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MARKETING METRICS: NOTE FOR MARKETING MANAGERS

Michael A. Stanko and Matthew Fleming wrote this note solely to provide material for class discussion. The authors do not intend to
provide legal, tax, accounting or other professional advice. Such advice should be obtained from a qualified professional.

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Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-08-01

Traditionally, marketers have been criticized for being far better at finding ways to spend their budget
than they have been at measuring the effectiveness of their marketing spending. This has been a noted
weakness in the marketing discipline for years (the Marketing Science Institute has listed improvement in
the use of marketing metrics as a priority for more than a decade1). Fortunately, the convergence of
several trends — e-commerce, increased emphasis on business analytics and a tighter partnership between
the marketing and finance disciplines — has resulted in greater emphasis on measurement tactics for
marketing performance.

This non-technical reading, aimed at marketing professionals (and those in training) explores the
importance of goal setting, then discusses several practical metrics to evaluate the overall success of
marketing initiatives. This is followed by discussion of supporting metrics used to evaluate each area of
the marketing mix. The metrics included here are by no means an exhaustive set of possible metrics, but
rather a starting point to measuring marketing productivity. Throughout, a critical view will be taken of
these metrics; many metrics have drawbacks when applied in certain instances that managers need to be
aware of. Along the way, industry examples will be used to highlight these metrics in use at organizations
across sectors of the economy. Research findings relevant to the use of these metrics will also be
discussed where informative. The formulas for all metrics discussed, with a measure of how commonly
used each metric is, are included in Exhibit 1.

GOAL SETTING

Establishing targets for performance is one of every manager’s essential functions, and is the first step in
the process of marketing performance evaluation. Marketing metrics can be thought of as a way to link
individual marketing tactics (such as an online ad, a public relations campaign or a channel promotion) to
overall strategy. While strategic objectives for the business unit might include comprehensive end-result
metrics (such as profitability gains of 10 per cent over the fiscal year), individual tactics should each have
relevant goals that allow for the discrete measurement of the performance of each tactic. This should be
done in a manner that demonstrates how each tactic supports the overarching strategic objective. For
instance, consider a housewares manufacturer with an overall strategic goal of increasing revenue 25 per
cent over the next five years. One tactic being used to drive revenue growth is a channel promotion to
attract new retailers. A meaningful way to assess this channel promotion would be to track the number of

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new retailers carrying the manufacturer’s products. Clearly, adding retailers supports the overall strategic
objective: revenue growth. By linking cascading goals, as seen in this simple example, everyone in the
organization can better understand the importance of individual tactics. Overall strategic objectives are
only meaningful when supported by individual tactics (each with well suited metrics) that will help the
organization achieve the overall strategic objective.2

Establishing a target when using a specific metric for the first time can be challenging. Without
examining past results, it can be difficult to realistically set targets for marketing tactics. However, with
continued, consistent use, metrics promote benchmarking within the organization and the identification of
best practices as marketing effectiveness can be meaningfully compared across the organization. When
setting a performance target with a new metric, managers are left with two guidelines. First, assess other
tactics’ results on these metrics before setting targets with new metrics. For instance, before setting goals
for web traffic generated from a social media promotion, consider examining this metric for previous
similar promotions. Second, when it is necessary to set targets without the benefit of experience, such as
in the case of a very new promotional tactic for the organization (or in the case of a student setting
performance goals as part of a case study recommendation), the adage to try to set achievable but
challenging goals is good advice.

One best practice in goal setting is the use of multiple levels of targets.3 For instance, TD Ameritrade
established three levels of targets for marketing performance. The most conservative target is the
“external” target, which may be revealed to analysts and the business press. The middle target is known
as the “internal” or actual target, with the “stretch” target being the most ambitious, providing an
aspirational goal for employees and encouraging them to think about new ways to substantially increase
marketing effectiveness. The three goals are not necessarily symmetrically situated around the internal
target; but rather, set based on historical variability and the impact of either missing an external target or
reaching a stretch target. Where there is no benefit to the organization from substantially exceeding the
internal target, the stretch target should be set close to the internal target; for instance, if 90 per cent target
market awareness is the internal target, and there is limited financial benefit to awareness beyond this
threshold, the stretch target may be only 92 per cent.

