25 essential marketing_metrics

25 ESSENTIAL
MARKETING METRICS
to Link Marketing Performance
with Financial Goals

By Saleem Sufi

Edition 1 | 2011 METRICS INTEGRATED
www.MetricsIntegrated.com

25 Essential Marketing Metrics

Copyright © 2009-2011
By Saleem Sufi & Metrics Integrated
All rights reserved. This book may not be produced
in whole or in part, by any means, without permission.

For information regarding the book, contact:

Saleem Sufi (Author)
saleem@metricsintergrated.com

For more information on Metrics Integrated, contact:

Sandra Jacobs
sandra@metricsintergrated.com

Created and Printed in United States of America
Copyright © 2009-2011


Introduction ..................................................................1

Chapter 1. Metrics Framework ......................................................5

Chapter 2. Revenue Growth Metrics .............................................9

Metrics #1: Sales From New Customers ..................................10
Metrics #2: Sales For New Products.........................................10
Metrics #3: Sales Price Increase .............................................. 11
Metrics #4: Discounts Allowed ..................................................12
Metrics #5: Customer Wallet Share ..........................................13
Metrics #6: Price / Brand Premium ..........................................14
Metrics #7: Market Share ..........................................................16
Metrics #8: Market Penetration .................................................18

Chapter 3. Profitability Metrics ....................................................20

Metrics #9: Customer Profitability .............................................21
Metrics #10: Return on Marketing Investment (ROMI) .............22
Metrics #11: Customer Lifetime Value (CLTV) ..........................23
Metrics #12: Return on Customer .............................................28

Chapter 4. Sales Productivity Metrics .........................................30

Metrics #13: Average Sale $ per Salesperson ..........................30
Metrics #14: Selling Costs as % of Sales ................................32

Chapter 5. Customer Metrics .................................................. 33
Metrics #15: Customer Retention Rate .....................................33


Metrics #16: Customer Satisfaction ..........................................37
Metrics #17: Customer Complaints ...........................................39
Metrics #18: Churn Rate ...........................................................40
Metrics #19: Net Referrals ........................................................41
Metrics #20: Customer Engagement ........................................42
Metrics #21: Customer Recency ...............................................43

Chapter 6. Brand Metrics ........................................................ 45
Metrics #22: Brand Awareness .................................................46
Metrics #23: Brand Equity .........................................................46
Metrics #24: Response Rate.....................................................48
Metrics #25: Conversion Rate...................................................49

Chapter 7. Conclusion ............................................................. 51

About the Author ...............................................................55

About Metrics Integrated ...................................................58


“Today you have to run faster to stay in the same place” Philip Kotler

The recent global economic crises have forced businesses to change
in many ways they operate. Most corporate boards, CEOs and CFOs
now believe that the only way to manage a business effectively is
through intensive financial management and scrutiny. They expect
their executives to provide more justification for the budgets they seek
and demonstrate adequate returns on their spending. This has created
renewed pressure not only on the Finance executives to install extended
systems and procedures for detailed evaluation of various expenditure
but also on operating executives to train and groom their staff to develop
the necessary financial acumen and capability to handle such requests.

During the last decade, since the recession after the 9/11 and the dotcom
burst, businesses in general have accomplished significant gains in
productivity and operational improvement. Intense business competition
and continuous focus on cost reduction forced manufacturing, supply
chain and support functions to reach to the new level of efficiency and
operational excellence. Marketing, however, in most organizations as
a function generally escaped such intense cost pressures on the belief
that cutting down marketing costs could be too risky for the future of the
company. Long term nature and lack of transparency in cause and effect
relationship between marketing costs and financial consequences did not
let the corporate executives venture with unknown risks. The result is that
marketing expenses as percentage of sales show significant increases
for many companies in the last few years.

After the recent economic turmoil of 2008-09 however, companies
are much more proactive and spending money in any area of their
businesses, including marketing, now requires lot more financial scrutiny
and justification. This has created pressure on marketing executives

www.MetricsIntegrated.com 1800 604 4121 1


to provide more financial and ROI type analysis on their marketing
expenditure. They are now forced to quickly establish necessary
analytical tools and capabilities within the marketing function to handle
this urgent requirement.

Generally, in companies there are detailed procedures and widely
accepted practices to thoroughly evaluate even a $10,000 expenditure
on an item of fixed assets before it is spent. However, when it comes
to financial evaluation of multimillion dollar spending on marketing
campaigns and programs, practices widely differ and any detailed
financial evaluations are almost non-existent. It has long been accepted
that most marketing expenditure particularly on advertising and brand
development do not require any detailed advance financial evaluation
and the confidence of the marketing executives and the belief of the
corporate executives that some value would be realized in the long term
is considered sufficient.

Additionally, despite the uncertainty about the returns on marketing
spending, there is a general belief that spending on marketing is
essential for the success of a company. The famous quote from a
company head “I am certain that half the money I am spending on
advertising is wasted. The problem is, I do not know which half” is still
true for many companies.

The question is not whether the companies should spend money on
marketing, but when and how much. The return on marketing campaigns
and programs must be evaluated before the budgets are approved and
systematically measured throughout the campaign to ensure efficiency
and effectiveness of the spending as well as to correct the course if the
results are not coming through as project and planned.

In the recent past with the advancement in ERP, CRM and other online
automated systems, there is extensive data available to companies
on customers, consumer demographics, products and buying patterns
that can be effectively utilized to create useful marketing metrics.
Corporate boards, CEOs and CFOs are getting impatient with the lack of
marketing metrics that can help them understand the linkages between
marketing spending and the corporate financial goals. It is the time for
the marketing executives to initiate a more robust quantification process
of their marketing programs and ensure that these are clearly linked and
fully aligned with the corporate financial goals.



One logical question from many marketing executives however is where
to start. The software market is crowded with expensive solutions in the
form of complex CRM systems and sophisticated marketing dashboards
and scorecards with unnecessary bells and whistles. For a mid market
company however the best place to start in an effective and economical
way is to establish a system of marketing metrics through creating their
own measures on a template based on an Excel spreadsheet.

Microsoft Excel is probably the simplest but most powerful software
that provides sufficient flexibility to experiment and test a metrics model
before it stabilizes and proves its worth within the specific culture
of a company. Once it reaches to a level of stability it can easily be
migrated to a complex CRM or ERP platform. Implementing a new
system of metrics is about performance measurement and performance
measurement is a sensitive subject that involves people and culture
of the organization. No two companies, even in the same industry with
same product portfolio, can be the same. The new metrics have to be
carefully evaluated and experimented to match the company requirement
and evolve within the company culture. It takes at least 6 to 12 months
to see if the metrics are properly established and accepted within the
organization.

