companies don't use marketing inputs and forecasts in financial guidance to Wall (Continued on page 7)

Page 6 Market Directions (C) Copyright (2008) All Rights Reserved

(Continued from page 6)

Street or in public disclosures." The study also said that a marketing department's return on investment numbers were not taken into consideration when setting budgets. Instead, most are setting budgets based on a percentage of revenue and/or the last year's budget--- with only 14% of marketing executives feeling that senior management had confidence in their marketing forecasts.”

A glimpse into an organization’s current and potential market is required to first answer--Will they buy? What will they pay? These questions can only be answered with market research. Market research used as a forward-looking instrument to reduce the risk and increase the value of marketing investments. A market risk associated with —Will they buy? and What will they pay?— is the chance that there is a consumer lifestyle change that makes he/she unable or unwilling to pay. This risk must be evaluated on a strategic level inherent in your strategic planning with market research.

Inability for a customer to pay may happen as a result of the turn in the economy— a risk that cannot be diminished by actions of the organization. However, the affects on the organization can be decreased if the organization protects itself by maintaining a diverse product line or other strategic initiatives.

When marketing is actively engaged in sales forecasts, based on acceptable financial models, then marketing can also be the major source of input for the assumptions required to build the models and the marketing metrics. Much of the current dialogue suggests that marketing should turn to finance in order to determine the appropriate metrics and the way they should be calculated. This is a risky position for a CMO. CMO’s must travel the path to marketing accountability, by overcoming some crucial obstacles: On a tactical level tailoring products to customer Staying on top of literature and data; efficiently gathering data, needs mitigates operational risk. That is risk associated with reporting and sharing information; properly the knowns about a consumer and how the interpreting and applying marketing research Wisdom begins in wonder… organization interprets, gathers and uses the findings; using the correct applications to Socrates data. To answer the questions — Will they disperse information and; finding skilled data buy? and What will they pay? — there is a risk Two ultimate questions for analysts and market research leadership, to of a customer’s lifestyle changing, “empty marketers to answer are: name a few. If not, marketing is viewed as a nesters”, for example. This type of consumer “Will they buy?” and discretionary cost center that will be funded preference and change can be predicted with “What will they pay? “ according to the CFO, not the CMO. some certainty by the organization.

Part III— Market Research, Risk and Value Market Research—Reducing Risk Marketing may be making a transition from guessing to quantitative measurements. Certain analytics will contribute to successful marketing in determining how well an organization knows its customers— current and potential— and help understand the environment in which customers live, work and desire products and services in order to maintain or improve their quality of life.

Market research is the basis for understanding which customer needs the organization can fulfill, profitably while maintaining its own mission and objectives. It helps define specific customer acquisition and retention programs and the risks associated with choices in the investments to maintain those programs. Better market research, with supporting metrics, leads to evidence based management in marketing— addressing the credibility and accountability issues facing marketing.

(Continued on page 8)

The Story of the CMO The average tenure of a CMO at the top 100 branded companies is 22.9 months compared to CEO’s tenure, which is 53. 8 months and only 14 percent of CMOs have been with their companies for more than three years. This data is from a research study conducted by Spencer Stuart, global search firm, concluded that the chief reason for the turnover was that CEOs often do not share high expectations for marketing.

Another report on the status of the CMO by Brandweek, describes the CMO in terms of their advertising campaigns— and super stardom. Giving evidence of such campaigns as “Softer Side of Sears”, and other top brand marketers at Home Depot, Pepsi, Taco Bell, Compaq (HP), whom the article attributes their success to memorable advertising campaigns. High profile CMOs were able to go to other top brand companies to apply their magic.

The term “chief marketing officer” was mentioned 28 times in The New York Times prior to 1986. The first mention, of someone named E.E. Wall’s promotion to the title for the California Oil Co., came in 1957. The first high-profile CMO was Paul Schrage at McDonald’s, who was listed as EVP-marketing in 1970, but by 1981 was called chief marketing officer. The designation didn’t really take off until the latter part of the ’90s.

