August traditionally is the month everyone flees to the beaches, mountains, or points unknown to recuperate from work-related stress, only to find that close proximity to family is not always the best antidote.  We hope you haven’t completely tuned out this month because we’re focusing this issue on how you can improve the allocation and ROI of your marketing spend with great articles from experts in this area.

In fact, the topic is so important that the CMO Council’s Elite Retreat in December is entitled:  “Less Burn:  More Return.”  The December 12 -13 get together in Sonoma, California will examine new marketing operational models and allocating, adapting, and advocating marketing spend in great detail.  David Haigh, founder and CEO of London-based Brand Finance plc. will keynote the Elite Retreat and lay the foundation for how best to maximize marketing spend.

In this issue we offer perspectives on the topic from John Petralia, senior vice president of marketing, for Iron Mountain in our Get to Know a CMO column; Raj Srivastava, an MPM Forum advisory board member and director of Emory University’s Institute of Brand Science, offers his POV on the subject; Eric Peterson, CEO and principal consultant at Web Analytics Demystified, approaches the topic from a Web perspective; and, James Connor, CEO of The James Group, instructs on how to set marketing budgets using customer value.

All four of these contributors understand that marketing is being challenged to deliver greater value and return at a time when budgets are being spread across an increasing number of business units.  These experts provide an early look at how to get "Less Burn: More Return."

August is rich with other mind itching articles, also.  Thomas Ordahl’s article The Existential Product makes the case that products are becoming less tangible and are instead bundles of benefits delivered through combinations of services, technology, Internet functionality, and hard goods.  Hard to argue when the iPod is used as an example.  Deborah Eastman - CMO of Satmetrix – takes on an Advertising Age article that says CMOs have zero impact on sales and concludes that the heart of the challenge is who carries the CMO title and how CMO performance is measured. 

Finally, we’ve dedicated The Download column this month exclusively to a new study conducted by Maritz Research called:  “Managing Your Boss:  The Impact of Manager Personality and Style on Employee Performance.”  Find out where you fit and what your employees call you…are you a “Superman” or a “Wonder Woman?”

Bob Nelson is also Academic Director for the CMO Council's MPM Forum and Mastering MPM programs and is a Puerto Vallarta, Mexico-based brand optimization consultant.

GET TO KNOW A CMO:

Marketing Magnified: Tell me about how marketing is structured at Iron Mountain?

We have five primary areas within the marketing organization that I manage. The first group is product and solution marketing, in-bound marketing, and out-bound marketing. The second group includes field marketing, marketing communications, trade shows and events, database marketing, and analytics. The third group is Internet marketing. Our fourth group is focused on advocacy programs or consultative selling where we develop risk assessments for our customers benchmarked against best practices from their peer group. By the way, this group has a 3X ROI for Iron Mountain. Finally, there is the marketing intelligence group, which drives marketing strategy informed by business intelligence and industry and customer trends. There are 50 people within the five groups. We don’t have a corporate marketing function at Iron Mountain. In my role as head of marketing I am also an executive team member.

Marketing Magnified: Getting a bang for your marketing buck is this month's focus. What process do you use to allocate your marketing budget to get the biggest bang?

I’ve been building my organization for the past three years and have ensured that marketing is aligned with key business objectives. Maximizing our core business is our key strategy. We translate that to marketing by leveraging our customer base. Our biggest opportunity is to drive cross-sell and up-sell of our existing base. When we allocate dollars, we look at our business objectives and then try to drive revenue growth through new product and customer penetration. Another key area is customer advocacy because it’s the primary driver for customer loyalty. It’s a better measure than satisfaction for incremental growth when considering share of wallet. Customer advocacy is built through education and training. We use seminars, Webinars, white papers, customer events and other tactics to educate our customers. We also provide them with risk assessment. All of these activities help to build a perception that we are a trusted and valued partner our customers look to for thought leadership. They give us permission to be thought leaders. We both teach them and solve their problems.

Marketing Magnified: What are your top three spending priorities this year?