The setting of specific and challenging goals has long been shown to be associated with superior
performance when compared to setting less ambitious goals or no goals at all.4 That goal setting
meaningfully directs employee behaviour and boosts performance in goal areas has been supported by
hundreds of research studies. This performance benefit is gained through focusing employees’ attention
and effort, as well as increasing persistence. However, a smaller group of researchers have identified
“side effects” of over-relying on too many aggressive goals, such as a narrowing of employees’ focus that
results in neglecting non-goal areas, and increased risk appetite.5 As will be discussed in the next section,
it is not always the case that more goals are better, though the use of a single marketing metric (what has
been referred to as a “silver metric”) does not adequately capture performance.6 Managers need to be sure
that they are setting and communicating marketing goals that are truly important to the organization. For
instance, if attracting high value customers is the goal, setting a target for the quantity of new customers
attracted will typically not result in high-value customers. Since the company’s sales force will be
incented to attract a bulk of customers, these customers are unlikely to be exclusively high-value
customers. When setting goals, managers should give ample thought to whether the metrics chosen reflect
true organizational desires.

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DEVELOPING THE SET OF METRICS

There are several basic criteria to consider when developing a set of targets for a marketing campaign:

Perspective: There are several perspectives that are important when measuring marketing effectiveness.
Many managers new to marketing metrics rely primarily (or solely) on end-result metrics — i.e.,
indicators only available once a transaction occurs. For instance, sales and profit are both end-result
metrics since these can only be assessed after transactions have occurred.

On the other hand, intermediate metrics assess aspects of performance prior to the transaction and may
provide an earlier glimpse at the success (or lack thereof) of a marketing tactic. Intermediate metrics may
also be helpful in pinpointing exactly where an unsuccessful tactic needs improvement. Since potential
customers must be aware of a product before purchasing, awareness is an example of an in-process
metric. Consider Microsoft’s Windows Phone launch: while Microsoft is of course concerned with end-
result metrics such as unit sales, they also set targets for intermediate metrics such as the number of
developers registered to build apps for the Windows Phone.7

One other meaningful dimension of classifying metrics is internal vs external focus. Internal metrics draw
only on data pertaining to the firm in question or its channel members (such as return on investment
(ROI)). On the other hand, external metrics include data from the market (e.g., brand awareness or
preferences) or combine both internal and external data (for instance market share, which includes both
the firm’s sales, as well as the market’s size). The metrics discussed in this reading are classified within
these perspectives in Table 1 below. When building a set of metrics, managers should try to select at least
one metric from several of the four quadrants.8

TABLE 1: METRICS PERSPECTIVES

Intermediate End-Result
Internal Average Items Carried Average Basket Size
Abandonment Rate Average unit Retail Price
Cost per Click Cannibalization
Cost per Impression Conversion
Initial Markup Factor Customer Acquisition Cost
Payback Period Customer Lifetime Value
Portfolio Balance Gross Margin Percentage
Traffic Gross Margin Return on Inventory Investment
Unique Site Visitors Inventory Turnover
Percentage of Sales from New Products
Percentage Sales on Deal
Return on Investment/ ROMI
Sales per Square Foot
Same-store Sales
External Brand Awareness All Commodity Volume
Brand Preference Market Share
Clickthrough Rate Net Promoter Score
Distribution Percentage Share of Wallet
Product Superiority
Purchase Intentions
Share of Shelf
Share of Voice