In the recent past, marketing experts have suggested metrics to
measure the aspects of marketing that were earlier considered difficult to
quantify if not impossible. Among these metrics, the most popular ones
are Customer Profitability, Customer Life cycle Value (CLTV), Return
on Marketing Investment (ROMI), and Brand Equity. These metrics
have been built on a common concept however, there are variations in
approaches and formulation suggested by different authors and experts.

A common challenge that remains is that most of these metrics are non
financial and even for the ones that are financial it is difficult to relate to
the corporate financial goals. For example, a higher customer retention
rate may not always lead to increase in the profitability of the company
unless customers are evaluated through CLTV and non profitable
customers are removed from the customer base or converted into
profitable customers through price increase or cross selling efforts.

The role of Marketing over a period of time has shifted from functional
and tactical to strategic in most organizations. Marketers must know
and understand their companies by understanding their common financial
measures. There is a deep and integral link between marketing and



financial performance. Financial performance is driven by marketing
objectives linked to customer, product, price, place and promotion.
Marketers cannot do an effective job unless they deeply understand this
link.

Marketing is about future and the future is uncertain. Marketing generally
requires significant financial investment in future. Ultimate objective
of marketing is to realize the corporate financial goal of creating
shareholders value. With increasing pressure to demonstrate financial
returns from their marketing investment, marketing executives have
to take charge of managing the financial returns and risks from their
marketing investments. It’s the time for CMOs to establish a deeper and
long lasting partnership with their CFOs.



1
Chapter

Metrics Framework

A major issue in linking marketing spending with financial performance
is the length of time it takes to realize benefits from such expenditure.
The benefit out of other functional spending is generally short term and
visible. Operating costs in manufacturing, supply chain, sales, IT, Finance
etc. Provide immediate benefit that is visible and tangible in most cases.
Money spent on marketing programs, however may take multiple years
before the benefit is fully achieved and realized.

A second challenge with marketing spending is the lack of cause and
effect relationship between the marketing programs and the financial
results. For example, the outcome from marketing programs aimed at
developing brand loyalty or improving customer relationship is hard to
measure directly in financial terms.

Thirdly, the nature of the marketing programs is risky. Marketing
executives argue that their marketing programs are investment in the
future of the company. Accounting rules, however, consider these
spending as expenses for the period and require to be charged off on the
P&L statement of the current period. Influenced by accounting principles,
financial managers in general have not enthusiastically pursued ways
and means to measure the ROI on marketing spending.

In the table below, a framework has been presented to show the linkages
between typical marketing activities and marketing objectives with the
corporate and financial goals of a company. This framework is based
on balanced scorecard approach, as developed by Robert Kaplan and
David Norton. This framework considers the marketing activities as input
to reach marketing objectives which lead to realization of corporate
and financial goals. Put differently, marketing activities and marketing
objectives should be treated as ‘input’ and corporate and financial goals
should be considered ‘outcome’.



Typical marketing activities can be clustered into the following categories:

1. Demand Generation: Mainly consisting of selling and
demand generation activities including short term marketing
campaigns and promotions aimed to increase sales.

2. Customer Fulfillment: Customer support activities focused
on optimizing and delivering on a compelling customer value
proposition.

3. Customer Relationship: Comprised of marketing
communication, loyalty programs, and customer retention
activities.

4. Branding & Image: Public relations, brand promotion and
brand/corporate advertisement.

5. Infrastructure & Capability: Mainly IT and HR related
structure and support activities. These activities and costs
are considered ‘Enablers’ for all other marketing activities.

It should be noted that the expected impact of different market activities
varies in time frame depending upon the category involved. Demand
generation and customer fulfilment activities are short term in nature and
their impact is usually noticeable within a year. Customer relationship
activities are somewhat mid-term in nature and the impact of such
activities is more significant in 1 to 2 year time frame. Branding and
Image building activities are long term in nature and their impact usually
results in 2 to 4 year time period.

In the remainder of this book, the metrics have been proposed for
each category listed above. It is to be noted however that the metrics
suggested under each category are not mutually exclusive.


Marketing Activities Marketing Objectives Corporate Goals FInancial Goals

Demand Generation:
Sales Activities - Demand Generation Revenue Growth
Campaigns / Promotions - Market Share Profitability
Sales Productivity

Customer Fulfillment:
Customer Service - Customer Value Customer Equity
Product Management Proposition
Price Management
Supply Chain

Customer Relationship: - Customer Retention -Shareholders
Market Communication - Customer Growth Customer Relation- Value
Advertising - Customer Satisfac- ship
Loyalty Programs tion
- Customer Acquisi-
Branding / Image: tion
Public Relationship
Braniding / Awareness
Corporate Advertising - Brand Loyalty Brand Equity
- Company Image
Supply Infrastructure:
Planning / Strategy
Market Research
Capabilities
Infrastructure - Enablers

Linkage from Marketing Activities to Corporate / Financial Goals

Different metrics serve multiple purposes and can be used to measure
the progress of several marketing objectives. This book should serve
as a reference guide for the marketing professionals interested in
developing and implementing an initial framework of marketing metrics
in their organizations with an objective to create linkage and visibility
towards accomplishing financial goals.

It is important to reiterate that many marketing programs are long term in
nature and it is not possible to see the results and outcome in the same
year when the money is spent. Unfortunately, accounting rules require
closing the accounting periods on a quarterly or at most yearly basis.
This creates challenge for many business managers to understand the
linkage between cost and benefit. According to accounting rules, all
marketing spending is considered expenses and charged off in the same
year when spent.

A system and framework of marketing metrics, when regularly maintained
and updated, help provide a better, meaningful and more realistic picture



of the marketing and financial performance of the company. It is highly
risky to depend and use only the accounting information for managing
strategic part of the business. Accounting information is prepared based
on strict GAAP rules and has its uses and benefits for the external
shareholder. Marketing executives must ensure that their marketing
performance is not being interpreted through accounting information only.



Revenue Growth
2
Chapter

Metrics
There are several common metrics widely practiced to measure the
revenue performance. Unfortunately, only a few go beyond measuring
the historical growth. Most measures are adequate for the purpose of
standard financial analysis. To understand sales revenue growth from
a marketing perspective however, we need a different set of metrics
which can help develop deeper insights. This can be accomplished by
decomposing sales keeping in mind marketing objectives of maximizing
revenue growth through an optimum marketing mix.

To develop an insight, it is helpful to look at the figure below. If overall
sales number can be split into each quadrant, it can tell us a lot about the
productivity of marketing programs than simply looking at the growth of
the total sales number.

