|
This week:
equity models.
 In
this era in which the tenure of CMOs is measured with stopwatches
rather than calendars, the focus tends to be on this quarter's
sales. At retailers that's often compressed to this week's
sales. Or even today's. But companies which have the luxury
of taking a longer-term perspective frequently deliver much better
results over time.
There are two principal ways to track long term marketing ROI:
Customer equity and brand equity. Both require a broader look at
marketing activities than just marketing communications. Everything
from customer experience to some aspects of product or service
functionality and satisfaction is involved in the equation.
Customer equity
is a concept which was originally developed and refined by catalog
marketers decades ago.
Catalog merchants used database marketing before they had computers
to manage their data. They kept customer information on
Addressograph plates and Keysort cards which could be physically
notched to record specific customer characteristics. Notched plates
of cards would be mechanically separated from un-notched cards to
segment a subset of customers.
Those subsets, or "selects," recorded basic demographic data, such
as gender (from the name prefix) and presumed age (based on purchase
patterns). They obviously included geographic data including the
customer's address. But catalog merchants soon went farther. They
collected source information to identify the mailing list the
customer's name came from, and offer type information to gauge the
type of merchandise and offer most likely to appeal to the
purchaser.
In the 1930's George J. Cullinan's RFM method provided a key to
profiling catalogs' most profitable customers based on the Recency
of their last purchase, the Frequency with which they
purchased during a predetermined period and the Monetary
value of all purchases made during the period used to calculate
frequency. Later overlays of a customer service code to identify and
eliminate customers who frequently return merchandise (a significant
expense for handling the return and restocking of the merchandise
and crediting a refund to the customer's card) gave a very clear
picture of which customers did most for a catalog merchant's bottom
line.
Just one last piece remained: when catalog merchants added length of
time as a customer to the selects they had all the components of
lifetime customer value, the core concept of customer equity
analysis. Because most could determine that various categories of
customers had specific – predictable – lengths of time over which
they would purchase from a particular cataloger.
Lifetime customer value is simply the total profit a marketer will
earn from a customer throughout their entire business relationship.
It is the marketer's equity in that customer.
Calculating customer equity takes a lot of data collected a long
enough time to determine the length of customer relationships in
various clusters of customer types. Compiling the database can take
years, but using it is straightforward:
· Group
customers into relatively homogenous clusters. The most significant
factors in these clusters will be source of the customers, the
classic RFM factors, demographics, inferred psychographics and the
categories of products or services members of the cluster buy.
·
Calculate the profit of sales to members of the group (taking into
account the marketing cost of each sale).
· Chart
the life cycle of customers in each cluster. Some may be customers
for months, others for decades.
· Multiply
the individual sale gross profit by the frequency of sales by
probably life cycle to get probably gross lifetime profit per
customer in the cluster.
· Subtract
the initial acquisition cost of each customer – the cost required to
generate the first store visit or purchase – from the gross lifetime
profit to get net customer profit.
·
Divide the new customer equity by the initial acquisition cost to
get ROI.
Note that this number only gives the lifetime value of the spending
of group members. If members of a particular cluster are especially
satisfied with your product or service – that is, those who have a
Net Promoter Score of 9 or 10 – they will attract other customers by
word through referrals. Although many companies now measure Net
Promoter Scores, few have mechanisms in place to place a monetary
value on the referrals. Those that do can add that value to the
lifetime value of the referring customers in their ROI analysis.
Brand equity
is a bit more difficult to calculate.
For a decade or so a number of academics and research companies have
been measuring the capital value of brand equity. Basically they
compare how much more money a company carries to the bottom line
because of the brand associated with their product versus what they
would do with an unbranded product. Then they assign a capital value
to that increased revenue stream, just as they would in evaluating a
new production facility.
The annual Interbrand study rates the world's 100 most valuable
brands based on that definition. In the 2007 study the top ten and
their brand values (in billions) were:
1.
Coca-Cola..............................................................................
$65.3
2.
Microsoft...............................................................................
$58.7
3.
IBM.........................................................................................
$57.1
4.
GE...........................................................................................
$51.6
5.
Nokia......................................................................................
$33.7
6.
Toyota...................................................................
$32.1
7.
Intel........................................................................................
$31.0
8.
McDonald's............................................................................
$29.4
9.
Disney....................................................................................
$29.2
10.
Mercedes
..............................................................................
$23.6
Those are the values of the brands. But what about the ROIs?
It's probably impossible to calculate an overall ROI for the
lifetime of the brand, because part of the equity brands enjoy today
was created years and decades in the past.
But some brand value is being created – or eroded – today. And in
some cases it is possible to compare current marketing
communications expenditures with changes in brand equity. For
example:
· Coca-Cola's
brand equity went down approximately $1.9 billion. They spend $1.6
billion on marketing to decrease their brand's value. Their ROI was
a negative 119%.
· Microsoft's
equity increased by $1.7 billion, and they spend $944 million on
marketing communications, for a 181% ROI.
· Nokia
did even better. They increased their brand equity about $3.6
billion with a marketing communications expenditure of just $287
million. A 1,254% ROI on marketing.
These examples are simplifications, of course. The selection of
functions to include in companies' marketing budgets is arbitrary
and often approximate. And Interbrand's methodology, although based
on data, also must include some intelligent supposition. The amount
of sweet, fizzy, black liquid Coke would sell if the stuff was
called Generic Cola and came in a grey can must be a speculative
number.
We've studied several formulae for do-it-yourself brand equity
analysis, and have not been convinced by any of them. (Not even the
one that went on for three pages). So, at least for the present, the
Interbrand list, or monumentally expensive studies for brands that
didn't make the cut, are the only ways to value a brand which we
find credible and practical. Which means ROI analyses of brand
equity are only for very major marketers.
But although this metric of marketing communications ROI may be
impractical for most companies, the others are not. The nature of a
company's product or service should determine which of the metrics
and analyses it uses. It's a critically important decision, because
selection of the right ROI model can improve the bottom-line
effectiveness of marketing communications by orders of magnitude.
Want to find out more about marketing communications ROI? Contact
BrainPosse at (865) 330-0033 or click here.
Next week: Equity models.
comment
I back to top I archive
|