Prepared by Market Directions

Page 7 Market Directions (C) Copyright (2008) All Rights Reserved

There are many marketers who believe that marketing Conclusion— Evidence Based Marketing is not just for increasing revenues; it is for EBMkt. Focused market research, the heart and mind of the consumer--- getting To summarize what EBMkt. should can provide a powerful a consumer to hold your brand top of mind look like— objective view from and to associate it with positive images. In customers and prospective • have standards for evidence in support of today’s organization this is not enough. customers. This will give marketing programs you statistically reliable Marketing must motivate customers to buy, deliver what has been promised and continually adapt and transform products, services, and the organization as customer requirements change.

data, and the insight needed to put marketing choices and business decisions on a sound footing.

Valuing the Firm by Valuing Customers Gupta, Lehman and Stuart in their 2002 paper

• understand and identify the biases involved in decision making • marketers trained as financial experts for allocating funds and applying financial metrics to marketing results

• constantly evaluate and re-evaluate— don’t do what’s always been done

“Valuing Customers” and in their subsequent book: Managing

• managers should be aware of advocates and avoid rewarding them simply for activity

Customers as Investments conclude that the traditional financial valuation methods based on discounted earnings with the marketing concept--- customer value--- serves as a useful metric to assess the overall value of a firm. Specifically, they define the value of the firm in respect to the intangible assets (off balance sheet) of customers as the expected sum of the discount future earning based on customer lifetime value which is the discounted future income stream based on acquisition, retention and expansion projections and their associated costs. Where the value of all customers is determined by the acquisition rate and cost of acquiring new customers. Additionally, their analysis concludes that that the impact of improving customer retention and acquisition costs has a greater impact on the value of the firm than improving the discount rate associated with the cost of capital by one percent.

• market research must have a role in the marketing process

If you are a marketing manager with the responsibility of marketing you must understand the financial terms used in the above statement--- because this is where marketing is headed----- it has become an integral branch of finance and economics (not accounting) with respect to firm valuation, and involves balancing risk and profitability while attempting to maximize the firms wealth and the value of its stock. While McKenna in 1990 simply gave a good anecdotal argument that the purpose of business is to create a customer, profitably— Gupta, Lehman and Stuart quantify the concept with accepted financial principles.

• marketing risk should be looked at and calculated the same as investment strategists do • a firm’s value should be calculated by marketing as the sum of the value of its customers Marketing’s ability to acquire organizational resources should be dependent upon its ability to set and meet revenue goals. However, marketing must first make a case for acquisition of the resources by providing reliable, fundamentally sound evidence— in the form of analytics, the voice of the customer and expert insight. It's important to use relevant evidence, use it effectively, and have an appropriate amount of it. This paper should give you ideas and an awareness as to what passes for evidence—qualitative and quantitative and to use evidence wisely in your quest for credibility.

Additionally, we hope that we have provided you with the tools to design measures and begin to put processes in place so that you can carefully assess exactly what the outcomes are that you need. Doing this is difficult, but necessary to keep marketing’s seat at the table. #############################

Selling the “sizzle” is still good marketing practice, however, the sizzle sale must add value to the organization through profit, because before it was viewed that a firm’s purpose is to create a customer— it was generally accepted that the purpose of a firm was to create a profit.

Prepared by Market Directions

Page 8 Market Directions (C) Copyright (2008) All Rights Reserved

Resource Appendix--- Resources and Websites Cited within the article.

Chaves, Mark A.; Marketing Accountability and ROI, Part I Back to the Future of Marketing ROI By Mark A. Chaves www.chiefmarketer.com/Channels/marketing_roi_1/ Davenport, Thomas H, Competing on Analytics and Jeanne G. Harris, Harvard Business School Press, 2007 DeLegge, Peter, The Bottom Line on Marketing Accountability www.marketingtoday.com/marketing/1204/ bottom_line_marketing.htm Drucker, Peter F. (1993 (reprint)). Management: Tasks, Responsibilities, Practices. HarperCollins. ISBN 0-88730-615-2.