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At the same time, the set of goals for each tactic should be
ROI: THE GRAND DADDY OF
consistent. That is, goals should not be mutually exclusive,
MARKETING METRICS
which can lead to marketing employees choosing one goal over
another arbitrarily or feeling as if they are in a double bind Return on investment (incremental
situation, which often results in managerial paralysis and failure project profit as a ratio of
to achieve either goal. For instance, if a consumer goods incremental project expenditure) is
company operating in a price sensitive market sets a goal of often the focus of decision-making,
raising margins through price increases by 8 per cent in one and, in many organizations,
year, it is likely inconsistent to also set a goal of raising unit managers’ projected ROIs are the
market share substantially in the same period. primary determinants of whether or
not a project or tactic is pursued.
While a comprehensive viewpoint is important, the flip side of ROI is easily understandable and
quickly comparable across projects
this is brevity. The success of a tactic needs to be easily
or units of an organization.
deciphered from a small number of metrics, each of which
should be informative with regard to the level of success of the Of course, a manager’s best guess
underlying tactic. Particularly since at times marketing metrics at a project’s future ROI is often not
will be linked to marketing employees’ evaluations (and the most accurate indicator, and is
compensation), it is important to rely on a manageable number subject to all sorts of biases (for
of informative metrics. Of course, using a smaller number of example, might the manager project
metrics for evaluation supports the notion of consistency among a low ROI for a project that might be
the set of metrics. effective but be a hassle to
oversee?). The use of ROI is also
complicated by the length of time
As discussed above, goals must consistently cascade from the
under consideration. For instance, a
business unit’s overall strategic objective down to the metrics one-year ROI target may encourage
used for goal setting and evaluation of individual marketing product managers to pursue tactics
tactics. Thus, the metrics chosen for all tactics must have that would grow short-term revenue
alignment with strategic objectives. while decreasing the value of the
brand (for instance, a luxury brand
pursuing discount channels). It is
OVERALL METRICS also difficult to meaningfully track
! ROI early in campaigns, particularly
The primary objective of most businesses is profit, which is a for products with a long sales cycle.
Without using intermediate metrics
good starting point in setting an overall goal for a marketing
to get forward-looking insight into
initiative. Of course, given that profit is the numerator in the performance, it is very difficult to
calculation of ROI, many of the same caveats remain when accurately measure performance
making profit projections (see ROI sidebar). Beyond profit and early on for this type of campaign.
ROI, there are several other metrics commonly used to measure
overall marketing performance: this first set of metrics should On its own, an ROI guesstimate is
be thought of as overarching targets which are impacted by all not a sound basis for organizational
areas of the marketing mix and should be supported by metrics investment. On the other hand, an
from particular areas of the marketing mix. Metrics are included ROI target supported by underlying
below due to a) common usage and/or b) potential value to targets, such as sales volume,
margins, consumer preference and
marketers. We do not advocate the use of all metrics discussed
awareness, constitutes an
here, as will be discussed below. informative set of metrics
supporting the overall project ROI.
A derivative of ROI (see sidebar), return on marketing
investment (ROMI) focuses only on the incremental profit and costs that can be attributed to a specific
marketing campaign or tactic. ROMI relies on the ability to estimate the discrete profit that is attributable
to specific actions. Some firms have begun to design their promotional tactics to more easily track

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discrete performance. For instance, 1-800-FLOWERS uses ESPN radio as a promotional tool. To track
the performance of, say, their promotion during the “Mike and Mike in the Morning” show, listeners are
told to use a specific online coupon code (mikeandmike) to enable the tracking of results attributable to
the specific promotional tactic.

Also closely associated with ROI is payback period. Commonly used in practice, the payback period is
the projected length of time until the marketing initiative pays for itself. Given estimates of the costs to
develop a new product and the projected profit flows over time, the payback period can be calculated.
This metric is different than others discussed in this section in that it takes a time-based perspective and is
informative to organizations when liquidity and cash flow are concerns — these considerations likely
explain its common use in industry. The sole use of this metric favours smaller, more incremental projects
over larger, longer-term projects — even those with substantial long-term profit potential. Payback period
also ignores any profit achieved after the breakeven point and does not take into account the time value of
money.

Market share is another commonly used overall metric (see the popularity index in Exhibit 1). Simply
put, market share is a particular company’s percentage of sales of the entire market as the company sees
it. This is typically calculated either as a percentage of total market revenue (i.e., dollar share) or as a
percentage of total market units (i.e., unit share). While this metric provides, at a very quick glance, a
measure of “how big a fish in the sea” a company is, there are several concerns with its use that marketing
managers should be aware of. First, when market share (or sales) is used as a primary goal, organizations
tend to emphasize sales at the expense of margins. Managers should remember the truism, “It is easy to
gain market share by giving away product.” More than 70 per cent of the time, the most profitable
company in a market is not the market share leader.9 The focus on leading an industry in market share can
lead to pursuits that harm profitability. Unfortunately, this war-like “beating competitors is the most
important thing” mindset is common among managers (many firms track competitive customer
conversions from specific competing brands). In fact, in surveys, over 30 per cent of MBA students
believe it is more important to beat competitors than it is to optimize the firm’s performance.10 Aside
from this, taking too narrow a view of the market when assessing market share may lead to a failure to
recognize future threats coming from outside this narrow scope. For instance, historically, Lego had
looked at its percentage of the construction toy market, in which its share was strong. More recently, Lego
realized that multimedia entertainment also competed for children’s attention, and it began focusing on
the share of children’s time spent engaging with Lego products. By taking this broader view of the
market, Lego’s perceived market share was lowered, but it also enabled Lego to reorganize and launch
products that compete with its true set of competitors. Concerns with the traditional use of market share
goals lead us to caution managers not to use market share as a primary metric: market share does not
necessarily translate to profit.

