1

INTRODUCTION

In recent years, data-based marketing has swept through the business world. In its wake,
measurable performance and accountability have become the keys to marketing success.
However, few managers appreciate the range of metrics by which they can evaluate
marketing strategies and dynamics. Fewer still understand the pros, cons, and nuances
of each.
In this environment, we have come to recognize that marketers, general managers, and
business students need a comprehensive, practical reference on the metrics used to
judge marketing programs and quantify their results. In this book, we seek to provide
that reference. We wish our readers great success with it.

1.1 What Is a Metric?

A metric is a measuring system that quantifies a trend, dynamic, or characteristic.1
In virtually all disciplines, practitioners use metrics to explain phenomena, diagnose
causes, share findings, and project the results of future events. Throughout the worlds of
science, business, and government, metrics encourage rigor and objectivity. They make
it possible to compare observations across regions and time periods. They facilitate
understanding and collaboration.

1.2 Why Do You Need Metrics?

“When you can measure what you are speaking about, and express it in numbers, you
know something about it; but when you cannot measure it, when you cannot express
it in numbers, your knowledge is of a meager and unsatisfactory kind: it may be
the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the
stage of science.”––William Thomson, Lord Kelvin, Popular Lectures and Addresses
(1891–94)2

1
Lord Kelvin, a British physicist and the manager of the laying of the first successful
transatlantic cable, was one of history’s great advocates for quantitative investigation. In
his day, however, mathematical rigor had not yet spread widely beyond the worlds of
science, engineering, and finance. Much has changed since then.
Today, numerical fluency is a crucial skill for every business leader. Managers must
quantify market opportunities and competitive threats. They must justify the financial
risks and benefits of their decisions. They must evaluate plans, explain variances, judge
performance, and identify leverage points for improvement––all in numeric terms.
These responsibilities require a strong command of measurements and of the systems
and formulas that generate them. In short, they require metrics.
Managers must select, calculate, and explain key business metrics. They must under-
stand how each is constructed and how to use it in decision-making. Witness the fol-
lowing, more recent quotes from management experts:

“. . . every metric, whether it is used explicitly to influence behavior, to evaluate future

strategies, or simply to take stock, will affect actions and decisions.” 3
“If you can’t measure it, you can’t manage it.”4

1.3 Marketing Metrics: Opportunities, Performance,

and Accountability
Marketers are by no means immune to the drive toward quantitative planning and eval-
uation. Marketing may once have been regarded as more an art than a science. Executives
may once have cheerfully admitted that they knew they wasted half the money they spent
on advertising, but they didn’t know which half. Those days, however, are gone.
Today, marketers must understand their addressable markets quantitatively. They must
measure new opportunities and the investment needed to realize them. Marketers
must quantify the value of products, customers, and distribution channels––all under
various pricing and promotional scenarios. Increasingly, marketers are held accountable
for the financial ramifications of their decisions. Observers have noted this trend in
graphic terms:

“For years, corporate marketers have walked into budget meetings like neighborhood
junkies. They couldn’t always justify how well they spent past handouts or what
difference it all made. They just wanted more money––for flashy TV ads, for big-ticket
events, for, you know, getting out the message and building up the brand. But those
heady days of blind budget increases are fast being replaced with a new mantra:
measurement and accountability.”5

2 MARKETING METRICS
1.4 Choosing the Right Numbers
The numeric imperative represents a challenge, however. In business and economics,
many metrics are complex and difficult to master. Some are highly specialized and
best suited to specific analyses. Many require data that may be approximate, incomplete,
or unavailable.
Under these circumstances, no single metric is likely to be perfect. For this reason, we
recommend that marketers use a portfolio or “dashboard” of metrics. By doing so, they
can view market dynamics from various perspectives and arrive at “triangulated” strate-
gies and solutions. Additionally, with multiple metrics, marketers can use each as a
check on the others. In this way, they can maximize the accuracy of their knowledge.6
They can also estimate or project one data point on the basis of others. Of course, to use
multiple metrics effectively, marketers must appreciate the relations between them and
the limitations inherent in each.
When this understanding is achieved, however, metrics can help a firm maintain a
productive focus on customers and markets. They can help managers identify the
strengths and weaknesses in both strategies and execution. Mathematically defined
and widely disseminated, metrics can become part of a precise, operational language
within a firm.

