Marketing Effectiveness Metrics

7/27/2019 Marketing Effectiveness Metrics

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RWS, IIFT


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The Control Process

What do we want to achieve?

What is happening?

Why is it happening?

What should we do about it?


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Types of Marketing Control

Annual plan control

Profitability control

Efficiency control

Strategic control


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Annual Plan Control

Goal Setting

Performance Measurement

Performance Diagnostics

Corrective Action


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Tools for Performance Analysis

Sales Analysis

Market Share Analysis

Marketing Expense to Sales

Financial Analysis

Market Based Score-card


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Market Share

Percentage of a market accounted for by aspecific entity

Unit market share

Revenue market share

Relative market share

Share of category


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Market Share

Brand Development Index (I)

= [Brand sales to group (#)/Households in Gp(#)][Total brand sales (#) /Total Households (#)]

How well the brand is performing within specific group of customerscompared to average performance among all consumers

Purpose- To understand relative performance within specified

consumer groups


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Market Share

Category Development Index

= [Category sales to group (#)/Households in Gp (#)][Total category sales (#) /Total Households (#)]

The index can also be calculated for customers, accounts, &businesses instead of H.holds

(retailers share of category sales (%) / Retailers share of market (%)


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Penetration

Market Penetration (a)

Brand Penetration (b)

Penetration share (b/a)

Customers who have purchased the brand (at least once in a

given period)/Customers who purchased a product in the

category (at least once in a given period))


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Share of Requirements

SOR= Brand Purchases (#, Rs)Total category purchases by brand buyers (#, Rs)

(% of customers needs in a category that are served by a given brand or product)

Purpose- To understand source of market share in terms of

breadth and depth of consumer franchise & in terms of

relative category usage


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Heavy Usage Index

HUI= Av total purchases in category by brands cust.(#,$)Av total purchases in category by all cust. for thatcategory (#,$)

Purpose- to define and measure if a firms customers areheavy users


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Decomposing Market Share

Market share (%)

= Penetration share (%)

x Share of Requirements (%)

x Heavy Usage Index (I)


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Market Share=

No. of customers for brand A

No. of customers for category

XQty of brand A purchased by Brand As customers

Qty of category purchased by Brand As customersX

Av. Qty of category purchased by brand As customers

Av Qty of category purchased by all customers


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Market Share=No. of customers for brand A

No. of customers for category

XQty of brand A purchased by Brand As customers

Qty of category purchased by Brand As customers

X

Qty of category purchased by Brand As customersNo. of customers for brand A

X

No. of customers for category (all customers)

Qty of category purchased by all customers


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Metrics for CustomerSatisfaction

Customer satisfaction

Willingness to recommend

Willingness to search


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Profitability Analysis

Relative profitability of

Different Channels

Product

Territories

Customers

Activity/Territory based costing

Profitability with full cost and Profitability

with direct & traceable costs


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Metrics for CustomerSatisfaction

Customer satisfaction

Willingness to recommend

Willingness to search


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A new look at ROMI

ROMI= LCV1- LCV0

Marketing Expenditure

LCV1= Lifetime Customer Value in Period 1

LCV2= Lifetime Customer Value in Period 2


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Customer Lifetime Value

How much is a current customer worth to the firm ?

(over the lifetime of the customers relationship with the firm)

Customer Lifetime Value (CLV) =

Net profit over the Customers lifetime

discounted to the present

(Net Profit= customer margin less the costs of

acquiring and serving the customer)


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Information needed to calculate CLV

1.Current contribution margin from customer

2.Projected future contribution margin from customer

3.Probability of the customer sticking with you-

and expected duration of staying with you

4.Costs to acquire, serve and retain customer

5.Your organizations discount rate


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Customer Profitability &

Lifetime Value

Example- Direct catalogue retailer of books

Cost of sending a catalogue = Rs 5

Cost of database per contact = Rs 2

Response rate = 4%

Acquisition Cost per customer

=Total cost of sending cataloguesResponse rate

= 7/0.04= Rs 175


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Direct Catalogue Book Retailer

Example

Frequent buyers-No. of purchases p.a = 2

Margin per purchase = Rs100/-

Retention rate = 75%

No. of times p.a, catalogues sent to a frequent buyer= 12

Occasional buyers-

No. of purchases p.a = 1Margin per purchase = Rs 160/-

Retention rate = 50%

No. of times p.a, catalogues sent to an occasional buyer= 4

Di t C t l B k R t il


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Direct Catalogue Book Retailer