PRODUCT
Existing New
Existing

Product
Penetration
CUSTOMER

Development

Customer
New

Development Diversification

[ Growth Strategies ]



Metrics # 1: Sales from New Customers:

One of the objectives of marketing is to acquire new customers and
develop and grow them fast enough to drive revenue growth and
profitability. A powerful metric to evaluate the performance in this area is
to separate the ‘sales from new customers’ and compare it with the target
or trend from previous years.

Sales $ from New Customers = Total Sales $ -- Sales $ from Existing Customers

A further extension of this metric could be ‘Average Sales from New
Customers’, and can be measured as:

Sales $ from New Customers
Average Sales $ from New Customers =
Number of New Customers

This metric highlights the average progress by a new customer and
should be compared with the average acquisition cost for a new
customer. Although the size of the first year sale may not be reflective
of the potential of a new customer, it does indicate the economic
justification of acquisition costs as well the expected potential of new
customers based on where they start.

Metrics # 2: Sales from New Products:

Companies spend substantial amounts of time and money developing
new products. While it is easier to sell the existing products already
established in the market place with satisfied customers, the company
must to go through the pain of introducing new products to survive in the
market in the long term. Once introduced and accepted, it is easier to



command higher margins on new products with a longer life cycle than
the matured existing products soon to be phased out.

Sales $ from
New Product = Total Sales $ -- Sales $ from Existing Products

This metric explains the productivity of new product introduction
programs as well as the performance of the product itself. The
importance of this metric is relative to a company depending on its place
on the technology roadmap of the industry involved. For a high tech
company with shorter product lifecycle, this metric is very critical. For
companies with commodity type products with a longer lifecycle, this may
not be much relevant.

A clear understanding of the definition of “New Products” is essential.
Packaging changes and small variations in the characteristics should not
be considered to qualify as New Product.

Metrics # 3: Sales Price Increase:

Price increases are probably the easiest but the riskiest way to increase
the bottom line in the short term. Price management therefore has
evolved as more of an art than a science. Despite all the risks involved
to lose market share, companies do want to play with prices to optimize
their profits. A simple formula to capture the impact of price changes is
following. ‘Current Period’ and ‘Previous Period’ can be substituted for
‘Actual’ and ‘Budget’ or ‘Target’.

Units sold x (Average Price Current
Sales Price Increase $ =
Period -- Average Price Previous Period)

This metric captures the impact on sales $ of price fluctuation between
the two periods and is an indicator of the company’s ability to manage
price changes.

The formula described above is simplistic. In reality, companies have
diverse products with different price levels. The number of SKUs may
run in thousands and aggregating quantitative volumes may not be



meaningful because of diversity of pack sizes and nature of the products.
This practical issue can be easily tackled by creating a ‘Price Variance
Analysis’ model on an Excel spreadsheet. To capture the overall price
variance, the above formula can be repeated for each different product
(or SKU) in rows and then adding up the price variance in all those rows
to reach an overall price increase or decrease.

A more complete analysis would involve extending the above metric to
a ‘Price/Volume’ analysis model where volume variance is also captured
along the price variance.

Sales Volume Average Price Current Period x (Unit Sold
=
Increase $ Current Period – Units Sold Previous Period)

A further extension of the price/volume analysis is price/volume/mix
analysis where each component of the variance is measured separately.
This analysis is very useful to understand the impact of product mix
changes on sales revenue in a multi product environment. Marketing
strategies to up-sell products can be very effectively measured through
price/volume/mix analysis.

For more ambitious analysts, a detailed template to create a model
for a complete ‘Price/Volume/Mix’ Analysis is available. If you are
interested in getting a free copy of the Excel template, please send
your request to Saleem@MetricsIntegrated.com

The above three metrics are intended to decompose sales in order
to understand the impact of new customers, new products and price
increases (a major focus of marketing). The next three metrics are
designed to measure the potential of sales that was not realized or lost.

Metrics # 4: Discount Allowed:

Discounts are common and an average company deals with a variety
of discounts. Unfortunately, in most computer systems while recording
sales, these discounts are net off and only net selling prices are
recorded, resulting in a complete loss of track how much discounts have



been allowed. This metric requires tracking of discounts. To get access to
data, solution is easy. Most computer system do have list prices captured
somewhere. It only requires a small tweak to let the system track various
kinds of discounts whenever a sale is recorded.

Discounts $ Allowed = Units sold x (List Price -- Net Price)

An average company passes substantial value to its customers in terms
of volume discounts, price discounts and other type of special discounts.
By tracking this information, a company can manage and rationalize
various types of discounts. This process can lead to substantial recovery
in net selling prices. As we all know any increase in prices directly add
into the bottom line.

Metrics # 5: Customer Wallet Share:

Marketing strategies in the recent past have significantly focused on
creating value through customer retention. Retaining customers is more
economical then acquiring new customers. But the focus of marketing
is not only on retention. Marketers want their customers to be more
profitable for their lifetime. This has resulted in newer approaches like
customer lifecycle profitability management, customer loyalty programs
and customer wallet share. Wallet share is a term used to measure
the company’s share of a customer’s full buying potential in a specific
product category (thus customer’s wallet).

Sales to Customer
in a category
Customer Wallet Share % =
Total Spending of that
Customer in that category

For example, if a customer has $2 million to spend on a particular
product or product category and a company’s sales to that customer for
the particular product totals $1.2 million, then the company said to have
a 60% share of wallet of that customer. This also



means that the customer is spending $0.8 million (40% of his wallet) with
competitors.

S 1.2 million
Customer Wallet Share = = 60%
S 2.0 million

Customer wallet share metric provides a focused approach to Marketing
in order to influence specific customers to grow their business with the
company. Since the company is already selling certain volumes to the
customers, it is very attractive for the company to increase the sales
volumes to the same customer at marginal costs to serve. Even for
manufacturing costs, the company may be able to save substantial costs
by not spending additional fixed costs.

Customers are usually aware of the economy of scales benefit the
company may gain due to increase in their volumes. But they are also to
benefit by consolidating their purchases from one supplier. Usually, such
deals are aggressively negotiated but ultimately both parties benefit.

Customer wallet share metric is also a gauge to measure the
effectiveness and influence of sales and account managers towards their
customers. A declining ratio may provide warning signs beyond the sales
and marketing issues leading to product quality or service issues. In any
case, it provides companies with the opportunity to customize strategies
towards specific customers to maximize revenue growth.

Access to data to measure customer wallet share can be difficult but
usually, sale and account managers are quite close to customers and
have good insights into overall spending limits of their customers.

Metrics # 6: Price Premium (or Brand Premium):
“You don’t sell through price. You sell the price.” Philip Kotler

Having a higher price premium (or brand premium) is the dream of a
marketer. Most of their efforts are focused on communicating the idea to
their customers that their product or service is unique and differentiated.
This is however only proven when majority of customer started to believe



into this by paying a higher price for their products than a competitor
charge for similar products.

