TheFinancialMetrics-PartI

The Financial Metrics – Part I Numbers, Numbers and More Numbers

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A Marke4ng Balanced Scorecard

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When you drive, there are a number of informa<on pieces available to you in your car

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Looking through the windshield lets you see the hazards ahead of you

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The dashboard with the speed and tachometer are metrics that complement what you see and help you to determine whether you are driving too fast or too slowly

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The rearview mirror provides feedback on what is behind and the side mirrors give a backward looking input

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The temperature and oil gauges are opera<onal metrics that measure how well the engine is running and the fuel gauge provides informa<on so you don’t run out of gas

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In marke<ng, measuring only sales revenue is like driving a car by only looking in the rearview mirror, because sales measures what has happened in the past

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Just like driving, you need a balanced set of metrics, or a scorecard, as a marketer

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What Is The Takeaway?

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Since demand genera<on, new product launch, and loyalty marke<ng drive measurable sales revenues, you can use financial return on marke<ng investment calcula<ons more than 50% of the <me h"p://emagine-­‐group.com

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But financial ROMI is not the answer for all marke<ng measurement and you have to have a balanced approach with mul<ple metrics

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Finance Hello Darkness My Old Friend!

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Finance is the language of business and the sooner we learn to speak this language, we gain respect in the boardroom.

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The one ques<on that most of you have asked me over and over is

“How do we get top management to accept this method of marke<ng?”

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Show them the money!

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I once told a CEO that if they did a specific marke<ng ini<a<ve, it would increase their share price by 40 cents a share – it was funded almost immediately.

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Now as you might remember from the early lectures, I explained that financial ROMI is applicable to more than 50% of marke<ng ac<vi<es.

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These include trial and demand genera<on marke<ng, and new product launch marke<ng.

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Now, we will look at these metrics and insights that are achieved through quan<fying marke<ng using financial metrics.

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55% of CMOs report that their staff does not understand financial metrics

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Whether you understand math and finance or not, you need to understand these rela<onships otherwise your career in marke<ng will be over very quickly.

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Metric -­‐ Profit

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Revenues -­‐ Cost Profit

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There is nothing special about this metric, since we all know the math behind it

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But there are some insights that you need to keep in mind when working the math….

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First

The marke<ng divide exists because some firms choose to invest more in demand genera<on marke<ng, running sales and promo<ons, which drive sales revenues, but kill profits. h"p://emagine-­‐group.com

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Top brands invest more in brand and customer equity, and as a result are able to charge a premium price, which means higher profits.

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Compe<ng on price is a losing game since it kills profitability.

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A few firms, such as Wal-­‐Mart and Dell, have been effec<ve with this strategy because they have excep<onal supply-­‐chain management capabili<es that drive cost down to a minimum. h"p://emagine-­‐group.com

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So if opera<onal efficiency is your core strategy, then by all means consider compe<ng on price – but for everyone else, using marke<ng to drive profits is a be"er strategy.

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Profit vs.

Market Share

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When you talk to brands, they are most interested in “grabbing” share in the market.

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Market share is important, but if you consistently lose profits to gain share, the over <me – this is a losing strategy.

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There is a conflict between marke<ng and sales, since sales is incen<vized on volume, not profits.

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If you analyze your sales forces, you will see the the top performers, those who get regular rewards, are ocen the least profitable and may even by nega<ve in profitability.

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How do you change this?

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When Mark Hurd became CEO of HP, he changed the incen<ve packages for all the HP Enterprise Sales team.

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He incen<vized the sales people based on the profits of the products they sell, not the volume.

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Result?

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HP’s overall revenues grew by 20% between 2005 and 2007, but the net income grew from $2.3 billion to $7.3 billion – increasing the stock price by 243%!

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Solving for the “right” price point to maximize profits and sales revenue is a pricing exercise and, if you are interested, there are many books to teach you how to do that

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But at the end of the day, price is set by what the market is willing to pay for the value of the products/ services you provide.

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One approach is to use a brute force method and increase prices by 5 -­‐ 10% a month and see where sales start to drop off – this is what we call the op<mal price maximizing sales and profits. h"p://emagine-­‐group.com

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But I don’t teach pricing methodology!

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The intelligence behind the whole discussion is that facing difficult <mes and compe<<ve pressures, the first thought is to compete by cuing price, at the cost of profitability. h"p://emagine-­‐group.com

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This will lead you to a death spiral of losing money in the majority of marke<ng ac<vi<es.

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A be"er strategy is to build brand and customer equity so that you compete on value, instead of price. This is what we call Value-­‐Based Marke<ng.