Data Availability and Globalization of Metrics

A further challenge in metrics stems from wide variations in the availability of
data between industries and geographies. Recognizing these variations, we have tried to
suggest alternative sources and procedures for estimating some of the metrics in
this book.
Fortunately, although both the range and type of marketing metrics may vary between
countries,7 these differences are shrinking rapidly. Ambler,8 for example, reports that
performance metrics have become a common language among marketers, and that they
are now used to rally teams and benchmark efforts internationally.

1.5 Mastering Metrics

Being able to “crunch the numbers” is vital to success in marketing. Knowing which
numbers to crunch, however, is a skill that develops over time. Toward that end, man-
agers must practice the use of metrics and learn from their mistakes. By working
through the examples in this book, we hope our readers will gain both confidence and
a firm understanding of the fundamentals of data-based marketing. With time and

Chapter 1 Introduction 3
experience, we trust that you will also develop an intuition about metrics, and learn to
dig deeper when calculations appear suspect or puzzling.
Ultimately, with regard to metrics, we believe many of our readers will require not
only familiarity but also fluency. That is, managers should be able to perform relevant
calculations on the fly––under pressure, in board meetings, and during strategic
deliberations and negotiations. Although not all readers will require that level of
fluency, we believe it will be increasingly expected of candidates for senior manage-
ment positions, especially those with significant financial responsibility. We
anticipate that a mastery of data-based marketing will become a means for many of our
readers to differentiate and position themselves for career advancement in an ever more
challenging environment.

Organization of the Text

This book is organized into chapters that correspond to the various roles played by mar-
keting metrics in enterprise management. Individual chapters are dedicated to metrics
used in promotional strategy, advertising, and distribution, for example. Each chapter is
composed of sections devoted to specific concepts and calculations.
Inevitably, we must present these metrics in a sequence that will appear somewhat
arbitrary. In organizing this text, however, we have sought to strike a balance between
two goals: (1) to establish core concepts first and build gradually toward increasing
sophistication, and (2) to group related metrics in clusters, helping our readers recog-
nize patterns of mutual reinforcement and interdependence. In Figure 1.1, we offer a
graphical presentation of this structure, demonstrating the interlocking nature of all
marketing metrics––indeed of all marketing programs––as well as the central role of
the customer.
The central issues addressed by the metrics in this book are as follows:

■ Chapter 2––Share of Hearts, Minds, and Markets: Customer perceptions, market

share, and competitive analysis.
■ Chapter 3––Margins and Profits: Revenues, cost structures, and profitability.
■ Chapter 4––Product and Portfolio Management: The metrics behind product
strategy, including measures of trial, growth, cannibalization, and brand
equity.
■ Chapter 5––Customer Profitability: The value of individual customers and
relationships.
■ Chapter 6––Sales Force and Channel Management: Sales force organization,
performance, and compensation. Distribution coverage and logistics.

4 MARKETING METRICS
 Customers and Market Research

Logistics
Operations
Product and
Customer
Portfolio
Profitability
Management Sales Force

Channel
Margins and Management
Profits and Sales
Force
Share of Hearts, Minds,
and Markets

Marketing
Pricing
and
Strategy
Finance
Finance

Advertising
Media and Web Promotions
Metrics

The Trade
Advertising
Agency

Figure 1.1 Marketing Metrics: Marketing at the Core of the Organization

■ Chapter 7––Pricing Strategy: Price sensitivity and optimization, with an eye

toward setting prices to maximize profits.
■ Chapter 8––Promotion: Temporary price promotions, coupons, rebates, and
trade allowances.
■ Chapter 9––Advertising Media and Web Metrics: The central measures of adver-
tising coverage and effectiveness, including reach, frequency, rating points, and
impressions. Models for consumer response to advertising. Specialized metrics
for Web-based campaigns.
■ Chapter 10––Marketing and Finance: Financial evaluation of marketing programs.
■ Chapter 11––The Marketing Metrics X-Ray: The use of metrics as leading indi-
cators of opportunities, challenges, and financial performance.