Gupta, Sunil and Donald R. Lehman, “ Managing Customers as Investments” http://www.12manage.com/methods_npv.html" Gupta, Sunil, Donald R. Lehmann, and Jennifer Ames Stuart, Valuing Customers, Sunil Gupta, Donald R. January 2002, Revised August 2002 Is it Time for a New Marketing Organization?, Marketing NPV Journal, Volume 2 Issue 1 pages 4-7, 2005 Johnson, Bradley; “ANA Confronts Lack of Confidence at Marketing Accountability” Conference; July 15, 2008; Advertising Age // adage.com/article?article_id=129629 Kotler, Philip (Nov. 1977), "From Sales Obsession to Marketing Effectiveness", Harvard Business Review Lenskold, James, Marketing ROI, American Marketing Association, McGraw Hill, 2003 Liodice, Bob; “Marketers, Get Serious About Accountability” AdAge Advertising Age, September 8, 2008 Lodish, Leonard, M. “ How Good, or Bad, Marketing Decisions Can Make, or Break, a Company” Knowledge@Wharton, knowledge.wharton.upenn.edu/article.cfm?articleid=358) Lunsford, Andrea A., and John J. Ruszkiewicz, John J. “Everything's an argument” Boston: Bedford/St. Martin's, 1999 Marketing Decision Support: Solve the Marketing Accountability Puzzle by Marketing Management Analytics (MMA) Marketing Management, 12th ed.. Pearson Prentice Hall, 2006 ISBN 0-13-145757-8.

McKenna, Regis (Jan. 1991), "Marketing is Everything", Harvard Business Review Milkman, Katherine L., Chugh, Dolly and Bazerman, Max H., “How Can Decision Making Be Improved?” (July 14, 2008). Harvard Business School Working Paper No. 08-102; Available at SSRN: http://ssrn.com/abstract=1147059 Miller, Richard E., and Kurt Spellmeyer “The New Humanities Reader Home Page” 22 Feb. 2005 ww.newhum.com/for_students/ tutorama/index.html.

Moorman, Christine and Roland T. Rust, “The Role of Marketing,” Journal of Marketing, 1999.

Pettit, Raymond, “Biggest bang for the buck: New frameworks for accountability in marketing, advertising and communications”, November/December 2005, Richard Ivey School of Business, The University of Western Ontario, London, Ontario 2005 Pfeffer, Jeffrey and Robert I. Sutton. Hard Facts Dangerous Half-Truths & Total Nonsense. Harvard Business School Press. 2006.

Pfeffer, Jeffrey and Robert I. Sutton; Harvard Business Review , “Decision Making”, January 2006 Practical Tools for Management Decisions: Making the Numbers Work for You Excerpted from Finance for Managers Harvard Business School Press Boston, 2006 ISBN-10: 1-4221-0585-7 ISBN-13: 978-1-4221-0585-6 Schweitzer, Maurice and Karen R. Chinander, “The Input Bias: How Managers Misuse Information When Making Decisions” Knowledge@Wharton (http://knowledge.wharton.upenn.edu/article.cfm?articleid=840) The Five Stages of Marketing Accountability Marketing & Strategy Innovation Blog http://blog.futurelab.net/2007/08/ the_five_stages_of_marketing_a.html www.ana.net/news/content/1403 Zutter, Chad J., “Capital Budgeting Process and Techniques,” Introduction to Finance

Authors whose ideas were basis for this paper: Sunil Gupta is Meyer Feldberg Professor of Business, Donald R. Lehmann is George E. Warren Professor of Business and Jennifer Ames Stuart is a Ph.D. candidate at Columbia Business School, Columbia University, New York, NY 10027.