Customer lifetime value (CLV) attempts to predict the value of the future profit flows associated with an
individual customer over the length of time the firm can retain the customer. In certain industries,
customer retention (or its inverse, customer churn) is closely watched, and the lifetime of a retained
customer and profit flows can be closely estimated based on customer profiles. In retention-focused
businesses such as mobile phones and credit cards, CLV is closely monitored. Thus, if a high CLV
customer attempts to cancel an American Express card, a customer retention associate will go to great
lengths to remedy the situation.11 Setting goals for CLV is one way to ensure a campaign is attracting
quality and not just quantity. Note that within CLV, there are two distinct metrics, each of which can be
used to set goals individually: customer retention rate and margin per customer.

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Net promoter score (NPS) is a more recently developed metric designed to quickly measure customer
loyalty by asking only one question of customers.12 Customers are asked, “On a scale from 0 to 10, how
likely is it that you would recommend our company to a friend or colleague?” Customers are grouped into
three categories based on their responses: promoters (9 to 10), passively satisfied (7 to 8) and detractors (0
to 6). The NPS is the percentage of promoters less the percentage of detractors. Scores above 75 per cent
indicate superior levels of customer loyalty. As would be expected, having a high promoter score tends to
be associated with a company’s rate of revenue growth; fiercely loyal customers provide valuable word of
mouth and make promotional efforts more efficient by being more receptive to new offerings from the
company. Conversely, beyond damaging a company’s brand through negative word of mouth, detractors
increase service costs and can negatively impact the morale of front line employees. Enterprise Rent-A-
Car has been aggressive in its use of NPS, going so far as to make branch managers ineligible for
promotion unless their branch’s NPS exceeds the company’s overall average. Despite the intuitive nature
of NPS and its ease of measurement, NPS (and customer satisfaction, as discussed below) have a very
limited relationship with profitability.13 In some markets multiple brands have high NPS; being one of
these brands may not be enough to ensure customer preference over rival brands.

Closely related to NPS, customer satisfaction (CUSAT) is an often used and increasingly criticized
metric. The American Customer Satisfaction Index (ACSI) has developed an approach to CUSAT
measurement and publicly releases satisfaction results for economic sectors, industries and individual
companies. While there are other approaches to measuring CUSAT, ACSI’s approach involves asking
customers to rate three aspects of their experience with the company: 1) level of overall satisfaction; 2)
the company’s performance when compared to the customer’s expectations; and 3) performance
compared to the customer’s ideal product or service in the category.14 While higher levels of satisfaction
are associated with positive outcomes such as customer retention and share of wallet (i.e., the portion of
spending in the product category that an average customer spends on a particular brand or through a
particular retailer), the overall relationship between CUSAT and company financial performance is
surprisingly weak (less than 1 per cent of stock market returns can be explained by CUSAT).15 Often,
evidence suggests, CUSAT and profit are not aligned: the cost of better satisfying customers can overrun
the potential revenue gains associated with these satisfaction improvements. There also tends to be an
inverse relationship between company size and satisfaction. Small companies are able to better delight
customers through higher degrees of focus. Profitable, mass-market leaders such as Walmart and
McDonald’s score poorly in CUSAT rankings when compared to smaller, more focused players (Walmart
is rated last in ACSI’s 2013 “Department and Discount Store” ranking, McDonalds is rated last in
“Limited-Service Restaurants,” and industry leaders are Nordstrom and Subway, respectively).16 Google
is a rare example of a market share leader that also does well in CUSAT rankings. While CUSAT has
positive associations with financial outcomes, these associations are weaker than often assumed, and
managers should be cautious when using CUSAT as a primary metric.

PROMOTIONAL METRICS

Once targets for overall metrics have been established, supporting goals for individual marketing mix
elements should be established, so as to develop a congruous system of cascading goals that allows for
both the tracking of overall success and the understanding of exactly which marketing tactics were
impactful and which were not. The first marketing mix element to be discussed is promotion.

Promotional tactics, such as advertising, public relations and sponsorship, are intended to increase brand
awareness and positive associations, and ultimately to increase sales. While researchers have developed
numerous models of how advertising is processed by consumers,17 a theme in these models is that brand

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awareness, brand preference and purchase intentions sequentially influence the likelihood of a consumer’s
purchase (this process is known as the hierarchy of effects). Note that while other aspects of the
marketing mix (such as the product itself) influence awareness, preference and purchase intentions, all
three elements will be discussed in this section for continuity.