Average Retail Price of Own Product
Price Premium % =
Average Retail Price of all Comparable Products

This metric describes the strength of a company’s brand because of
the price premium it enjoys. Price premium is the price that can be
commanded above the normal market price of similar products. Usually
this is possible due to a strong brand name, well known distinctive quality
or functionality or any other unique features of the product or service.

The formula for price premium metric may result in a negative value if the
average price of the company’s product is less than the market average
of all competitors’ products. In any case, it either shows the sales
premium it enjoys due to higher than market prices or the lost potential of
sales due to lower prices that can be recovered by raising prices. This is
an excellent indicator of the value of the company’s products or services
as perceived by customers.
QUALITY
Low High
Low

Economy Penetration
PRICE
High

Skimming Premium

Pricing Strategies
A price or brand premium is established over a long period. A company
may take temporary advantage of the market by imposing higher prices



for a short period of time. This skimming strategy does not warrant to be
called a brand premium. A brand premium is established in a competitive
environment for relatively longer period of time. A few excellent examples
of brand premium are Rolls Royce, Rolex, and Maserati.

The data gathering for measuring price premium may be challenging but
possible. It is important that sufficient market research is carried out to
gather sufficient data to justify a declaration of price premium. Besides
pricing data, qualitative factors related to the perception of customers
about the brand or the product must be considered. Temporary lower
level of competitors’ price due to promotion or price cuts should be
ignored for calculating the price premium.

Metrics # 7: Market Share:
“If you don’t have a competitive advantage, don’t compete.” Jack Welch

A major focus of marketing is to create opportunities for profitable
growth mainly through increase in sales revenue. The measures we
have covered so far are internally focused. To measure the competitive
growth performance in market place, marketers use Market Share which
compares own sales growth with growth in the overall market or market
segment.

Own Company Sales in Units or Dollars
Market Share % =
Total Market Sales in Units or Dollars

Market share describes a company’s sales as percentage of total sales
volumes or dollars in a specific industry, market, or market segment.
It clearly shows the competitive strength of the company against all
other players in that market or market segment. Market share can be
measured for an entity at any level of geographic hierarchy; whether a
city, country or at global level.



Depending upon the nature of the industry it is possible that market
share is measured only in dollar terms. This happens when the nature
of the products is so heterogeneous that it does not make sense to
aggregate quantitative volumes. However, when it is possible to measure
the market share in dollar as well as in units, the resulting ratio may not
always be the same and may reveal additional interesting information.

To illustrate, if a shoe manufacturer has sales of $24 million and the
total size of that market segment is $150 million, the market share for
that shoe manufacturer is 16%. Similarly, in terms of units, if the same
manufacturer sells 0.75 million pairs and the total size of the market is5.0
million pairs, the market share for the shoe manufacturer is 15% based
on units sold in the same market.

In this case, 1 point higher in dollar based market share reveals that this
shoe manufacturer enjoys a 6.7% price premium over the market.

Market Share % (Dollar based) 16%
Price Premium = = = 6.7%
Market Share % (Unit based) 15%

Market share brings an external and strategic perspective. Growth in
sales when looked internally may create a false sense of satisfaction and
complacency. In high growth industries, a company may quickly lose its
market standing if it is not growing fast enough to maintain its market
share. In contrast, companies in matured industries may still strengthen
their market position by achieving meager growth in their sales.

The internal sales numbers in dollars and units are usually available
from the Accounting or Finance Department. The sales information of the
market may come from several outside sources, including industry trade
associations, consulting firms, and market research firms etc.



Metrics # 8: Market Penetration:
“Don’t watch the product lifecycle; Watch the market lifecycle.”
Philip Kotler

Market Penetration is one of the common marketing strategies to grow a
business. It’s a measure of popularity for a brand or product category.

Number of Customer Who Purchased a
Product in the Category
Market Penetration % =
Total Number of Prospects in that Category

Market Penetration helps companies assess remaining growth potential
in the existing markets. Compared along the four growth strategies
(see below), i.e. Market Penetration, Market Development, Customer
Development or Diversification, Market Penetration is the most cost
effective and economical way of achieving growth.

CUSTOMER
Existing New
Existing

Market Customer
Penetration Development
MARKETS

Market
New

Development Diversification

Growth Strategies



Let’s assume a market for coffee drinkers in a specific city. Current
demographics reveal that out of the total population of 12 million, 40%
fit the profile of a coffee drinker. Current demand is generated out of 2.4
million coffee drinkers. The market penetration at this level is 50%.

2.4 Million
Market Penetration % = = 50%
4.8 Million (40% of 12 Million)

Depending upon the level of penetration, it can be economical or
expensive to penetrate further. A lower penetration warrant enough room
for existing companies to penetrate further with less effort and costs.
A higher penetration signals saturation of the market and the efforts to
further increase penetration may be expensive.

Market Penetration metric helps the marketers to understand and decide
whether to seek further sales growth by acquiring existing product users
from their competitors or by expanding the total population of product
users.

Finding the data for measuring market penetration can be challenging.
However, basic market research through small scale surveys can be
helpful.



3
Chapter

Profitability Metrics

“Results are gained by exploiting opportunities, not by solving problems.”
Peter Drucker

It is said that the sole purpose of marketing is to get more people to buy
more products, more often, and for more money. So if the marketing is
not creating more profits, it is not doing its core purpose. Unfortunately,
traditionally there have not been many metrics that are used in marketing
to measure the profitability.

It is also well known that the ultimate purpose of a business (for profit)
organization is to make money and create wealth for its shareholders.
While too many companies and their sales and marketing department
are too busy aggressively growing their revenues, it is apparently clear
that any growth without profits is meaningless and actually harmful.
It is therefore, critical that the overall model of marketing metrics is
adequately balanced between growth and profitability measure to
maintain a good balance.

Traditional financial measures are over dominated by metrics that
measure profitability. In this text, we do not have to repeat those
measures. What we need is the strategic measures within the context
of marketing metrics that can ensure that marketing campaigns and
programs are profitable and adding value to the bottom line. In addition,
we need to ensure that we leverage our focus on customer to generate
more profits through Customer Lifetime Value (CLTV) model.



Metrics # 9: Customer Profitability:
Peter Drucker said “the purpose of a business is to create a customer...”.
If we combine this logic with more common understanding that the
purpose of a business is to make money, it seems obvious that each
customer must be profitable. Unfortunately, not all customers are equal
and not profitable. It is therefore important that we measure customer
profitability on a regular basis.

There are many acceptable approaches how to compute customer
profitability. Below is a basic model.