Number one is our customer advocacy initiative followed by demand generation through cross-sell and up-sell, and, of course, new product launches.

Marketing Magnified: How do you measure the ROI of your marketing spend?

One of the key areas we measure and report on for the marketing team is  marketing-activity based ROI, that is how much demand we create and our conversion-to-opportunity success. We also look at how many we convert to sales, average order size, and total revenue influenced. We also look at the top 10 vertical markets year-over-year revenue growth. We also look at new product revenue growth as a percent of new sales. Customer thought leadership metrics are also employed (Web site traffic, our knowledge center traffic, number of Podcasts downloaded, Webinar participation, etc…). And, we look at customer product penetration rates for three product categories across the total customer base: cross-sell penetration rates, spend-to-budget, and spend to marketing headcount.

Marketing Magnified: Do you have a formal MPM or marketing performance measurement system in place?

No, not a formal system, which would be nice to have but we have other priorities for our budget right now. We have a foundation set up, but it’s manual. This works just fine for us now. We spend our money to increase revenue, decrease costs, and decrease risk for the corporation. The measurement program in place works fine but we have no software tool. We use two dashboards to keep the organization informed, a quarterly executive dashboard and a monthly marketing dashboard. We also plan to include our results in business unit results.

Marketing Magnified: What are your top three marketing challenges this year?

Continual optimization of our marketing programs and continual feedback loops to optimize our spending. Also, I am placing a strong emphasis on recruiting. Sometimes it’s hard to recruit “A” level players in the B2B space. I want the best players possible from a market that is beginning to tighten up. I’m looking for people who have what I call “business athleticism”, that is they understand business. They should also have technical expertise so they can hit the ground running and domain expertise. And, I want to make sure we stay focused on priorities that meet corporate goals and don’t get overextended. They key is to focus spending to get better results and better yield.

POINT OF VIEW: THE PERILS OF RESOURCE ALLOCATION AND RETURN ON MARKETING SPEND

The quest to establish a link between marketing spend and financial performance has also been echoed globally as Chief Marketing Officers (CMOs) struggle to show how major market-based investments lead to increased performance and shareholder value. While there is little disagreement about the importance of marketing performance measurement – what is not measured cannot be well-managed – there is limited consensus on how to go about doing it. Unsurprisingly, marketers have homed in on metrics such as return on marketing investments (ROMI) to both measure the return on marketing spend (retrospectively) and to compete for funds against other demands for corporate resources. The search for a single silver bullet is likely to be both elusive and a mistake.

As Ambler and Roberts (2006) argue with considerable passion, market performance measurement has to be multi-dimensional. One must distinguish between tools and metrics that are useful for marketing performance evaluation versus those that might be better for planning and resource allocation. Backward-looking measures are more appropriate to monitor past actions performance. Forward-looking measures and tools are more appropriate to plan the future.

The distinction between retrospective and forward-looking measures may not pose a problem in mature, stable markets. But, in dynamic markets subject to product and marketplace changes, looking backwards may not be the best way for driving forward. Human nature gravitates to tangible information. The tendency to focus on what has happened, not what might happen, places too much weight on short-term results. Let’s look at challenges faced by marketers in each of these contexts.

Performance measurement challenges

Measures based on outcomes of past marketing actions are used to provide information for reward and incentive systems, and market diagnostics to aid adaptive management and planning the future. These metrics are in and of themselves less useful. Their value is enhanced when compared to credible benchmarks related to key competitors or expectations based on historical performance. Subsequent variance analysis can provide diagnostics information.

There are many issues that marketers must contend with in assessing past performance. Some marketing actions such as price-promotions are inherently short-run and can be best evaluated via short-term measures such as changes in margins, share and ROMI. Other marketing actions such as customer acquisition, channel development, and brand-launch expenditures have long-term, multi-period payoffs. Short-term performance metrics - such as ROMI -under-estimate the impact of marketing on business performance. Historically, marketing analysts have not done a good job in controlling to this difference. Marketing mix models (and now more comprehensive marketing dashboards) can lead to questionable conclusions. For example, advertising, which has long-term, multi-period benefits is often drowned by price-promotions when its impact is examined in terms of monthly or weekly sales response.