Brand awareness plays a crucial role in determining which brands will be considered by a consumer and
which will not; consumers cannot consider alternatives that they are not even aware of. Cognitively,
awareness is the first step in building consumer associations about the brand. Once the consumer is aware
of the brand, associations can be mentally attached to the brand as consumers learn. Generally, consumers
perceive brands they are aware of as being of higher quality. Brand awareness can be measured using
recall (i.e., unaided awareness) or recognition (i.e., aided awareness). Recall can be tested by asking,
“Which online music services are you aware of?” while recognition can be tested by asking, “Have you
heard of Pandora.com?” Of course, recognition is nearly always higher than recall since some individuals
will not recall the brand name without prompting, but will recognize it when aided. There are also
derivatives of these approaches, such as asking consumers for only the most salient brand in a category
(i.e., top-of-mind awareness). When using awareness as a target, there are several considerations to be
aware of. Recall that awareness is a preliminary step towards building associations and purchase
intentions. Thus, awareness should not be treated as the ultimate goal. While awareness and purchase
intentions generally positively relate, this is not always a clear relationship. To illustrate the potential
disconnect, students are sometimes asked: “Are you familiar with a canned meat product branded as
SPAM?” Typically, the results of this informal poll will show over 90 per cent brand recognition.
However, when asked how many students intend to purchase this product in the coming month, purchase
intentions are typically below 5 per cent. Also, consider very well established brands such as GE or
American Airlines: these brands may be so well known that the recognition metric becomes moot (top-of-
mind awareness is more meaningful in these instances).

Brand preference indicates the likelihood of potential customers favouring a given product (for either
rational or emotional reasons), typically from among a choice set of relevant competitors. Often, to assess
brand preference, potential consumers are asked questions such as, “Of this set of products, which are you
most likely to buy?” Preference can also be measured with more involved statistical tools, such as
conjoint analysis. As with awareness and purchase intentions, brand preference can be measured before
and after potential customers are exposed to a marketing tactic (for instance, a television advertisement)
to gauge the impact of that particular tactic. One concern when looking to brand preference is making
sure preference is measured within the group of target customers. For instance, high school students may
prefer the luxury auto brand Bentley to competitors, but given that they are outside of Bentley’s target
market, their preferences are unlikely to translate into sales.

Purchase intentions are typically measured by asking potential consumers how likely they are to
purchase the product in a given time frame. While purchase intentions correlate significantly with actual
purchase behaviour, intentions are not a perfect predictor of sales — particularly for innovative new
products. Purchase intentions will tend to exceed actual sales for a number of reasons, such as unplanned
events, financial concerns or an overestimation of the consumer’s own likelihood of purchasing the
product.18

Brands are valuable assets whose value is tracked more closely than ever before. As brands have been
increasingly acquired from one company to another, there has been more focus on understanding the
value of brand assets.

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Brand equity is the set of assets