Customer Revenue from a specific Customer -- Cost of
=
Profitability Products or Services sold -- Cost to Serve

Customer Profitability metric measures the profits earned through a
specific customer or a segment of customers. As the focus of marketing
has shifted to customer in the recent past, this metric has become
a critical measure. Based on this metric, companies are making
adjustments in the service level to customers to align with the level of
profits earned. Indeed, the customers who provide higher profitability
deserve more attention and better service from the company.

It is estimated roughly that in most companies 80% of the profit is
contributed by 20% of the top customers. Unfortunately, half of this 80%
profit is eroded by the 20% of the bottom customers who are unprofitable.

The calculation of customer profitability remains a challenge in most
companies as the accounting systems are yet not geared up to handle
the issue. There obviously seems no problem in ascertaining the sales
revenue for individual customers. Most companies have that basic
system in place. Additionally, finding the cost of the products or services
sold to specific customers also does not pose major issues, provided a
standard costing system is in place. Finding the cost to serve (mainly
sales and marketing costs) applicable to individual customers, however,
is a major challenge.



In a traditional financial or accounting systems cost to serve is captured
along the functional categories and shown as Sales and Marketing
expenses on P&L statement. Generally, these costs are not primarily
booked on customers’ accounts. The common way for companies to
identify these costs by customer is to re-assign these costs by using an
activity based costing system. Reasonable accuracy however can be
achieved using a simple spreadsheet model for allocation of sales and
marketing costs using certain assumptions with a level of consistency.

Customer profitability metric is a powerful measure that can help
companies to eliminate their unprofitable customers or convert them into
profitable ones. It also significantly helps in evaluating and aligning the
right service level for specific customers or re-negotiating the prices to
continue providing higher level of services.

Although the customer profitability metric is intended to measure the
profitability of an individual customer, it can easily be applied to a
customer segment, or channel. For certain large consumer companies
that deal with millions of consumers, there is no need to measure the
profitability of individual consumers. It is economically unfeasible and
does not serve much purpose. A better approach is to use customer
segments with similar profile and characteristics to measure profitability.
For companies with several channels, they can treat the distributor or
middle channel as the customer and measure what profit is earned
through them.

Metrics # 10: Return on Marketing Investment (ROMI):

Return on Marketing Investment (ROMI) is more of an approach and
a model to evaluate various marketing spending rather than a single
marketing metric. Its concept is explained in the following formula or
equation. Actual application may require elaborate assumptions and
calculations.

Present Value of (Incremental Revenue from Marketing
Investment x Contribution Margin%) -- Marketing Investment
ROMI (%) =
Marketing Investment ($)



Return on Marketing Investment is relatively a new metric but rapidly
growing in popular mainly due to its obvious promise to measure the
ROI, a term favorite to corporate boards, CEOs and CFOs. The measure
however, requires quite different approach than a typical ROI calculation
carried out for a capital expenditure project.

The ROMI metric is a measure of future promise and requires certain
assumptions to be made. While the cost of the campaign or the
marketing program is more certain, the main challenge lies in developing
assumptions related to the incremental revenue growth expected to
come out as a result of the specific marketing investment. Once the
revenue stream is identified, it is translated into net profit or cash flows by
applying a contribution margin percentage.

If the revenues are spread beyond the current year, it requires applying
Net Present Value (NPV) methodology to convert those future cash flows
into present values. Finally, the present value of the future generated
cash flow is compared with the cash outflow in the form of marketing
investment and a ROI % is calculated.

The beauty of ROMI metric is that it can be applied to a variety of
marketing campaigns and programs as long as the objective of the
investment is to increase sales revenue. The expected revenue increase
may generate in the current year or over several years in future. The long
term nature of the resulting cash flows, however makes the calculation of
ROMI somewhat complicated due to application of NPV approach.

Metrics # 11: Customer Lifetime Value (CLTV):

“The most important thing is to forecast where customers are moving,
and to be in front of them.” Philip Kotler

With significant resources being spent on customer retention, growth,
loyalty development and relationship building, it is a logical question
as to what is their economic worth for the company. One measure that
has been developed to answer this question is Customer Lifetime Value
(CLTV). CLTV is the sum of present value of company’s future cash flows
generated from its customer. It is also called Customer Equity.



CLTV = Present Value of (Average Profit generated per year x Number of
Years) -- Acquisition Costs

It is a generally agreed among marketers that
bringing a new customers is more expensive than
retaining the existing ones. This understanding
has provided a renewed focus to companies
to retain their existing customers for long term.
These companies aggressively pursue ways
and means to develop an intimate long term
relationship with their customers in order to
maximize their economic value.

One important component of the CLTV is
customer acquisition costs. In today’s highly
competitive environment it is difficult and
economically expensive to acquire new
customers. With major focus of marketing now
on retaining customers through significant
investment in developing their loyalty and level
of satisfaction, no company is willing to lose their
profitable customers to their competition. But
marketers cannot completely forego acquiring new
customers. They need to keep new customers in
the pipeline to make up for some inevitable loss of
existing customer.

Companies before they pursue new customers
carefully measure and evaluate cost of acquiring
new customers so that they do not overspend
and keep these newly recruited customers
profitable from the beginning. In its simplest form
the customer acquisition costs can be calculated



as the total acquisition spending divided by the
number of new customers acquired during a
period.

Acquisition Spending ($)
Average Acquisition Cost ($) =
Number of Customers Acquired

The average Acquisition Cost metric helps the
companies to track profitability of their new
customers. It also helps to optimize their strategy
of balancing between acquiring new customers
and retaining existing ones. Customer acquisition
costs are all the costs spent in acquiring new
customers. These usually include prospecting
costs comprised of cold calling, visiting, demos,
samples, marketing materials and time of sales
and marketing people spent in pursuing new
customers.

In a B2C environment, for companies dealing with
large number of customer e.g. telecommunication,
banks, insurance, and healthcare it makes sense
to measure this metric for segments of customers
with similar characteristics. For these companies,
this is a critical measure as these industries lack
customer loyalty and migration to competitors
is frequent. While highly attractive promotional
offers motivate the customers to switch carriers,
it becomes extremely difficult for the company to
make money on these new customers in the short
term.



One of the challenges with acquisition cost metric
is how to segregate marketing costs between
acquisition costs and other marketing costs. Many
marketing programs overlap and mutually benefit
to their objectives. For example, the money spent
on a program to create brand awareness may also
lead to acquiring new customers.

While Customer Profitability metric clearly depicts
the level of current profitability of a customer, the
CLTV model provides a long term perspective
and approach. It provides the opportunity and
confidence for companies to manage and grow
their existing customers as their most valuable
asset. A strong and positive customer lifetime
value justifies keeping a low profit or even a
negative profit customer in anticipation of getting
higher returns in future.