Robert I. Sutton, Professor of Organizational Behavior (by courtesy), Graduate School of Business; Professor of Management Science and Engineering, School of Engineering; Codirector of the Customer-Focused Innovation Executive Program

Prepared by Market Directions

Page 9 Market Directions (C) Copyright (2008) All Rights Reserved

Appendix to Market Directions’ Evidence Based Marketing (EBMkt.) White Paper

Metrics and Measurements in Marketing — Contents

Expected Response Rates

2

Net Present Value (NPV)

2

Internal Rate of Return (IRR)

2

Breakeven Analysis

3

Customer Lifetime Value (CLV)

3

Profitability Index (PI)

3

Market Segmentation Analysis

4

Mean, Median & Mode

5

Standard Deviation

5

Sample Size

5

Developing Standards for Marketing— What are the right metrics?

There is a Standards Or- 2. Predictive…accurately 3. Objective…not subject to ganization that promotes predicts outcome of pend- personal interpretation marketing metrics and their ing action 4. Calibrated…means the vision is: same across conditions and The vision of the Marketing cultures Accountability Foundation 5. Reliable…dependable (MAF) is an independent and stable over time standards body, laying the measurement foundations 6. Sensitive…identifies for marketing professionals meaningful differences in to realize full accountability outcomes and strategic status in the 7. Simple…uncomplicated Marketing Accountability Boardroom, as reliable foreStandards Board (MASB) meaning and implications casters and achievers of www.themasb.org clear consistent growth in cusLaunched by tomer revenues, earnings “The Boardroom Project”...

8. Causal…course of action a three year study of and cash flows. leads to improvement marketing accountability concluded that, Metrics which qualify ac9. Transparent…subject to marketing was not cording to MMAP will demignoring issues surindependent audit onstrate the following 10 rounding metrics and accountability—— howcharacteristics: 10. Quality Assured… ever initiatives were ongoing process to assure 1narrow in focus, lack1. Relevant…addresses and 9 above. ing integration and informs specific pending not tied to financial action performance.

Special points of interest: ♦There is a Standards Board for Marketing Metrics ♦CFOs as using the following metrics: • IRR (76%) and NPV (75%) — the most.

• Payback period was used by 57%.

• The profitability index was used 12%. ♦Small firms and capital constrained firms use payback period more than the NPV and IRR. ♦Payback periods also tend to be used more frequently for smaller projects. ♦Companies with older CEOs without MBAs tended to use the payback method more frequently.

Source: How do CFOs make capital budgeting and capital structure decisions? Graham and Harvey, Journal of Applied Corporate Finance (2002).

Accept, Reject or Rank Projects The relevant cash flows to evaluate a project are the incremental cash flows that are all changes in the firm’s future cash flows that are a direct consequence of accepting the project.

Mutually Exclusive Projects are investments that compete in some way for a company’s resources. A firm can select one or another but not both.

Independent Projects, do not compete with the

firm’s resources. A company can select one, or the other, or both -- so long as they meet minimum profitability thresholds.

If the firm has unlimited funds for making investments, then all independent projects that are acceptable projects (i.e., determined to add value to the firm) can be accepted and implemented.

als to determine whether they meet the firm’s minimum acceptance criteria.

The ranking decision involves the ranking of capital expenditures on the basis of some predetermined measure, such as the rate of return.

The accept-reject decision involves the evaluation of capital expenditure proposPrepared by Market Directions

M e t r i c s — f o r m e a s u r i n g m a r k e t i n g ’s e f f e c t i v e n e s s

M e t r i c s — f o r m e a s u r i n g m a r k e t i n g ’s e f f e c t i v e n e s s — C a p i t a l B u d g e t i n g

Response rates will vary depending on the list you're working with (house vs. prospect), the industry you're working in, your offer and the objective of your campaign. Typical Consumer campaigns expected results: High Low Typical Direct Mail ............................. 1.9% .............0.12%.............. 0.9% E-mail ..................................25%.................0.1% .............. 1% Catalog ................................. 3% .................0.05% ............. 1.2% Inserts .................................. 1.5% ..............0.002% ........... 0.3% Coupons ................................ 1.5% ...............0.009% ........... 0.05% Telemarketing ........................ 9% .................0.09% ............. 0.16%

Capital Budgeting

Net Present Value (NPV) Calculation NPV

=

n

∑

t= 0

CF t (1 + r )

Present Value of $1 to be Paid in Future This table shows how much $1, to be paid at the end of various periods in the future, is currently worth, with interest at different rates, compounded annually.

t

Rate

Accept project if NPV > 0.