(and liabilities) associated with a ONLINE METRICS: MAKING SENSE OF THE DATA DELUGE
brand that adds to (or subtracts
The near instant availability of online data, as well as the ability to
from) the value provided by a associate specific promotional tactics with purchases online has
product or service to a firm and/or led to an emphasis on metrics in online marketing. The use of
that firm’s customers.19 The brand overall strategic goals supported by underlying targets remains
consultancy Interbrand annually good practice in online marketing. Most of the metrics discussed
publishes its list of the 100 most throughout this reading can be applied online, just as they can
valuable global brands (topped by offline (e.g., ROMI, payback period, customer acquisition cost),
Apple at over $98 billion).20 while some metrics have developed slightly different meanings
When valuing these brands, when used in an online context. For instance, share of voice,
factors akin to awareness, when used in context of online marketing, refers to the portion of
all advertising on a particular site devoted to a given product or
preference and purchase
brand.
intentions are part of what
Interbrand deems “brand When examining the impact of a website or a specific online
strength,” while several other tactic, measuring the number of unique site visitors is a basic
factors, such as the economic measure of impressions generated. Examining the clickthrough
performance of the company, the rate for an online ad measures the percentage of all viewers that
ability of the brand to ensure opt to click on an ad. E-commerce sites are often evaluated by
price premiums, the ability of the examining the abandonment rate at various stages in the
brand to continue to attract customer’s purchase process (e.g., viewing the item, placing the
customers into the future and the item in cart, beginning checkout). This progression can be thought
of as an online parallel to the flow from initial awareness to
overall risk associated with the
preference to purchase intentions discussed earlier.
brand are also important when Understanding the shape of the “funnel” as potential customers
calculating an overall value. progressively drop out of the purchase process at various stages
allows efforts at site improvement to be made in an informed
Share of voice is the portion of manner.
total advertising activity within a
product category conducted by a Given the ease of associating particular online tactics with specific
given brand. Share of voice has purchases, one risk is that only online tactics that directly lead to
been shown to be associated with purchases (i.e., they are clicked immediately before purchase) will
market share, particularly during be credited with driving performance. The value of online
promotions that influence purchase behaviour, or “assist” in the
economic downturns when it is
purchase, but are not the final click, are often not well understood
easier to increase share of voice by online marketers (a typical example is social media presence).
due to competitors’ declining Using analytic techniques to estimate the assisting value of these
advertising spending.21 Of course, tactics allows for a more complete evaluation of online marketing
this metric (as with cost per tactics.i Progressive online marketers are tracking online tactics’
impression) measures advertising roles both in closing sales as well as assisting in them. Potential
activity rather than consumers may be exposed to several different online tactics
accomplishment. Most firms over time, each of which may be necessary to generate the sale.
would prefer to have a lower
share of voice (and thus lower Measuring social media’s impact can be especially challenging —
only 15.9 per cent of chief marketing officers say that they can
advertising costs) while more ii
quantitatively show the impact of social media efforts. While best
efficiently attracting customers practice is to measure the value of these efforts both in
through distinct, memorable ads generating and in assisting with purchases, it is also possible to
(see customer acquisition cost). flip the typical notion of ROI and, instead, measure customers’
social media investments in the brand. These investments include
Cost per impression (sometimes liking the brand, engaging with an online promotion, video or
iii
abbreviated CPM, M being the game or mentioning the brand online.

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Roman numeral for 1,000, as the cost per 1,000 impressions) gives an indication of the cost efficiency of
promotional tactics at exposing potential customers to brand messages. Generally, advertising mediums
such as radio and outdoor advertising have lower CPMs when compared to other mediums such as
television, newspaper, magazine or even online advertising.22 Managers should remember, though, that all
advertising exposures are not equal: outdoor advertisements are often not fully processed by potential
customers and radio is sometimes referred to as the “half-heard” medium since it is not always actively
listened to. While cost per impression was once commonly used for online advertising, measuring cost
per click has become much more common (see sidebar: Online Metrics). This shifts the emphasis from
online advertisers paying for exposure to paying for results (i.e., clicks).

Similar to cost per impression, customer acquisition cost measures the cost to acquire one additional
customer through a given promotional tactic. This puts the emphasis on the results of the promotion
(customer acquisition) instead of merely generating impressions. Acquisition cost is a favourite metric of
several of the investors on ABC’s Shark Tank, who are keen to quickly understand the costs of bringing
in new customers for early-stage businesses. By comparing acquisition costs across multiple tactics, it is
possible to find out, for example, that the acquisition cost per acquired customer from blog outreach and
social media tactics is substantially lower than from traditional advertising. As with ROMI, to compare
acquisition costs across tactics the effectiveness of individual tactics needs to be parceled out by
identifying specific outcomes associated with each tactic. One caveat when using this metric: for most
businesses not all customers are equally valued (recall CLV); looking only at the value to acquire
customers neglects the reality that some promotional tactics may attract higher value customers.

PRICING METRICS

As stated in Forbes, “These days, pricing is the hottest topic in retail, and it is also the most complex.”23
Manufactured suggested retail price (MSRP) is the suggested (but not mandated) retail price for
customers. This price is set by manufacturers to allow for profitability while maintaining the brand’s
value proposition.

There are several pricing metrics that are used to evaluate a company’s success at selling products at
MSRP versus discounting. Percentage sales on deal quickly shows the portion of sales that were made
while the product was priced at a lower (promotional) price. For example, a national brand of ready-made
crescent roll dough has an MSRP of $2.29, but its price is reduced to $0.99 during holidays. At this lower
price, 80 per cent of the product’s annual volume is achieved (thus, unit percentage sales on deal is 80 per
cent), making the average unit retail price (AUR) $1.25. Setting goals at product launch for AUR can
help to focus marketing efforts on ensuring healthy margins and consistency between the brand’s
positioning and the actual price that consumers are paying. When a brand’s AUR is close to its MSRP,
this generally indicates that promotion and channel tactics are working effectively. A closely related
concept to AUR is minimum advertised price (MAP), which is the lowest price that retailers are
allowed to advertise a brand while receiving incentives from the manufacturer (such as promotional
funds). MAP policies are a response to online retailing and the ease with which consumers can conduct
online and mobile price comparisons. Unsurprisingly, marketers have been giving much more
consideration to MAP in recent years. Examining the AUR in context of the MSRP and MAP gives a
quick indication of the profit potential for the product.

