How to Become a Marketing Hero
Imagine the following scenario. A CMO presents the results of the latest marketing campaign to the CEO and other members of the executive team. Their expectations for the presentation are remarkably different from what they may have expected 10 years earlier. Today, CEOs and CFOs expect marketers to quantify their contributions to the bottom line. The CMO walks the team through the latest results, including the revenue impact and return on marketing investment. As the conversation turns from past results to future plans, the CMO uses data to show the predicted impact on revenue from the planned campaigns. The CEO and CFO agree and allocate additional budget to fund the campaigns.
This scenario is increasingly common but still rare in many organizations. The use of data to quantify marketing’s contribution to financial outcomes is quickly dividing marketers into the “haves” and “have-nots” of data-driven approaches. When marketing is able to speak the language of the CEO and CFO, alignment improves as well as the CMO’s standing in the organization. Data-driven marketers are much more likely to be invited into strategic planning sessions and be perceived as delivering greater value to the organization.
While only a fraction of organizations could be considered data-driven today, many marketers understand the need to move in this direction. There is often some degree of hesitation, and many marketers are unsure of how to take the initial steps. Wharton professor David Reibstein summarized this very well in a recent interview:
There are some CMOs who embrace finance, data, dashboards, and transparency. These CMOs are the ones who are being invited to the table. However, there are many who simply seem afraid. Some seem afraid of being held accountable. The irony is that without demonstrated value, they are actually more at risk of being fired. Some seem to be afraid of what the data will show, that perhaps the valuation isn’t as good as you’d like. However, this shouldn’t be something to be feared as the first time you measure it you are creating a baseline. The goal is simply to be able to figure out how to improve the valuation over time.
The good news is that there are relatively simple and straightforward ways to get started. Many marketing Key Performance Indicators (KPIs) can be captured on spreadsheets and don’t require lots of additional data or technology investments. The key is to start with something simple and evolve over time.
While there are many different marketing KPIs, two stand out as perhaps the most important: Customer Lifetime Value and Return on Marketing Investment. Let’s explore each of these in turn.
Customer Lifetime Value (CLTV)
Calculating the lifetime value of a customer can create significant new insights for marketers. Customer Lifetime Value, or CLTV, is simply the projected profits from a customer over the entire relationship with that customer. CLTV helps organizations understand the upper limit on how much they should spend to acquire a customer.
Some marketers calculate the average CLTV across their entire customer base. However, this can cover up some of the interesting insights happening below the surface. As Don Peppers and Martha Rogers often advise: “not all customers are created equal.” CLTV is also important in driving an improved understanding across the organization of how much more valuable certain customers or customer segments are than others. For example:
Customers in Segment A have a CLTV four times higher than the average customer. Even if it costs more to acquire customers in this segment, it can be highly valuable to target and acquire them.
While there is no standard calculation of CLTV, it is possible to begin with relatively simple calculations and evolve from there. Harvard Business School Publishing has made an online CLTV calculator available at: http://hbsp.harvard.edu/multimedia/flashtools/cltv/customer_lifetime_value.swf
Return on Marketing Investment (ROMI)
Return on Marketing Investment, or ROMI, is simply a measure of financial contribution attributable to marketing. It is a measure of the net revenue attributable to marketing divided by the cost of the marketing effort. It can be calculated as:
ROMI = (Revenue attributable to marketing – cost of marketing) / cost of marketing
For example, consider a company that spends $75K on a new marketing campaign that results in $500K in new sales. ROMI would be calculated as:
($500K – $75K) / $75K = 5.7
So for every $1 invested in the marketing campaign, the campaign returned over $5.
ROMI is a powerful way for marketing to begin connecting with the language of the CFO and quantify financial contribution. And, it is a great place to start when moving down the path of data-driven marketing.
The Path Forward
For many marketers, the best approach will involve starting with simple versions of relatively few metrics. Most of these metrics can be calculated in little time using spreadsheets. It is also important to learn from what other marketers are doing. There is little value in re-inventing the wheel. Seek out other marketers and discuss marketing metrics that they have put into place. Take part in marketing networking groups and share your knowledge.
Marketing is changing at a rapid rate. Key to success going forward will be our ability to learn as individuals and help our organizations increase the number of “learning cycles” we complete each year. What are your successes and lessons learned with marketing metrics? What is your experience with the best way to get started?