Net Present Value (NPV) • • •

is a measure of how much value is added for the firm today by undertaking a project. is the present value of the incremental cash flows generated by the project. where CFt is the cash flow in year t and r is the discount rate for the project.

NPV = CF 0 +

CF 3 CF N CF 1 CF 2 + + + ... + 2 3 (1 + r ) (1 + r ) (1 + r ) (1 + r ) N

Internal Rate of Return (IRR)

NPV ($)

7.0%

Years

$0.873439 $0.865333 $0.857339 $0.849455

3

$0.816298 $0.804961 $0.793832 $0.782908

4

$0.762895 $0.748801 $0.735030 $0.721574

5

$0.712986 $0.696559 $0.680583 $0.665045

6

$0.666342 $0.647962 $0.630170 $0.612945

7

$0.622750 $0.602755 $0.583490 $0.564926

8

$0.582009 $0.560702 $0.540269 $0.520669

9

$0.543934 $0.521583 $0.500249 $0.479880

10

$0.508349 $0.485194 $0.463193 $0.442285

11

$0.475093 $0.451343 $0.428883 $0.407636

12

$0.444012 $0.419854 $0.397114 $0.375702

13

$0.414964 $0.390562 $0.367698 $0.346269

14

$0.387817 $0.363313 $0.340461 $0.319142

15

$0.362446 $0.337966 $0.315242 $0.294140

0 =

n

∑

CF t ( 1 + IRR

IRR

)

t

NPV>0

NPV>0

multiple IRRs, no real solutions Timing problem

8.5%

2

t = 0

Disadvantages of IRR

8.0%

$0.934579 $0.930233 $0.925926 $0.921659

If IRR is greater than the cost of capital, accept the project.

• • •

7.5%

1

Discount rate

NPV<0

NPV<0

Sometimes projects do not have a real IRR solution

IRR

Analysis of the financial value of a specific investment requiring the follow: • Estimation of all future cash flows • Nature and extent of risk associated with each source of cash inflow/outflow • Estimation of proper discount rates to apply to cash flows • Determination of whether the project will cover the cost of the investment or of the financing Page 2

Prepared by Market Directions

M e t r i c s — f o r m e a s u r i n g m a r k e t i n g ’s e f f e c t i v e n e s s Breakeven analysis tells you how much you need to sell in order to pay for the fixed investment— Fixed costs. These are costs that stay mostly the same, no matter how many units of a product or service are sold.

M e t r i c s — f o r m e a s u r i n g m a r k e t i n g ’s e f f e c t i v e n e s s

Variable costs. Variable costs are those that change with the number of units produced and sold Contribution margin. This is the amount of money that every sold unit contributes to paying for fixed costs— it is defined as net unit revenue minus variable (or direct) costs per unit

Breakeven Volume = Fixed Costs / Unit Contribution Margin

Profitability Index, a capital budgeting technique is a modification of NPV that evaluates projects using a “return” measure.

PI decision rule:

Present Value of Benefits PI = Present Value of Costs

–If PI > 1 the project is acceptable.

–Ranking: Projects with higher PI are ranked higher.

Customer Lifetime Value (CLV) is the present valuec of the future cash flows attributed to the customer relationship

Inputs:

m= Margin i = discount rate r = retention rate Avg. Spend per Purchase Avg. Number of Purchases Discount Rate

c

is the value on a given date of a future payment or series of future

Gross Product - Direct Costs = dGross Margin

Inputs: x = the number of customers still buying in year two y = the number of customers who bought in year one C = customer lifetime (in years)

Page 3

R=( x / y ) C=R / R 1

2

C is the Retention Rate in Year one divided by the Retention Rate in year 2….