The initial markup (IMU) factor is used by retailers to multiply by their product cost to arrive at their
initial retail price. In the grocery industry this may be 1.33 times, convenience stores may be two times
and wine at a restaurant may be three to five times.24 Similarly, retailer gross margin percentage can be

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 Page 10 9B14A040

calculated as dollar markup (selling price less cost) as a percentage of selling price. Gross margin
percentage can be thought of as how many cents on the dollar the company keeps to pay overhead costs
and turn a profit. The 1.33 times markup characteristic of grocery retailers equates with a 25 per cent
retailer margin, and a five times markup on restaurant wine equates with an 80 per cent margin. In the
fashion industry a common term is keystone markup, typically two times cost or a 50 per cent margin.
This standardization of margins is a way to cope with the difficulty of managing price for thousands of
quickly changing products.25 With developments in information technology (IT) systems, more analytical,
real-time pricing systems may eventually replace keystone pricing. Retailers often need to mark down or
reduce price, causing the high initial margin to end up at a more modest maintained margin (the margin
across all sales, including discounted sales).

Whether inside or outside the retail sector, constant consideration for margins throughout the marketing
planning process is a good starting point for successful pricing. Considering the revenues and margins at
each link in the channel allows marketers to ensure that a planned product is viable given particular cost
and channel structures. McKinsey’s Waterfall is a graphical way to show how MSRP is reduced at
various stages of the channel (through costs, margins and discounting) to arrive at the manufacturer’s
much smaller margin.26

CHANNEL METRICS

There are multiple relevant aspects to consider when evaluating the performance of marketing channels
(also known as “distribution” or “place”). Key questions concerning the channel include: How widely
available are our products? How profitable is investment in inventory? How effective is a certain retail
outlet? Metrics to address each of these questions will be discussed in turn.

Availability

All commodity volume (ACV) shows the breadth of distribution

of a particular product in an area. It is the percentage of relevant
retailers’ sales that occur within retailers carrying a particular
brand. This indicates whether customers are shopping at retailers
that currently carry the brand. Of course, if some retailers carry a
very broad range of products, with only a very small percentage
of sales being generated in the specific product category (such as
often happens within superstores), this metric could be
misleading. Examining distribution percentage (the unweighted
portion of all relevant retailers carrying the brand) along with
ACV may give a more complete picture of the brand’s
availability.
Consider the Gorilla Glue Company,27 whose flagship product is widely available at hardware retailers.
The company is actively trying to grow availability of its lines of tapes and epoxies. While ACV and
distribution percentage are quite high due to wide availability of the flagship glue product, managers are
likely concerned with the availability of the brand’s other products. Average items carried measures
how many stock keeping units (SKUs) are carried in stores that sell the brand’s products. This gives an
indication of how much of the family of products is being carried by a typical retailer. Share of shelf is a
closely related metric that indicates the portion of shelf space in the category devoted to the brand in
question.

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In order to track many of these availability metrics, it is typically necessary to subscribe to data from
Nielsen or Information Resources, Inc. (IRI), who supply information to consumer packaged goods
(CPG) industries.

Inventory

For many retailers, the largest asset on their balance sheet is inventory. Inventory can be thought of as an
investment sitting idly on the retail floor until it is sold. The longer inventory sits, the higher the holding
cost, the greater the need for markdowns and the higher risk for shrinkage (i.e., theft or damage). Also,
the retail environment looks less fresh when old merchandise is on the floor.

Inventory turns is a key inventory productivity metric. It measures how many times a company or unit
sells its inventory over a year. Retailers desire the highest turn rate possible while preserving their
maintained margins. Various retail sectors have different turnover expectations; for example, historically,
supermarkets have averaged 14 to 15 turns per year, convenience and specialty food stores 11 to 12 turns
per year, and clothing stores two to four turns per year.28 While shoe stores average less than two turns
per year, athletic specialty retailer Foot Locker has an aggressive external corporate goal of greater than
three inventory turns per year.29 Of course, the risk in having too high a turn rate is the possibility of
stock-outs and lost sales.