Chapter 1 Introduction 5
Components of Each Chapter
As shown in Table 1.1, the chapters are composed of multiple sections, each dedicated to
specific marketing concepts or metrics. Within each section, we open with definitions,
formulas, and a brief description of the metrics covered. Next, in a passage titled
Construction, we explore the issues surrounding these metrics, including their formu-
lation, application, interpretation, and strategic ramifications. We provide examples to
illustrate calculations, reinforce concepts, and help readers verify their understanding of
key formulas. That done, in a passage titled Data Sources, Complications, and Cautions,
we probe the limitations of the metrics under consideration, and potential pitfalls in
their use. Toward that end, we also examine the assumptions underlying these metrics.
Finally, we close each section with a brief survey of Related Metrics and Concepts.
In organizing the text in this way, our goal is straightforward: Most of the metrics in this
book have broad implications and multiple layers of interpretation. Doctoral theses
could be devoted to many of them, and have been written about some. In this book,
however, we want to offer an accessible, practical reference. If the devil is in the details,
we want to identify, locate, and warn readers against him, but not to elaborate his entire
demonology. Consequently, we discuss each metric in stages, working progressively
toward increasing levels of sophistication. We invite our readers to sample this informa-
tion as they see fit, exploring each metric to the depth that they find most useful
and rewarding.
With an eye toward accessibility, we have also avoided advanced mathematical notation.
Most of the calculations in this book can be performed by hand, on the back of the
proverbial envelope. More complex or intensive computations may require a spread-
sheet. Nothing further should be needed.

Reference Materials
Throughout this text, we have highlighted formulas and definitions for easy reference.
We have also included outlines of key terms at the beginning of each chapter and
section. Within each formula, we have followed this notation to define all inputs
and outputs.

$—(Dollar Terms): A monetary value. We have used the dollar sign and “dollar
terms” for brevity, but any other currency, including the euro, yen, dinar, or yuan,
would be equally appropriate.
%—(Percentage): Used as the equivalent of fractions or decimals. For readability,
we have intentionally omitted the step of multiplying decimals by 100 to obtain
percentages.

6 MARKETING METRICS
 #––(Count): Used for such measures as unit sales or number of competitors.
R––(Rating): Expressed on a scale that translates qualitative judgments or prefer-
ences into numeric ratings. Example: A survey in which customers are asked to
assign a rating of “1” to items that they find least satisfactory and “5” to those that
are most satisfactory. Ratings have no intrinsic meaning without reference to their
scale and context.
I––(Index): A comparative figure, often linked to or expressive of a market
average. Example: the consumer price index. Indexes are often interpreted as
a percentage.

$––Dollar. %––Percentage. #––Count. R––Rating. I––Index.

References and Suggested Further Reading

Abela, Andrew, Bruce H. Clark, and Tim Ambler. “Marketing Performance Measurement,
Performance, and Learning,” working paper, September 1, 2004.
Ambler, Tim, and Chris Styles. (1995). “Brand Equity: Toward Measures That Matter,” working
paper No. 95-902, London Business School, Centre for Marketing.
Barwise, Patrick, and John U. Farley. (2003). “Which Marketing Metrics Are Used and Where?”
Marketing Science Institute, (03-111), working paper, Series issues two 03-002.
Clark, Bruce H., Andrew V. Abela, and Tim Ambler. “Return on Measurement: Relating
Marketing Metrics Practices to Strategic Performance,” working paper, January 12, 2004.
Hauser, John, and Gerald Katz. (1998). “Metrics: You Are What You Measure,” European
Management Journal, Vo. 16, No. 5, pp. 517–528.
Kaplan, R. S., and D. P. Norton. (1996). The Balanced Scorecard: Translating Strategy into Action,
Boston, MA: Harvard Business School Press.