Example

Lifetime value

calculation

Frequent Buyers Year 1 Year 2

Acquisition cost 175 0Margin (annual) 100*2=200 100*2=200

Survival ratio 100% 75%Cost of mailing catalogues 5*12=60 5*12=60

Total expected profit percustomer 200-60=140 0.75*(200-60)=105

Cum. profits per customer net

of acquisition costs 140-175=-35 105+ (-35)=70
http://localhost/var/www/apps/conversion/tmp/scratch_3/lifetime%20val%20of%20freq%20vs%20occassional%20buyers.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_3/lifetime%20val%20of%20freq%20vs%20occassional%20buyers.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_3/lifetime%20val%20of%20freq%20vs%20occassional%20buyers.xlshttp://localhost/var/www/apps/conversion/tmp/scratch_3/lifetime%20val%20of%20freq%20vs%20occassional%20buyers.xls


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Occasional Buyers Year 1 Year 2

Acquisition cost 175 0

Margin (annual) 160*1=160 160*1=160

Survival ratio 100% 50%

Cost of mailing catalogues 5*12=60 5*4=20

Total expected profit per

customer 160-60=100 0.5*(160-20)=70

Cum. profits per customer net

of acquisition costs 100-175=-75 70+ (-75)=-5


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An approach to CLV

T= time horizon for calculation, i.e no. of years out to estimate the value ofthe customer

m=net cash flow per period (if active); i.e-recurring margin from thecustomer (will include cost of serving & retaining customer)

r= retention rate (1-churn rate)

d= organisations discount rate (or WACC)

AC= acquisition cost

m * rt

(1+d)t- AC

T

t=0

CLV =


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Simple CLV with Infinite Horizon

If you assume :Margin,Retention Rate, Discount Rate fixed across periods

An infinite time horizon (i.e. letting T )

The equation simplifies to:

CLV =

m

1 r + d

- AC


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Average retention (churn) rate across some set ofcustomers

Infinite horizon model assumes no changes inretention rate, discount rate, or margin over time

Assumes that we know the retention probability(ignores customer purchase context)

One customer (not a segment)

Discount rate is using firms WACC

Good when an approximation is sufficient

Simple model with many assumptions:


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Example CLV

Customer Acquisition Cost (AC) (Rs300)

Customer Acquisition Revenue: Rs 100

Customer Acquisition Costs: Rs 400

Customer Recurring Margin (M) Rs1000/yr Margin from products/ services: Rs 1200

Cost to service and retain: Rs 200

Retention Probability (r) 75%

Time Horizon (T) 3 Years

Cost of capital (d) 10%


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With Infinite Time Horizon

CLV =m

1-r+d-AC

CLV =1000

1-.75+.1

- 300 = Rs 2557


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Driving Lifetime Value

The main ways a co. can drive lifetime valueof its customers are:

Increasing retention

Attracting switchers

Increasing customer profitability

Increasing share of wallet


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Impact of Increased Retention on LifetimeValue

Cost of Capital = K = 10% or 0.10

Lifetime Value of Customer (100% Retention)

= (300 thsd/0.1)200k

= Rs 2,800 thsd

Lifetime value of customer (80% Retention)

= (300 thsd/(0.1+0.2)200k

= Rs 800 thsd

Lifetime Value of Customer (70% Retention)

= (300 thsd/(0.1+0.3)200k

= Rs 550 thsd


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Simple CLV as a tool for strategic choices

Which marketing approach will be more effective?

Should we try to increase retention rate or getcurrent customers to buy more?

On which customers (or segment) should we focus?

When should we firea customer?

How should our sales force prioritize their time (withcurrent or potential customers)?

What new market opportunities should weinvestigate?


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Customer Management at Cisco Systems

Challenge- spur double digit year to yeargrowth for a 20+ billion organisation

Key questions for customer analytics Which cos have we sold to and not sold to

What is Ciscos total potential of existing

marketplace

Can we identify over and under penetratedaccounts


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Cisco customer value segmentation

Jackpots Nuggets

Lemons Acorns

Total category

spend (by each co

in IT & telecom)

Customer spend with Cisco

Hi

Lo

Lo Hi

National level, sales area level, account

level


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Once You Know What a Customer is Worth

.. you need to look at-

What actions will:

1. Increase the lifetime value of your customers

(get current customers to spend more, stay longer)

1. Enable you to acquire new profitable customers

(by meeting the needs of the market better)


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Stages of CustomerRelationship

Attract

& Create

Broaden

&

Deepen

Defend

&

Harvest

Stage 1 Stage 2 Stage 3

Value, Brand , Relationship

Documents

Marketing Effectiveness Metrics