Marketing Metrics: Key Concepts Defined

There is no shortage of buzzwords, acronyms and metrics in any industry and marketing certainly contributes to this pantheon. In our experience, there are many terms in common use amongst marketers which have multiple meanings and ambiguous definitions. The Canadian Marketing Association first set out to shortlist the most important metrics that tie to business performance, that both the CMO and CFO would agree on – the idea being that agreement on key metrics would further the working relationship. What began with a CMA Task Force that included input from the Canadian Management Accountants of Ontario, a host of metrics were identified. These were then consolidated and vetted by CMA’s Customer Insights and Analytics Council in terms of the importance of the metric, consensus of its definition, and its acceptance within the marketing community.

 

Below, the detailed definitions for these key metrics.

Acquisition / Retention

The cost of acquisition is simply the total marketing spend dedicated to supporting the acquisition of new customers (including incentives) divided by the number of customers acquired. It should be expressed both as an absolute number and as a percentage of the lifetime value of those customers acquired.

Conceptually, the cost of retention is designed to be comparable to the cost of acquisition - the idea is to understand whether it is more effective to invest in acquisition or retention. Given the difficulty in determining what customers have been retained, however, retention costs can be more difficult to calculate. Ideally, the cost of retention should be calculated as the cost to save a customer. Once again, this number should be expressed as an absolute number and as a percentage of the lifetime value of those customers retained. 

COA: Cost of Acquisition

The total cost required to acquire a new customer or sale divided by the total number of sales attributed to the campaign or marketing program. This should include all costs associated with the campaign or overall marketing (including items such as agency fees, media costs and incentives).

Used in conjunction with metrics like value after the first year, we then have a means of calculating ROI in the short-term (first year). This can be used as a comparative metric when evaluating various techniques and initiatives. The use of LTV (life time value) can be used as a broad measure to determine when the COA will be paid back. Used in conjunction with metrics like LTV, the COA should be below your customer LTV in order to be profitable. It can also be used to compare different campaigns and channels for marketing effectiveness.

Customer Satisfaction

The customer satisfaction metric is normally derived from primary research conducted with a sample of customers, where customers are asked to provide quantitative feedback about their overall satisfaction and with various aspects of their experience with a company.

In order to make this metric more robust and understand not only the level of overall satisfaction but also its drivers, a model is normally built using overall satisfaction as a dependent variable and potential satisfaction drivers as independent variables. The outcome of this process is a modeled satisfaction score based on the drivers of satisfaction and their weighting.

Depending on the types of customer segments within the customer database, it may be necessary to look at customer satisfaction and its drivers separately for each segment.   

Other considerations are: linking satisfaction to loyalty and financial performance, frequency of measurement, how frequently the model and survey questions need to be revisited, and the need to compare customer satisfaction to that of customers of the competitors. Another key consideration is to look at how satisfaction is changing over time. Trigger-based type marketing programs can be targeted against those customers where satisfaction has changed substantially, assuming this does not violate confidentiality agreements.

Employee Satisfaction

Employee Satisfaction is normally measured on an annual basis. The metric is typically derived from research conducted amongst employees, where employees are asked to provide quantitative feedback about their satisfaction with the company as well as with various aspects of their job experience. This includes evaluation of the environment, career advancement opportunities, compensation, executive team leadership, immediate management performance, internal communications, clarity of job requirements/objectives and understanding of the company strategy/values. 

In order to make this metric more robust and to understand not only the level of overall satisfaction but also its drivers, a model is sometimes built using overall satisfaction as dependent variable and potential satisfaction drivers as independent variables. The outcome of this process is a modeled satisfaction score based the drivers of satisfaction and their weighting.

Other considerations are: linking satisfaction to retention and performance, frequency of measurement.

LTR: Likelihood to Recommend/Repurchase

Repurchase behaviour is a metric that can be derived directly from a purchase/transaction database. The RFM (Recency of last purchase, Frequency of purchases, and Monetary value) index should be looked at as a key performance indicator of repurchase and ultimately engagement.

Capitalizing on this thinking, predictive models can be built by initially looking at survey information related to the likelihood to recommend. This data would be appended to the customer database – and RFM, along with other database variables, would then be considered as potential inputs to a model. This predicted likelihood to recommend model can then be applied against the full customer database where each customer is given a score on how likely they are to recommend. Other variables in the customer database could be used alongside RFM to enhance this model. Text mining and sentiment analysis could be conducted to yield further variables or inputs to this model.

Retention Rate

Customer attrition rates range from 2 per cent to 40 per cent annually, depending upon the industry. Slowing this customer "churn" rate by as little as 1 per cent can add millions of dollars to any sizable company's bottom line. As it is widely held that customer acquisition is 4 to 5 times more expensive than retention, an effective customer retention strategy is crucial to a company's success.

Marketing departments are traditionally focused more on acquiring new customers than retaining existing ones. But when finding new customers is more challenging, customer retention becomes a major corporate priority. The core idea is very simple but the calculation might vary from one industry to other. The basic formula is as follows:

Retention rate = 1 - attrition rate

Attrition rate = (number of customers at the beginning of the period + number of customers acquired during the period – number of customers at the end of the period) / number of customers at the beginning of the period. Some industries will use an annual retention rate, while others like the telcos will monitor this monthly or even weekly.

You can add a financial evaluation by either doing the calculation purely on the revenue gains and losses or by estimating the cost related to losing a customer. For the last avenue, you have to be careful to not use the revenue related to the customer that the organization lost just at the moment the customer is lost. Often the client has been slowly attriting over a longer period and their behaviour and value has been declining for a while. Using their most recent value will likely under represent the true impact to the business. It is recommended to use a historical average of the revenue of the customer over a certain period prior to the cancellation.

ROMI: Return on Marketing Investment

Return on Marketing Investment (ROMI) is designed to quantify the return on the organization’s total marketing spend. It should answer the question: for the marketing activities supported by the marketing budget, what would profit and expenses have been? The formula for calculating ROMI is fairly straightforward:

ROMI = [(Incremental Revenue due to Marketing Activities * Gross Margin on those Revenues) – Costs of Marketing Activities]/Costs of Marketing Activities

ROMI is typically calculated for the short term and does not include the estimates of the longer term impacts of declining brand equity. It is most often used as a benchmark rate of return for prioritizing marketing investments and/or to quantify marketing’s overall contribution to the total profitability of the firm. For this reason, it is helpful to be able to identify the contribution of discrete elements of marketing to the overall result.

Paul Tyndall

 

 


 

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Tags: Analytics, Measurement, Customer Insights, Marketing Education