But CLTV measurement has its own challenges.
Like ROMI, its calculation requires assumptions
about future. Converting future cash flows in
present value using the NPV approach may be
challenging for many managers. Despite these
difficulties, however, CLTV has its own advantages
which may justify its practice.

The reward for the marketing efforts to retain
customers and build their loyalty is not only
limited to customers’ current level of profitability.
An effective retention program is focused on
opportunities to further increase the customer
value through cross-selling (selling other
complementary products) and up-selling (selling
more expensive version of similar products). On



top of it, a highly satisfied and loyal customer is
also expected to provide referrals. These referrals
create additional revenue and profit opportunities
for the company.

In data gathering for CLTV computation, the
major challenge is predicting the buying behavior
of customers. In addition, estimating the profit
from projected purchase transaction is quite
challenging. Costs at the transaction level are
usually not available except the gross margin in
most cases. It would therefore be necessary to
develop assumptions not only for contribution
margin or gross margin but for the assignment of
the sales, marketing and service department costs
as well.

The accuracy of estimates is enhanced if the
model is developed for aggregate profile of
customers based on historical data available in
computer systems. This is applicable to large
retailers who have detailed information available
in their computer files about the buying patterns of
their millions of customers.

Despite uncertainties associated with predicting
the assumption for future, there is substantial
value in developing, and maintaining a CLTV
metrics model. It provides the framework to
develop and operate a marketing strategy to
acquire, retain, and grow customers for long term
shareholder value creation.



Metrics # 12: Return on Customer:

Return on Customer is a powerful measure
that combines the CLTV and ROMI (Return on
Marketing Investment) metrics. It is calculated as
follows:

Current Cash Flow from Customer + Change in CLTV
Return on Customer =
CLTV at the beginning of period

The marketing strategy to retain customers is far
beyond just maintaining retention rates. It basically
leads towards managing customer lifetime value
(CLTV). Every marketing program aimed at
customers must carefully evaluate the impact
of any short term gain on the long term lifetime
value of the customer. Many marketers may be
tempted to create short term gains in revenue
and profitability without any regard to a negative
impact it may create on customer’s long term
lifetime value.

To illustrate, if a marketing campaign promises to
return a cash flow of $250k from a customer and
the CLTV is maintained at $3.0 million, the return
on customer is 8.3%.



$250,000 + 0
Return on Customer = = 8.3%
$3,000,000

It is possible that high frequency of promotions
and campaigns targeted at customers may
displease them and they may decide not to
respond for future promotional offers. If this
happens this will erode the loyalty of the customer
resulting in lower response in future campaigns,
ultimately negatively impacting their CLTV.
Assuming a lower CLTV of $2,400,000, the ROC
will be a negative 11.7%.

$250,000 + ($ --600,000)
Return on Customer = = --11.7%
$3,000,000



Sales Productivity
4
Chapter

Metrics
Sales productivity metrics measure the
productivity of sales people and efficiency of sales
function as a whole.

Metrics # 13: Average Sales $ per Salesperson:

Companies desperately looking for sales growth
may be tempted to hire more sales people. On
the other hand, the companies that are looking
for significant cost reduction may consider cutting
down sales force. In both situations it may be
challenging to identify the right balance. One way
to answer this question is measuring the average
sales $ per sales person and benchmark with the
competitors or industry average.

Total Sales $
Average Sales $ per Salesperson =
Number of Salespersons

Average sales $ per salesperson is a simple but
powerful metric to describe overall productivity



of the sales function. When compared with the
actual sales $ achieved by individual salespersons
it shows the gaps or strengths of individual
performance. A comparative evaluation of this
metric with an external benchmark provides the
competitive strength of the overall sales and
marketing function and also provides justification
for setting higher sales targets.

Average sales $ per salesperson metric should
be used with caution for any management
decisions. An advantage with the abundantly
available sales related data is that extensive
slice and dice analysis can be made quickly and
effectively. While making a comparative evaluation
of individual results, the nature of products,
size and characteristics of the territories, and
nature and complexity of the customers assigned
should be taken into account before reaching any
conclusions on individual performance. The metric
should rather be used as a trigger to carry out
additional analysis.

Management should also be cautious to use
individual results as a benchmark for other
individuals without sufficient analysis. The
sales results from a sales person assigned to a
couple of large customers should not become
a benchmark for another salesperson who may
have been assigned two dozen accounts that may
still aggregate to the same sales level. The two
groups of customers may require quite different
level of effort and altogether a different focus and
approach.



Metrics # 14: Selling Costs as % of Sales

Another way to measure the sales productivity
is to consider all the costs of sales function and
compute as a percentage of total sales $. Since
the main purpose of the sales department is to
generate sales in the short term, this metric makes
a lot of sense.

All Costs of Sales function
Sales Costs as % of Sales =
Total Sales

This ratio may significantly vary from industry to
industry and between companies with B2B and
B2C business models. In retail chain industry for
example, most sales are driven through mass
marketing activities. In such situations the sales
costs as % of sales could be significantly lower
as most demand is generated through marketing
costs. In a direct sales or B2B business model,
sales people could be the main driving force for
generating sales dollars.



5
Chapter

Customer Metrics

“Consumers are statistics. Customers are people.”
Stanley Marcus

In the recent past customer has taken a prominent
place in the marketing mix; a different focus
than the famous four P’s model where customer
was even not mentioned. Companies are
busy optimizing their customer acquisition and
retention strategies to create best value for their
shareholders.

Metrics # 15: Customer Retention Rate:

To consistently achieve the goal of earning
profits, a company not only needs to acquire new
customers but retain them long enough in the
business to ensure desired shareholders’ value
and profits are created. The Retention rate is a
metric that measures in percentage the ability of
a company to retain its customers over a period



of time. In other words this metric measures the
loyalty of customers.

Number of Customer at the End of Current Period
Retention Rate % =
Number of Customers at the End of Previous Period

Losing a profitable customer has financial
consequences for a company. It’s not only lost
revenues but the additional cost of bringing in the
new customer to replace as well as the cost of
educating and building up the relationship with the
new customer. If the new customer is not brought
in to replace, the company may have even more
losses in the form of unabsorbed fixed costs due
to unutilized capacities that was created for lost
customers.

Another important point to note is that the
retention in itself is not sufficient unless customers
are profitable. The loyalty alone cannot lead to
accomplishment of financial goals. Therefore
retention should be considered a means towards
an end.

One caveat about the retention rate is that it is
a historical measure and any future projection
based on this historical trend is only an estimate.
Additionally, competitors may always aggressively
pursue new tactics to lure customers to defect in
their favor.