Retention Rate provides a snap-shot of how many customers are staying loyal to you from year to year NOTE: "Customer Lifetime" should NOT be confused with "Customer Lifetime Value"

Prepared by Market Directions

Life stage and Lifestyle Marketing Resources— Market Segmentation Approaches Companies that provide segmentation and life stage and lifestyle data for marketing include:

Life stage and Lifestyle Marketing Resources— Market Segmentation Approaches

Claritas The industry standard for lifestyle segmentation, Claritas classifies every U.S. neighborhood into one of 62 distinct PRIZM — part of Nielsen Acxiom's InfoBase offers a sophisticated suite of overlay and analysis products - everything from response data, demographic, geographic, purchase and lifestyle.

InfoUSA FormerlyDatabase America, offers a comprehensive family of list enhancement services for both Consumer and Business programs. They offer 61 consumer data types and 13 business data types.

MapInfo's Psyte neighborhood segmentation system is a proven and easy to use tool for analyzing and predicting lifestyle and consumer behaviors at the neighborhood level. Good tool to overlay on your data.

Equifax Sophisticated suite of analysis, reporting and mapping tools available. Through geocoding, Equifax's has classified the US into 50 segments. They also offer more sophisticated overlays, segmentation and predictive tools.

Experian offers a suite of from address hygiene to letter shop to data modeling.

Lifestage Matrix Marketing - Consulting company that specializes on generational cohort segmentation.

Market Segmentation Approach The purpose of market segmentation is to design a marketing mix that more precisely matches the needs of the individuals. A market segment consists of individuals, groups or organizations with one or more characteristics that cause them to have relatively similar product needs.

Market segmentation based on lifestyle falls into three categories—activities, interests, and opinions.

Activities are divided into four parts: work, entertainment, sports, and hobbies. Interests are divided into career, home, family, fashion, and food.

Opinions are broken into social issues, education, business, politics, and the future.

Along with these variables, demographic factors are used for defining market segmentation.

Psychographic variables are any attributes relating to personality, values, attitudes, interests, or lifestyles.

Cartographics includes mapping and data products that present area boundaries. This varies from Censusdefined geographies such as a county or block group, media-defined areas that include television markets, and industry definitions such as cable systems and wire centers.

Page 4

Prepared by Market Directions

Remembering Statistics Mean, Median & Mode and Standard Deviation Mean - This is the average value of a set of numbers.

Median - This is the number that is in the middle of your set.

Mode - This is the number that occurs most frequently in your set.

Mean is the most often seen number.

Median is the most useful and less likely skewed number. The median always results in 50% of the values being above it, and 50% of the values being below it. The median can be misleading when values are polarized into very high and low bands with 50% of values falling into one band and the rest falling into the other band. In such instances, the mean calculation may prove more reliable.

Mode is generally only useful where there are a limited number of different values within the data e.g. 1-5 grading systems used in research surveys. In such cases, the mode is a useful tool.

Standard Deviation

Remembering Statistics

A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance.

In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility.

Sample Size: Selecting What is the optimum percentage of a population to accurately predict from this sample the characteristics of the population. Above a certain sample size, the margin of error decreases only slightly, regardless of the size of the population.

You can achieve â&#x20AC;&#x153;95-percent confidence level with a margin of error less than 5 percentâ&#x20AC;? with a sample as small as 385 respondents from a population of 8,000.

Doubling the size of the sample (to 770 respondents) only reduces the margin of error by 1.4 percentage points. Decreasing the margin of error, and increasing the level of confidence both require drawing a larger sample.

The table gives the sample size necessary to estimate population characteristics given various levels of sampling error, population size and variation. The sample sizes are based on a 95 percent confidence level.

Page 5

Prepared by Market Directions