Five Keys to an Effective Marketing Dashboard: Part Three
In this series, we’ve been examining the five keys to designing and deploying an effective marketing dashboard. They are:
- Building cross-functional alignment on the role of marketing in the organization;
- Mapping the knowledge base to identify possible critical metrics;
- Providing a financial (versus purely strategic) framework for bridging short- and long-term results from marketing investments;
- Building a comprehensive brand scorecard; and,
- Designing a highly engaging user interface.
The first installment provided some guidance on building the cross-functional alignment of influential stakeholders to get the foundation of credibility under your marketing measurement plan. The second looked at how to begin to assemble your knowledge base of data, research, and experiential insights and translate them into some hypotheses about what your most critical marketing metrics might be.
Now, in today’s spotlight, we look at the third key:
Providing a Financial Framework for Bridging Short- and Long-Term Results From Marketing Investments
In the pressure of today’s business environment to produce quantifiable results, the challenge of measuring marketing effectiveness has been, well, perverted.
The increasing emphasis on understanding the impact of marketing in the current quarter has driven most measurement efforts dangerously down the short-term path. CFO’s, Sales VP’s, and other P&L owners eager for tangible benefit have created an environment in which marketers have been politically pressured to shift an increasing portion of their program portfolio into tactics that pay back NOW or not at all.
From a measurement standpoint, the implications have been pronounced. Unless a given marketing investment can clearly be shown to generate sales, profits, or leads, its value is questionable.
To understand this dynamic, we need to first look at it in an accounting context. As shown in Figure 5 below, most marketers understand that while many marketing investments have some immediate payback, many require a bit of continuity to build to their critical mass of contribution over time. Unfortunately, our colleagues in finance and accounting (who are often in the position of vetting the proposed marketing expenditures) live in a world where generally accepted accounting principles (GAAP) clearly and unquestionably require that all marketing expenditures be booked as expenses in the quarter in which they are incurred.
This disconnect in perspective often leaves the marketers in a pique of frustration as they struggle to explain the longer-term benefit in words like “brand equity”, “share of voice”, and “market development”. And while the more enlightened finance managers will understand the concepts behind these terms, they aren’t able to quantify them in a way that allow them to be compared to other pressing needs for the same finite pool of resources available at the time.
The end result is that marketing efforts not fully justified in the near-term returns wind up at the top of the chopping list as soon as discretionary spending tightens. Worse yet, spending on longer-term marketing initiatives starts and stops in an odd tango dance with variable quarterly results often experienced by growth companies who need some marketing constancy the most.
Overcoming this “marketing incontinence” requires the development of a measurement framework that escapes the tyranny of short-termism by providing a financially based framework to evaluate both the short- and long-term benefits in dollars and cents.
Once effective approach is to employ the concept of Customer Franchise Value(CFV). The math behind CFV is easy. CFV equals the number of customers you have at a given moment in time multiplied by the net present value of those customers (in gross profit contribution) over their expected lifetime (See Figure 6). Importantly, determining the net present value of the customers should be done in the most conservative approach – looking only at what they are presently buying and the expected rate of continuation of those purchases into the future. This is the time to work with finance to establish a formula that everyone agrees is a fair representation of the economic value of the present customer base.
When you think about the elements of the CFV formula in the ovals, they tend to be the very same things marketing investments are intended to achieve – acquisition, retention, and changes to the breadth, depth, and profitability mix of customer spending. Virtually all marketing expenditures (with a few exceptions we’ll discuss in part 4 of our series) are intended to deliver some combination of these outcomes. Which means that nearly all marketing investments – advertising, promotions, channel programs, etc. – can be evaluated in the same financial context of their impact on Customer Franchise ValueTM.
Having arrived at a formula for CFV that marketing and finance can agree on, the organization can now use CFV as the means of assessing the impact of investments across time periods too. So, for example, investment proposal A would demonstrate its forecast on CFV over each of the next 6 quarters. Investment B would do likewise. And even if A and B were very different types of investments (e.g. consumer advertising versus trade show premiums), we could evaluate the relative value of each on the same CFV scale. That way, investments whose primary value was created in later periods would get clear credit for their benefit, and the likelihood of short-sighted decisions is significantly diminished.
Another interesting benefit of the CFV bridge is how it can bring clarity to the definitions of “marketing effectiveness” and “marketing efficiency” – two fairly amorphous terms that are thrown about quite casually.
As shown in Figure 7, “marketing effectiveness” can now be defined as the actual change in CFV for each period compared to the expected change in CFV. If our marketing initiatives are funded with an expectation of delivering a certain lift in CFV, we can measure our effectiveness in terms of performance versus those expectations.
Likewise, “marketing efficiency” can also be clearly defined as the change in CFV per marketing dollar spent.
Each of these measures – effectiveness and efficiency – are best viewed in a historical context and evaluated against target goals for continuous improvement. And while your actual target goals may not be smoothly upward-sloping lines, setting and refining expectations is the ultimate way of promoting organizational knowledge development.
Now you’ve got a means of bridging the short- and long-term payback of marketing investment in a financial context. You’ve also got some better tools for selecting critical dashboard metrics and building alignment on the important things to monitor.
In our next installment, we’ll propose an approach to building a brand scorecard that will help the dashboard properly capture the progress marketing is making at building economic value through investments in brand equity development.
Pat LaPointe is Managing Partner at MarketingNPV (insert link to www.marketingnpv.com) – a consulting firm that builds marketing measurement frameworks, analytical processes, and marketing dashboards for Global 1000 companies across industries. He is also the author of Marketing by the Dashboard Light: How to Get More Insight, Foresight, and Accountability from Your Marketing Investments.
