Measuring the Value of a Marketing Measurement Project - Part 2

The first post in this series explained why I might create a standard spreadsheet to measure the value of a marketing performance measurement (MPM) project. In a traditional consulting engagement, this measurement would be a custom analysis tailored specifically to the project at hand. In the self-service world, this is an unavailable luxury. I’m starting with value measurement because I’m incurably linear and the first question to answer about a project is what value the client hopes to receive. The answer drives everything else.

In creating a generic project value form, the trick is to define a set of categories that are specific enough to be useful yet broad enough to cover all the possible cases. My inner Platonist wants to start with a general value formula such as value=revenue – costs, and then subdivide each element. But how would you know if the subcomponents corresponded to the value drivers of actual MPM projects? It’s better to start with a sample of MPM projects, identify their value drivers, and then see if these can be joined as components of a single formula. (Philosophy majors everywhere will recognize the difference between deductive and inductive reasoning. But I digress.)

A reasonable list of typical MPM projects would include marketing mix models, brand value studies, response measurements, Web analytics, social media measurement, and operational process measurements. Except for the final category, these all help allocate marketing resources to the most effective use. In contrast, operational processes help the department perform its internal functions more efficiently. This distinction immediately suggests breaking the value formula into two primary components: value received and marketing operations.

Of course, value received is the more important of the two, particularly if the calculation includes non-overhead marketing costs such as advertising, discounts and channel promotions. One way to subdivide value is to consider that a typical marketing plan will be divided among customer acquisition, development and retention programs. Of these, acquisition and retention focus on number of customers, while development focuses on value per customer. It therefore makes sense to calculate value as the product of these factors (i.e., value= number of customers x value per customer). Since many companies are more product-oriented than customer-oriented, value per customer could further be divided into value per unit and units per customer. Value per unit, in turn, could be split into revenue per unit, product cost per unit (cost of goods sold, shipping, etc.), and marketing cost per unit.

A single value for “number of customers” doesn’t really capture the dynamic between acquisition and retention rates, so it too must be broken into pieces. The basic formula is number of customers = (existing customers + customers added – customers lost).

The result of all this is a value formula with the following elements:

net value = value received – marketing operations cost

value received = number of customers x units per customer x value per unit

number of customers = existing customers + customers added - customers lost
units per customer (possibly broken down by product mix)
value per unit =revenue per unit – product cost per unit – marketing cost per unit

Now let’s do a reality check against our list of MPM projects:

- marketing mix models include product mix, pricing, advertising, and channel promotions as their major components.

- product mix is covered by revenue per unit and/or units per customer.

- pricing is covered by revenue per unit and/or marketing cost per unit, depending on how you treat discounts, coupons, etc.

- advertising is covered by marketing cost per unit

- channel promotions are covered by product cost per unit and/or marketing cost per unit

- brand value studies measure the relation of consumer attitudes to behaviors such as trial, retention and consumption rates. These are covered by existing customers, customers added, customers lost, and possibly by units per customer. A more formal sales funnel could easily fit into this section of the formula if appropriate.

- response measurements are covered by customers added and marketing cost per unit.

- Web analytics projects encompass a range of objectives such as lower cost per order, improved conversion rates and higher revenue per visitor. These are covered respectively by marketing cost per unit, number of new customers, and a combination of units per customer and revenue per unit. Other objectives could also probably be covered by the formula components.

- social media measurements are like brand value measurements: they relate messages to attitudes to behaviors. They would also be covered by changes in customer numbers and units per customer.

- operational process measurements are covered directly by marketing operations cost

So it looks like the proposed set of variables lines up reasonably well with the value drivers of typical MPM projects. This means that project planners should be able to define the expected benefits in terms of these variables without too many intermediate calculations. Once they’ve done this, the actual value calculation is purely mechanical.

The final set of inputs would look like this (with apologies for poor formatting):

inputs..................current value....expected value......change

Number of Customers:
existing customers........xxxx............xxxx...................xxxx
+ customers added........xxxx............xxxx...................xxxx
- customers lost.............xxxx............xxxx...................xxxx

Units per customer:......xxxx............xxxx...................xxxx

Value per Unit:
revenue per unit............xxxx............xxxx...................xxxx
- product cost per unit...xxxx............xxxx...................xxxx
- marketing cost/unit.....xxxx............xxxx...................xxxx

Marketing Ops Cost.......xxxx............xxxx...................xxxx

Based on those inputs, the final calculation is:

Value Received (= Number of Customers x Units per Customer x Value per Unit)
- Marketing Ops Cost
= Net Value

OK, so now we have a formula that calculates business value using inputs relevant to marketing measurement projects. But the real work is deciding what values to apply to those inputs. Part 3 of this sequence will talk about that.