The Marketing Metrics Mystery - Januray, 2006 Update

Apart from cheap movie tickets and what the banks call “concessions” for senior citizens one of the rare benefits of breaching the golden years’ ceiling is the ability to choose when to go on holiday. Now that the beaches, roads and restaurants are free of school-constrained families we can take our turn. When you read this, we shall be taking up our place in the sun.

What I pondered over the festive season was the conflict between the proponents of marketing measurement. The dominant group employs allegories to make its point. The airline pilot, for example, uses a bank of instruments to operate the aircraft. There is no single gauge to which he can refer to assure him that he can stay in the air, is on track and that all is well with the flight

So it is with marketing. Marketers use an array of measures to test the performance of their brand. They look at market share (both volume and value), relative pricing, levels of distribution and out of stock, consumer awareness, customer satisfaction and measures that track consumer perceptions and attitudes towards the brands in the category. No single measurement captures how well or badly the marketers are doing.

Another viewpoint

But let’s look at the allegory from a different standpoint. Airlines comprise numerous aircraft and pilots. If they and the ground crew do their work, the airline will make money from their performance. If they do not the airline goes out of business. While the pilot conscientiously watches her instruments and the administrators on the ground analyse passenger numbers and yields, the management is watching a single number. Is the operation profitable? Is it making money?

Management of companies expect its divisional managers to have their metrics to measure their aspect of the business. Human resources, finance, IT, operations and marketing, all look after their parts of the enterprise and are judged by their specialist criteria.

If the divisions all meet their respective targets the board should be able to see this reflected in the numbers that interest them most. Since boards of directors are appointed by the shareholders to run the business for them, it is not surprising that management’s primary pre-occupation is with measures of shareholder wealth. This most often is the net asset value of the company.

Talking past each other

When marketers get in a flap (as they do) because they perceive their measures not being taken seriously by the board, they should understand that it is because this is not the measure the board wishes to see. No amount of research and scholarly papers in academic journals will change that. Boards don’t ask individual pilots how much fuel they used, the altitude at which they flew and whether they arrived on time. They want to know if the sum of all those things over all the fleet made money.

Kevin Lane Keller – undisputedly the world’s leading branding academic – conceptualised what he calls Consumer Based Brand Equity (CBBE) as having both a source and an outcome. This was not his intention, but that idea presents a framework to explain the link between marketing measures and the financial metrics needed for board reporting.

Marketers create brand equity in the memories of the consuming public. They make the brand available through some sort of distribution channel; they set the pricing and, through carefully crafted communication programmes, create awareness of the brand that through trial and usage, becomes associated with perceptions that make the brand desirable. If they are successful they will establish a cohort of users who like the brand sufficiently to buy it regularly. Their campaigns are then designed to stop those consumers from switching to competitive brands and to add new users to the group.

Different strokes …

The wide range of available marketing measurements is used by marketers to gauge the progress they are making towards market domination, unseating powerful competitors, blocking newcomers, testing the market for brand extensions and launching new innovations. Marketing measurements are used to track the source of brand equity.

The outcome is the value that is created by building CBBE. Quite correctly Keller states that brand value can be measured in a number of different ways. Value is not necessarily financial. Non-financial measures tend to be strategic and are used to set the course for the future.

But the measurement that is of primary concern to the owners of the business is the one that indicates the contribution the brand is making to their wealth. This one is financial. And there is only one. It is the value of the brand asset.

It’s only since the advent of the new accounting standards (SFAS 141 in the United States and IFRS 3 elsewhere) that brands have assumed balance sheet level importance. And much more has still to happen. That probably explains why there is a dichotomy in marketing circles regarding brand metrics. This is so new that many marketers have not yet realised that brands are assets and have a new status in the world of finance.

Academics who have committed themselves to a set of beliefs will find it hard to change. They were not wrong. Circumstances have changed.

A bundle of numbers

What should ease the transition to this new truth is the fact that the recommended way to value assets is Discounted Cash Flow. There are other approaches but this is the favoured method. The asset value is a single number. It becomes that way through a process that actually captures many of the measures used in the source part of the CBBE framework.

The growth trend for example, should take account of likely market impediments and category opportunities. It should incorporate brand plans and investment decisions (including those of a capital nature). Properly structured the discount rate will include the nature of the economy and the risk associated with the brand category. And the analysis of the brand accounts, which is fundamental to a DCF type valuation, will expose the way the brand is supported financially.

The BrandMetrics method goes still further because it models the entire expected economic life of the brand being valued. It determines the number of years in the forecast by combining, mathematically, the ability of the brand category to sustain economic profits with the relative position of the brand as compared with others in the category. The statistics for this calculation come primarily from the data used by marketers to measure the effectiveness of their activities.

Time to change

If all the airline staff meet their objectives (fly the aircraft economically and on time; carry optimal loads and give outstanding customer service), the business will make money. A multitude of measures wrapped into a single number. Similarly, if all those (not just the marketers) responsible for the health of a brand meet their targets (maximise share, sustain product or service quality, gain new users, maintain customer satisfaction), their success will be reflected in the value of the brand asset.

A single metric for the measurement of brand performance is no longer a “nice to have”: It is on its way to becoming a necessity. Often practice serves and academe scrambles for the rally. Practitioners are starting to recognise these new conditions. The academics must change tracks and provide the theoretical support.