A variation of this measure can be ‘average
retention time’ for a customer to be with the
company. This is a broader metric that can be
measured over a longer period of time and
strongly reflects the overall customer satisfaction,
loyalty and commitment.

Data sources to measure retention rates are
readily accessible. Usually, accounting or
finance department keeps a track of customers’
engagements and terminations in their computer
systems.

One of the challenges for companies to maintain
higher retention rates is in managing the retention
costs for existing customers. The companies
however have realized that it is easier and
economical to continue to serve their existing
customer rather than acquiring new customers.
This has shifted the focus of companies and
more and more marketing programs are now
centered on customer retention strategies through
developing customer satisfaction, loyalty programs
and long term relationship. To manage retention
costs, one effective metric is to measure ‘Average
Retention Cost’.

Total Retention Spending ($)
Average Retention Cost ($) =
Number of Customers Retained

The Average Retention cost metric not only helps
companies to understand the costs they spend on



retaining their existing customers, when combined
with the metric of Average Acquisition Cost it
provide insights that help optimize the strategy for
balancing between acquiring new customers and
retaining the existing ones.

The compilation of retention costs should be
carried out with caution to avoid overlap. The
customers who are acquired in the same year
should not be counted in measuring the average
retention costs. Retention costs should be clearly
defined. The ideal criterion is to test if customers
defect had these costs were not incurred. This
brings another interesting dimension to the
measurement issue. The customers who are
higher on the satisfaction level and loyalty scale
are not vulnerable to leave anyway. Should they
really be counted in the denominator of ‘Average
Retention Costs’ measure?

The purpose of the retention costs is to retain
customers who are vulnerable to leave. Of
course, such retention costs and programs when
implemented also benefit the customers who are
not that vulnerable and such costs strengthen their
loyalty. The purpose of retention costs however
remain to retain vulnerable customers and only
such risky customers should be counted to
measure the ‘Average Retention Costs’.



Metrics # 16: Customer Satisfaction:

“It is no longer enough to satisfy customers. You

must delight them.”
Philip Kotler

The increasingly competitive landscape for
marketers has fostered new thinking on customer
satisfaction. Complete customer satisfaction
is now considered a minimum requirement for
a successful sale of a product or service. If
customer is not satisfied for any reason a full
refund is usually offered, no questions asked.
Based on this newer thinking, some marketing
experts have suggested measuring ‘Customer
Delight’ instead of Customer Satisfaction. A
customer is considered delighted when he gets
more than what he expected.

Customer satisfaction however remains a basic
and common measure for many companies.
As a matter of fact, for many companies it still
remains a challenge how to reach the level of full
satisfaction with all of their customers.

Customer satisfaction is usually measured as
a rating compiled through customer surveys.
Customers are asked structured questions like
the following:



How satisfied are you with the product, service,
experience or the company?

The answers are measured on a scale of 1 to 5
showing the level of customer satisfaction:

1 2 3 4 5
Very Somewhat Neither Somewhat Very Satisfied
Dissatisfied Dissatisfied Satisfied nor Satisfied
Dissatisfied

The survey may have several questions related
to specific area of product, service or the
company and the weights may be assigned to
each category. Once compiled, this would result
in an overall customer satisfaction rating. Some
companies keep the rating for individual category
and still ask a concluding question about the
overall satisfaction.

Some marketing experts consider the willingness
to recommend the service or the product as a real
criterion for measuring the level of satisfaction.
Therefore, an extension of the customer
satisfaction metric could be a question to measure
the willingness to recommend, like the following:

How likely are you to recommend the product or
service to your families and friends?

1 2 3 4 5
Very Unlikely Somewhat Not Sure Somewhat Very Likely
Unlikely Likely



Metrics # 17: Customer Complaints:

The companies that have a culture of Six Sigma
and zero tolerance prefer to measure defects
in order to completely eliminate them. These
companies do not want to see any customer
complaints and closely monitor the number of
complaints in order to completely eliminate them.

Customer Complaints = Number of Customer Complaints during a Period

Customer behavior studies have revealed that a
satisfied customer may not talk much about his
positive experiences to others but a dissatisfied
customer bad-mouths often and may harm
the reputation and goodwill of the company or
products. It is therefore important to monitor
customer complaints closely and resolve them as
fast as possible.

An extension of this metric therefore can be
measured in terms of the number of days it takes
to resolve a customer complaint. If the customer
base is very large, some level of complaints
is inevitable. The company should develop
the structure and capability to resolve these
complaints fast enough.



Metrics # 18: Churn Rate:

Despite the best efforts of a company to acquire
and retain customers, some will defect in favor
of competitors. Churn Rate is used to measure
customer attrition.

Number of customers lost during the period
Churn Rate (%) =
Number of customer at beginning of the period

Higher churn rates are more common in industries
where the product or services are considered
commodities. Rental cars, hotels, auto insurance,
telecommunication and internet service providers
fall into this category. Churn rates provides
insight to marketers why customers leave when
the causes are studied in detail. Unfortunately,
in many industries higher churn rates only leads
to price wars among the competitors and no one
wins. An effective strategy to improve churn rates
is to improve on branding and differentiation
strategy. Apple did it very successfully with
iPod which was primarily an MP3 player i.e. a
commodity.

If you are already using Retention rate as a metric,
Churn Rate may look surplus. It is not. Churn
Rate is focused on the analysis of reasons why a
customer left while Retention is used to measure



loyalty and commitment from customers.

The data for churn rates can be accessed
easily. Most companies keep actual data in their
computer systems for any customer terminations.
A better approach would however be to monitor
the churn rates proactively for customers at the
risk to depart. This can be achieved by closely
monitoring the patterns of customer who have
departed in the past.

For example, in wireless telecommunication it
is common for customers to switch to another
carrier soon after their contracts expire. This is an
opportunity for the marketer to make a compelling
offer proactively to such customer before they
actually depart. Once they have decided to leave,
it is difficult and expensive to bring them back.

Metrics # 19: Net Referrals:

One of the objectives of customer loyalty
programs is to improve the Customer lifetime
value beyond the customer’s own potential.
This is achieved by raising the level of customer
loyalty and commitment so high that customer
assumes ownership of the product or service of
the company and starts making referrals. These
referrals bring new customers and add to the
overall profitability of the company.



Net Referrals is a concept to measure net impact
of customers who are willing to make referrals and
those who are not.

Percentage of Customer Willing to Refer
Net Referrals (%) =
-- Percentage of Customer Not Willing

Net Referrals % is based on a scoring compiled
through customer surveys. Customers are
asked question if they are willing to recommend
the company to others on a scale of 1 to 10.
The customers who respond 6 and above are
considered “willing” and the customers who
respond 5 and below are considered “not willing”.

