Measuring Market Performance
Part 1: MEASURES OF MARKETING PERFORMANCE
The measures of marketing performance are external to the business and they usually consider competitor position, customer satisfaction, and customer perception of the company and its brand. There could be as many as 18 metrics for measuring market performance. The metrics can be divided into the key performance indicators and the supporting metrics. Under the key performance indicators, there are five major metrics that include the customer lifetime value, the cost of customer acquisition, retention rates, revenue growth, and lead volume. In this section, we shall discuss the first three metrics mentioned. These metrics measure the effects of marketing on the company’s bottom line and require intense sales integration.
a) Customer Lifetime Value
The formula for the CLV is intended to compare the revenues generated by the customers to the costs that they incurred to acquire said revenues. The CLV analyses the potential value added when a customer buys products from the company. It is a prediction of how much profit a customer can bring to the company throughout his relationship with the company. This metric is important as it helps companies shift their focus from their bottom-lines to establishing healthier long-term relationships with their customers. In addition, the measure helps businesses to stop focusing on how they can gain customer quickly and cheaply. The CLV helps the businesses to think about how they can best optimize the acquisition expenditure for maximum value rather than minimum cost.
To arrive at the customer lifetime value, multiply the monthly recurring revenue per customer by the margin per customer. Then divide the results by the Churn.
b) Cost of Customer Acquisition
Simply put, the COCA focuses on how many resources the company invests into acquiring new customers. The measure takes the entire cost of acquiring one customer over a period and then divides this result by the number of customers that the company manages to acquire within this time. The cost is all-inclusive meaning it covers the product cost, marketing, research, and accessibility costs. This metric is essential when it comes to determining the value of a customer as well as the return on investment of acquiring a new customer.
The metric is not only useful to businesses but also to investors. These individuals use the metric to determine the scalability of start-up Internet businesses. The investors can determine and analyze the profitability of such a start-up by looking at how much value can be extracted from the customers and the cost of this extraction.
Other parties interested in the metric include the marketing specialists or the head of the internal operations in the company. These individuals will use the metric to optimize the company’s returns on any advertisement investments carried out on the company’s behalf. If the marketing specialist can reduce the cost of extracting money from the customer then the company’s profitability increases.
The investors now have more interest in investing in the company and providing it with more resources. The partners are more committed to ensuring that the company continues to grow, as long CAC remains low. The company can utilize the increased profit margins to pass the value to the consumers so that it can attain a favorable market position.
The CAC is usually calculated by dividing the sum of all the costs incurred in marketing (acquiring new customers) by the number of customers that the company has been able to acquire during the period that the money was being expended.
There are certain instances whereby the calculation of CAC can be clouded. For instance, if a company has incurred advertisement expenses in early stage SEO or a new market segment, the company would not expect to see results until a later period. The experts suggest that in such a situation, there should be multiple variations for the CAC to account for any discrepancies.
c) Retention Rates
Many managers often dismiss the customer retention rates or lack the insight into the calculation of the metric. However, companies are realizing that customer loyalty is essential in maintaining a profitable market share. If the company wishes to become scalable and sustainable, then it needs to reduce on its churn rate. The churn rate is the rate at which people discard the products and services of a company after a single transaction or after successive transactions with the company (Johnson & Gustafsson, 2000).
The customer retention rate is a reflection of how functional the customer service department is as well as the effectiveness of the marketing strategies being employed. Customer retention is much more than giving the consumers what they expect. It also involves going beyond their expectations until they become loyal ambassadors of the company’s brand.
It is also a well-known fact that customer retention has a direct impact on the profitability of the company. Research indicates that engaged customers have the ability to generate about 1.7 times more revenue than ordinary customers do. In addition, having a high customer and employee retention rate can result in 3.4 times the revenue than in circumstances with high employee and customer attrition rate. The marketing, sales, and customer service departments have to work hand in hand to ensure that the company’s customer retention rates continue to increase for the prosperity of the company (Jesse, 1978; Wiley, 1991).
Most managers underestimate customer retention. They focus more on customer acquisition rates as this rate demonstrates the company is gaining more exposure. However, they ignore their attrition rate because it is disheartening to keep monitoring how many customers the company is losing in every sales period.
