Wednesday, September 19, 2007

Accountability Discourse

Almost every week marketing journals like the AdAge reiterate a constant theme in the marketing discourse. This theme hunts CMO’s and ensures a short average tenure of less than 24 months for CMOs: It’s called Accountability. This whole Accountability discourse circle around three different questions that need to be kept separate:

  • Do marketing investments provide a positive Return or not?
  • What kind of metrics should be measured and tracked to better understand the performance of my marketing?
  • How can these metrics be measured and tracked in an ongoing and reliable manner?

The first question solely focuses on a positive financial impact that assumes a direct and measurable correlation between marketing and sales that can be predicted with a high level of statistical confidence. Most of us marketers know that this is extremely difficult to prove, but the marketing community as a whole has made some progress against this question.

The second question gets more interesting. It realizes that one need more indirect measures between marketing and sales to build a more accurate correlation between these variables. I like to distinguish between indirect and direct metrics, where brand awareness, considerations, purchase preferences, satisfactions are indirect (non-behavioral) metrics and where repeat purchase rate, retention rates, etc. are direct metrics.

As part of the more direct metrics l have lately started to embrace a concept that I call “Earnings per consumers (EPC)”. EPC describes how much profit a brand does either with a particular consumer, with a distinct consumer segment, or with the average of all consumers that a brand has. To calculate the operating profits of a brand EPC needs to be multiplied by number of consumers of a particular brand. This concept is borrowed by a key financial metric “Earnings per share (EPS)” that well known financial expert like Eddie Lampert focuses on. The EPS formula is pretty simple: EPS = Profit/Weighted Average Common Share.

These financial wizards are being driven by increasing the earnings per share, while marketers focus on optimizing the earnings per consumer and on increasing the numbers of consumers. I believe that this EPC concept forces marketers to focus on elements of their marketing strategy that are often neglected:

  • Improve the quality of consumers. It’s not just that all consumers are not equal but that brands have to focus on attracting consumers with high profitability potential.
  • Balance attracting new consumers with average profit per consumer: Most marketers don’t know how to balance the acquisition of new consumers with increasing the revenue and profit potential of existing consumers. Too many marketers believe that they have to decide on one area at the expense of the other
  • Increase profitability by consumer: Most marketers focus on retaining consumers instead of increasing profit and revenue of existing consumers.

These three implications of taking EPC seriously can significantly alter a brand’s marketing strategy. In one of my next blogs I will tackle the third question of the “How” to measure and track. EPC.


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