Chapter 1 Introduction 7
 Table 1.1 Major Metrics List

Section Metric Section Metric

Share of Hearts, Minds, and Markets 3.3 Price Per Statistical Unit
2.1 Market Share 3.4 Variable and Fixed Costs
2.1 Unit Share 3.5 Marketing Spending
2.2 Relative Market Share 3.6 Contribution per Unit
2.3 Brand Development Index 3.6 Contribution Margin (%)
2.3 Category Development 3.6 Break-Even Sales
Index 3.7 Target Volume
2.4–2.6 Market Share 3.7 Target Revenues
2.4 Market Penetration
Product and Portfolio Management
2.4 Brand Penetration
4.1 Trial
2.4 Penetration Share
4.1 Repeat Volume
2.5 Share of Requirements
4.1 Penetration
2.6 Heavy Usage Index
4.1 Volume Projections
2.7 Hierarchy of Effects
4.2 Growth—Percentage
2.7 Awareness
4.2 Growth––CAGR
2.7 Top of Mind
4.3 Cannibalization Rate
2.7 Ad Awareness
4.3 Fair Share Draw Rate
2.7 Knowledge
4.4 Brand Equity Metrics
2.7 Beliefs
4.5 Conjoint Utilities and
2.7 Intentions
Consumer Preferences
2.7 Purchase Habits
4.6 Segment Utilities
2.7 Loyalty
4.7 Conjoint Utilities and
2.7 Likeability Volume Projections
2.8 Willingness to Recommend
Customer Profitability
2.8 Customer Satisfaction
5.1 Customers
2.9 Willingness to Search
5.1 Recency
Margins and Profits 5.1 Retention Rate
3.1 Unit Margin 5.2 Customer Profit
3.1 Margin (%) 5.3 Customer Lifetime Value
3.2 Channel Margins 5.4 Prospect Lifetime Value
3.3 Average Price per Unit

8 MARKETING METRICS
 Table 1.1 Continued

Section Metric Section Metric

5.5 Average Acquisition Cost 7.4 Optimal Price

5.5 Average Retention Cost 7.5 Residual Elasticity

Sales Force and Channel Management Promotion

6.1 Workload 8.1 Baseline Sales
6.1 Sales Potential Forecast 8.1 Incremental
6.2 Sales Total Sales/Promotion Lift

6.3 Sales Force Effectiveness 8.2 Redemption Rates

6.4 Compensation 8.2 Costs for Coupons and

Rebates
6.4 Break-Even Number of
Employees 8.2 Percentage Sales with
Coupon
6.5 Sales Funnel, Sales Pipeline
8.2 Percent Sales on Deal
6.6 Numeric Distribution %
8.2 Percent Time on Deal
6.6 All Commodity Volume
(ACV) 8.2 Average Deal Depth

6.6 Product Category Volume 8.3 Pass-Through

(PCV) 8.4 Price Waterfall
6.6 Total Distribution %
Advertising Media and Web Metrics
6.6 Facings
9.1 Impressions
6.7 Out of Stock %
9.1 Gross Rating Points (GRPs)
6.7 Inventories
9.2 Cost per Thousand
6.8 Markdowns Impressions (CPM)
6.8 Direct Product Profitability 9.3 Net Reach
(DPP)
9.3 Average Frequency
6.8 Gross Margin Return on
9.4 Frequency Response
Inventory Investment
(GMROII) 9.5 Effective Reach
9.5 Effective Frequency
Pricing Strategy
9.6 Share of Voice
7.1 Price Premium
9.7 Pageviews
7.2 Reservation Price
9.8 Clickthrough Rate
7.2 Percent Good Value
9.9 Cost per Click
7.3 Price Elasticity of Demand
Continues

Chapter 1 Introduction 9
 Table 1.1 Continued

Section Metric Section Metric

9.9 Cost per Order 10.2 Return on Investment—ROI

9.9 Cost per Customer Acquired 10.3 Economic Profit—EVA
9.10 Visits 10.4 Payback
9.10 Visitors 10.4 Net Present Value (NPV)
9.10 Abandonment Rate 10.4 Internal Rate of Return
(IRR)
Marketing and Finance
10.5 Return on Marketing
10.1 Net Profit Investment—ROMI;
10.1 Return on Sales—ROS Revenue

10 MARKETING METRICS