Short-term performance measures such as ROMI do not capture the impact of market-based investments on the value of off-balance sheet intangible assets such as brands, customers, and channel partners. These investments and consequent market-based assets can be leveraged to enhance cash flows, accelerate growth, and reduce business risks – in short, drive shareholder value (Srivastava, Shervani and Fahey 1998). Omission of such “value” metrics can leave “blind spots” in decisions ranging from resource allocation to M&A valuations, costing marketing a seat at the C-Level dining table and corporate boards.

Resource allocation challenges

Since its humble beginnings in 1919, the DuPont model has come a long way in being accepted as a standard technique in the industry for measuring performance based on return on assets and investment, and the definitional components (margins and turnover) leading up to it. Quite understandably, performance measures such as ROMI derived from the DuPont model also guide resource allocation. But, using the same metrics to both measure past performance and to resource the future can have disastrous results:

• The best way to kill new product innovations that have long-run payoffs is to use short-term, backward-looking metrics such as margins, turnover, and return on assets that favor incumbent products thus starving innovations of badly need growth funds.
• Blurred insights can lead to questionable decisions. For example, higher short-run sales response elasticity for price-promotions has led to a systematic decrease in the share of marketing mix budgets allocated to advertising in the long run.
• Because marketing activities are listed as expenses rather than investments, they must typically “pay” for themselves within a year. Ironically, market-based assets such as customers and brands are the only assets that appreciate, and not depreciate (Srivastava et al 1998).

Logically, strategy must precede metrics. However, metrics can develop a life of their own and begin to dictate strategy. Because of reward and incentive systems based on key performance metrics, managers all too often manage metrics such as ROMI rather than managing the business. For example, when profits or returns are limited under adverse economic conditions, companies often cut back on marketing investments in order to produce acceptable performance (ROMI’s). Ironically, for strong companies, this may be the best time to go on an offensive because less robust competitors may be weaker still (Srinivasan, Rangaswamy and Lilien 2005).

If strategy is to precede metrics, knowledge of the competitive environment and company objectives must precede strategy development. Short-cycle environments require fast-cycle capabilities such as flexibility and agility. Markets at different stages of their product life cycle (PLC) offer different opportunities and pose different challenges. The challenge during the growth phase of the PLC is to justify investments in intangible market-based assets such as brands and new channels. Because costs are quite concrete and benefits are intangible, companies often under-spend in this phase. As markets mature the strategic imperative shifts to maintaining share and enhancing profitability. Here marketing mix models and dashboards play important roles in enhancing marketing productivity. A Deutsche Bank study based on analyses across several product markets suggests that companies might be overspending in mature markets.

Resource allocation approaches must also accommodate product-market differences. Even within the same product category, emerging markets with double-digit category growth require brand investments while developed markets may require cost controls. For example, HP’s PC division faces daunting competition from Dell and a flat market in the U.S. Growth in India is upwards of 30 percent and HP faces a limited Dell presence. Clearly, there is also no silver bullet when it comes to marketing performance assessment and resource allocation. The right metrics depend on the firm’s objectives, strategies and competitive environment.

References

Ambler, Tim and John Roberts (2006), “Beware the Silver Metric: Marketing Performance Measurement has to be Multidimensional”, Report 06-113, Cambridge: Marketing Science Institute

Srinivasan, Raji, Arvind Rangaswamy and Gary L. Lilien (2005), “Turning Adversity Into Advantage: Does Proactive Marketing During a Recession Pay Off?”, International Journal of Research in Marketing, 22, 109-125

Srivastava, Rajendra K., Tasadduq A Shervani, Liam Fahey (1998), “Market-based Assets and Shareholder Value: A Framework for Analysis”, Journal of Marketing, 62, Iss. 1; p. 2-18