What managers should know is that it is 6 times more expensive to acquire a new customer than to maintain him. In addition, a company can lose more than $200 for every customer it loses. Finally, loyal customers can be ten to twenty times more valuable than their first purchase.
The most effective way of calculating the customer retention rate is subtracting the number of new customers in that period from the number of customers at the end of the period. The result is then divided by the number of original customers who were there at the start of the period. The result is then multiplied by 100 to turn it into percentages.
The customer retention rate is usually calculated by subtracting the number of lost customers from the original number of customers (at the beginning of a sales cycle) and dividing the result by the original number of customers for that given period. A good customer retention rate is dependent on the industry that the company operates in. However, most companies across the industries aim at a customer retention rate of 95%.
The companies that rely heavily on accurate predictions of the customer retention rate are those that operate on a membership basis. A classic example of such a business model is the gym that requires customers to continue being members so that the establishment can remain profitable.
Wal-Mart is probably one of the best companies at using market performance metrics in its marketing activities.
PART 2: NET MARKETING CONTIBUTION OVER THE LIFE CYCLE
The net marketing contribution can be described as the measure of the profits after sales and marketing expenses have been accounted for. It is usually calculated by multiplying the sales by the percent gross margin. The marketing and sales expenses are then subtracted from the result.
Several marketing strategies affect the net marketing contribution in the short-term. Differentiation involves making a company’s product appear to be different and more appealing than the competitor’s products although sometimes the differences between the two are subtle and inconsequential. Successful product differentiation creates a competitive advantage for the company in the market. Differentiation usually has a positive effect on the net marketing contribution if the marketing strategy proves to be successful. Differentiation, when applied successfully, generates more revenue and expands the company’s customer base. However, differentiation can significantly increase the marketing expenses without having any positive impact on the company’s profitability. Differentiation can be a costly venture and in some instance the ROI is very low (Schnaars, 1998).
The second marketing strategy to be discussed here is market segmentation. This strategy involves dividing the market into different segments based on demographics and other characteristics of the population. The segmentation is based on age, income, sex, preferences, cultures, and religion among other characteristics that can help in dividing the market. This division is necessary as it ensures the company can produce segment-specific products. These products match the individual tastes and preferences of the individuals in the segment.
The segmentation strategy also has an impact on the net marketing contribution in several ways. First, once the company has divided the market into segments, it has to focus on marketing techniques targeted at the specific segments. This segment-specific marketing can be expensive depending on the type of marketing it is. The number of marketing segments can also have an influence on how much the overall spending on advertisement will be. The costs associated with advertising to the specific market segments and the number of markets can reduce the net marketing contribution for a specific sales period for the company.
b). Net marketing contribution in the introductory stage
The net marketing contribution in the introductory stage is usually low because the company invests heavily on marketing, advertising, and sales (Subramaniam, 2009). The product is new to the market and the company has to use several methods to raise awareness about the product. Creating an awareness campaign about the product is usually cost-intensive. In addition, at this stage, several adjustments are made to the product to make it more appealing to the consumers. These costs are added to the marketing costs significantly reducing the net marketing contribution to the company.
c). net marketing contribution in the late-growth stage
The late growth-stage is usually characterized by a decline in the demand for the product as it has been in the market for a considerable amount of time. The marketing strategies utilized at this stage are meant to build on customer loyalty. The stage often involves marketing techniques such as special promotions and trying to convince customers to switch brands. Holding promotions can be expensive for the company and these marketing efforts might reduce the net marketing contribution if the revenue generated as a result is less than marketing and sales costs among other associated costs. However, the net marketing contribution can be significant for the company if the promotion strategies increase the company’s revenues by more than the associated costs.
Jesse, E.V. (1978). Measuring market performance: Quantifying the non-quantifiable. Retrieved on 16/11/2015 from http://aae.wisc.edu/fsrg/publications/Archived/WP-15.pdf
Johnson, M., & Gustafsson, A. (2000). Improving customer satisfaction, loyalty, and profit. New York, NY: Jossey-Bass Inc.
Schnaars, S. (1998). Marketing strategy. New York, NY: Free Press.
Subramaniam, A. (2009). Marketing-performance & profitability: implement, monitor, and control marketing department value.
Wiley, J.W. (1991). Customer satisfaction and employee opinions: a supportive work environment and its financial costs. Human Resource Planning, 14(2): 117-124.