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Value Based Marke4ng Marke<ng Based on the Value of the Customer

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Value-­‐Based Marke<ng drives significant performance gains and firms that bridge the marke<ng divide focus on customer value in all marke<ng ac<vi<es.

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An Example of Direct Mail Offers Low to Medium CLTV + Low to Medium Response Rates are not sent a mailing

From a ROMI point of view, these customers are slow on the take rate, so why waste marke<ng dollars here?

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An Example of Direct Mail Offers High CLTV + Low Response Rates are also not sent a mailing

The cost of the mailing is not jus<fied

Our focus, as marketers, must be on the medium to high CLTV + Medium to High Response Rate customers

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An Example of Direct Mail Offers No4ce

Highest Expected Response Rate + the Highest CLTV get the 2nd most expensive offer

Highest Expected Response Rate + Medium CLTV get the 3rd most expensive offer

While the Lowest CLTV don’t get an offer at all

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Why do you think that is?

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Those that have the lowest CLTV are coming anyway so they get the lowest, most cost effec<ve offer. They are coming because they value your product but don’t respond to the “offers”; so it would be a waste targe<ng them.

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By focusing this single strategy on a value-­‐basis, we cut our marke<ng costs in half – since we now focus on less than 50% of the poten<al customer base, but the impact is significantly higher because we are focusing on profitability.

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Golf, Marke4ng & Finance

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Ask someone with a golf handicap if they keep score and they will laugh…

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“Of course, how else do I know if I am improving or not?”

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A golf handicap is calculated by taking the average golf score over the last 10 rounds of golf played.

The handicap is the average number of shots over par.

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For those who have never been on a golf course, there are 18 holes – some with a par of 3, some with a par of 4 and some with a par of 5.

Par is the number of strokes (shots) expected for the “expert” golfer. h"p://emagine-­‐group.com

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Adding up the 18 holes, par for playing a golf course is typically 72 strokes.

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Understand that golf is an incredibly difficult sport where you have to account for wind speeds, water hazards, and trees.

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Why am I talking about golf scores?

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Golf and marke<ng are very similar and it’s very easy to demonstrate finance’s role in a simple story.

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Let’s assume that you have a golf handicap of 10. This means that you rou<nely keep score and on average shoot 82 – or 10 strokes over par.

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But today, you get the opportunity to play at Pebble Beach, one of the world’s top golf courses. Will you shoot exactly 82 again?

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Doubsul. Most likely, you will shoot more – let’s say 90. Exactly 90?

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Well, no – let’s say there is a range from 82 to 100.

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What does this mean?

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First

Good golfers keep score so that they know how well they played

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Second

They keep score mul<ple <mes to had a handicap.

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The handicap is trend data that helps them predict the future, but when playing a new course for the first <me, there is a risk..

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Third

Because of risk, it is not possible to predict the future exactly – there is a range of possible outcomes.

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For financial ROMI, these are the three major takeaways that you must remember.

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Every year in February, there is a pro-­‐am tournament at Pebble Beach that bring great golfers and celebri<es together. Let’s assume that you enter this tournament and win! h"p://emagine-­‐group.com

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Very excited, you get the large trophy and a check from $ 1 million, but there is fine print on the bo"om of the check -­‐

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You must chose $100,000/year for 20 years or $520,000 today. You have to decide – which would you chose?

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Being a financial decision, it would be helpful to know how much the $100,000 per year is actually worth today.

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Basic educa<on tells us that a dollar today is not worth a dollar a year from now, but how much is it worth?

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If I invested $1 today, what would it be worth next year –

$1 x (1 + r)

r = rate of return we expect to get h"p://emagine-­‐group.com

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So the $1 today should grow to (1 + r) dollars with interest next year

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To make this easier, you can divide both sides by (1 + r) meaning that:

$1/(1 + r) = today’s dollar

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So if r = 10%, then a dollar received a year from now would be worth 91 cents today.

$1/(1 + 10%) = $1/1.1 = .909

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So let’s go back to Pebble Beach

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If we had $ 100,000/year for 10 years, with payments at the end of each year, the value today is:

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PV = $100K/(1+r) + $100K/(1+r)2 + $100K/(1+r)3 + …… + $100K/(1+r)10

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So, the value of $100K per year for 10 years in today’s dollars, assuming a discount rate of 10%. You would have $614,000 instead of the $520,000 today.

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This example highlights that calcula<ng the metric is only the first step in management decision making.

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In management, one can argue that there are no wrong answers. But with metrics, there are “be"er” answers.

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