Net Referrals is a strong measure to assess
customer loyalty.

Metrics # 20: Customer Engagement:

Good companies want to keep their customers
engaged in positive communication. The customer
engagement ratio measures the overall tone of
customer engagement.

Number of Customer Suggestions
Customer Engagement =
Number of Customers Complaints



It is believed that the customers who are loyal
and highly committed to the company usually
make suggestions for general improvement in
company’s business. This is considered a positive
sign as compared to those customers who only
make complaints. By taking a ratio of customer
suggestions over customer complaints the tone of
customer engagement can be determined. This
metric can be measured for individual customers
or a group or segment of the customers. Customer
complaints and customer suggestions should be
carefully segregated. A complaint is generally
related to a specific transaction and requires
rectification. A suggestion mostly relate to process
improvement.

Metrics # 21: Customer Recency:

Good and profitable customers buy product
and services consistently and regularly. Good
supplying companies keep track of purchase
frequency of their customers. Customer Recency
is a measure to assess how active and current
customers are with their purchases.

Customer Recency = Number of Days since Last Purchase

This metric measures the length of time since a
customer’s lat purchase. Usually this metric is
useful for individual customers, particularly the



ones who are important, large or considered
strategic for the company.

It is believed that longer the time period a
customer is out of touch, higher the risk of losing
that customer. This metric provides an opportunity
to the company to proactively monitor and retain
customers before they decide to switch to their
competitors.



6
Chapter

Brand Metrics

“The most effective way to cope with change is to
help create it.”
I.W. Lynett

Brand is probably the most valuable marketing
asset that has unique marketing power for many
well known large consumer product companies.
Companies spend years and millions of dollars to
build and develop brands. Unfortunately, when it
comes to measuring the power and effectiveness
of a brand, there are no easy answers.

Marketing experts have suggested various
approaches to measure the value of a brand, most
of which are based on quantifying the perception
of customers through market surveys. A few of
more common and well accepted metrics are as
follows:



Metrics # 22: Brand Awareness:

Brand awareness is a simple metric used to quantify
the popularity of a brand among the prospective
customers. It measures the effectiveness of brand
campaigns. The measurement is based on a scoring
system developed through customer surveys. The
questionnaire asks customers typical questions like:

Survey Questions:
• For the product or service, what is the
first company or product brand name
that comes to your mind?
• For the product or service, what other
companies or product brand names
that you can think of?

Based on the statistics obtained through surveys,
a comparative brand awareness chart can be
developed for own brand and that of closest
competitors. The surveys provide meaningful
results to measure the effectiveness of a brand
campaign if carried out before and after the
campaign.

Metrics # 23: Brand Equity:

There are various approaches suggested by
various marketing experts how to measure brand
equity. One approach suggested by Roger J.
Best, Emeritus Professor of Marketing from the



University of Oregon, is to consider the brand
equity like owner’s equity on a balance sheet. He
suggests the following formula:

Brand Equity = Brand Assets -- Brand Liabilities

Best sees brand as comprising of five primary
assets: Brand Awareness, Market Leadership,
Quality Reputation, Brand Relevance and Brand
Loyalty. He suggests companies to compare own
brand to that of an average brand in their market
and score each of the five brand assets on a scale
of 1 to 20. This should give a maximum possible
score of 100.

He suggests a similar framework for Brand
Liabilities which he identifies as: Customer
Dissatisfaction, Environmental Problems, Product
or Service Failures, Lawsuits and Boycotts, and
Questionable Business Practices. Similar to brand
assets, these liabilities have to be scored against
the benchmark brand or company. To compute an
index for Brand Equity, the brand liabilities have to
be subtracted from brand assets.

Other simpler approaches suggested by other
experts include taking the market value of a
company and subtract the book value of assets as
shown on the balance sheet. The residual reflects
several important intangible assets like intellectual
property, human capital, profit potential etc. but a
large portion of that value can be ascribed to the
brand or reputation of the company.



An even more financially focused valuation model
suggests subtracting all the marketing costs
from the total revenue to result in a value that is
considered a fair representation of the magnitude of
brand value. This valuation model may cater to the
needs of those who want to see a financial value
for this most critical and important marketing asset.

Metrics # 24: Response Rate:

With increasing pressure on companies to
improve the productivity and efficiency of the
overall operations, marketers are under pressure
to improve the productivity of their campaigns
wherever possible. One of the metrics to measure
the effectiveness of short term direct marketing
activities is to measure the response rate.
Response rate is also considered a barometer of
the long term popularity of a brand.

Number of People who Responded to the Offer
Response Rate (%) =
Number of People Exposed to the Offer

For example, an email campaign may be sent
to 10,000 prospects and if 300 respond, the
response rate would be 3%.

300
Response Rate (%) = = 3%
10,000



This response rate describes the leads generated
only and is not a guarantee of purchase. The
leads converted into actual purchases are
measured as Conversion Rate (explained next).
The responses from a campaign are dependent
upon ‘call of action’ as described in the offer. The
offer may not necessarily be to buy something. It
may simply be for a trial or motivating to request
more information from the seller. But the response
rate shows the interest of the prospects as well as
the popularity of the brand.

Response rates vary based on the medium
used for marketing campaigns. Depending upon
the costs involved, a higher or lower response
rate may be acceptable. In recent years with
the advent of internet, online direct marketing
has established a prominent place in the overall
marketing mix. With its minimal costs, it is now
possible for marketers to build the confidence
and trust with the customers with multiple email
campaigns in a phased approach. This however
requires a progressively positive response rate
from such campaigns.

Metrics # 25: Conversion Rate:

Conversion rate is an important metric that
measures the conversion of leads into actual
purchases. It is the next metric after Response
Rate to measure the success of a campaign.
Conversion rate is also impacted by the popularity
of a brand. For example, a promotional offer



from Apple is expected to yield a much higher
conversion that an unknown or lesser known brand.

Number of People who Responded and Purchased
Conversion Rate (%) =
Number of People Responded to the Offer

For example, if 400 people responded to the offer
and in the next step only 20 actually purchased,
the conversion rate in this case is 5%.

20
Conversion Rate (%) = = 5%
400

Companies always strive for higher conversion
rates. However, for a prospect to respond to
a promotional offer as well as actually buy the
product or service requires not only a strong and
persuasive campaign but also a compelling value
proposition through a good balance of price,
quality, features etc.

Another means to achieve higher response
and conversion rate is to target a quality list of
prospects. If the proposed product or service is
customized to the needs of the target prospects,
the chances of response and conversion are
higher.


25 essential marketing_metrics

25 essential marketing_metrics

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