Gross margin return on inventory investment (GMROII) examines the extent that investments in
inventory generate gross margin to pay for other business expenses, such as payroll and rent (and
ultimately to contribute to profit). Many retailers and distributors are able to measure GMROII down to
the category and item level to focus their performance improvement efforts.

Retail

One common retail metric is same-store sales: the percentage

revenue growth/decline that stores achieve relative to their
prior year. This metric provides insight into the growth of
retail stores without being skewed by the addition of any new
stores. RadioShack’s stock price took a dramatic dip after
management announced a 14 per cent decrease in same-store
sales.30 To compare across retailers or shopping centres, sales
per square foot (or per square meter) is commonly used. As
of May 2014, Apple led U.S. retailers with $4,551 in retail sales per square foot, Tiffany’s placed third
with $3,043 per square foot and lululemon was fifth with $1,841 per square foot. The second-place
retailer may surprise some: Murphy USA.31 The gasoline retailer boosts its sales per square foot to $4,221
by turning over “sin items” (such as cigarettes) efficiently from smaller footprint stores.32

To increase same-store sales, retailers typically strive to grow traffic, conversion, and average basket size.
Traffic is the number of people who walk into a given store: both buyers and non-buyers. This is
typically measured using automated traffic counters. However, traffic is only valuable if it results in
purchases. Conversion measures the ability to convert traffic into transactions (note that conversion is the
opposite of abandonment rate, discussed in online metrics sidebar) — but how large are these converted
transactions? Average basket size is the average dollar expenditure per transaction.

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 Page 12 9B14A040

PRODUCT METRICS

The final element of the marketing mix to be discussed is product. Here, metrics related to brands’ current
and planned new products will be discussed.

Customers’ perceived product superiority assesses whether customers believe that a given product is
both unique and of higher quality than competitors’ products. For example, a food products company was
particularly concerned with achieving head-to-head product superiority versus private label competitors
that were gaining ground. This would be assessed using a blind consumer trial of the two competing
options.

Cannibalization is the extent that a new product’s sales come at the expense of sales of existing products
from the same company. A high degree of cannibalization means revenue is being divided among
multiple products (instead of being grown) while the company typically faces substantial costs to add
products: maintaining more product lines adds cost in terms of inventory and manufacturing complexity,
as well as promotional and channel costs. However, some companies take a less glum view of
cannibalization. When a customer can be convinced to switch to a different product (even one made by
the same company), this is a signal that the customer was less than fully satisfied; in this situation it is
better for the customer to be cannibalized by one of the company’s own products than to be lost to a
competitor’s brand. Further, a fear of cannibalization has been shown to be a major inhibitor of radical
innovation. When managers feel that an innovation might reduce sales of their existing products, they
may delay an innovation effort or cancel it entirely. For instance, MSN conceived of pay-per-click
advertising long before Google’s dominance. However, because managers felt that a shift towards pay-
per-click advertising would be harmful to MSN’s (then lucrative) sales of banner advertising, MSN did
not immediately pursue offering pay-per-click advertising and eventually lagged behind in this area.33

To assess innovativeness, businesses are often evaluated on the percentage of sales from new products
(typically products launched in the past five years). This provides insight into how “fresh” the roster of
products is, and gives an indication of the organization’s ability to come up with winning new products.
For instance, in 2010, 60 per cent of Apple’s sales were from products launched in the last three years —
a virtually unheard of level of growth (for an existing firm) that grew shareholder wealth substantially.34
On the other hand, for firms with entrenched products and continually repurchasing customers, it may be
very difficult to achieve a high percentage of sales from new products. Thus, in the event a business has a
low percentage of sales from new products, it is important to understand why: is it because new products
are not selling or because existing products make up such a substantial entrenched revenue base that it is
difficult to supplant this with new product sales?

Targets are also set and tracked for products being developed. Portfolio balance is a central theme in
managing a firm’s portfolio of products being developed. This is often tracked using plots of all projects
being developed (e.g., bubble diagrams). Often, managers choose to plot risk (e.g., the chance of projects’
technical success) versus return (e.g., projected ROI). Other managers examine projects’ level of
innovativeness. Looking at the entire portfolio in this way allows managers to view the overall risk profile
of the portfolio. Portfolios are also examined to ensure that they are consistent with the overall strategy of
the company.

CONCLUSIONS

In summary, there is tremendous value to goal setting. Marketers should set specific goals for each
campaign and tactic, which will guide efforts and, ultimately, improve performance. The use of strategic

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 Page 13 9B14A040

goals (such as incremental profit or ROI) supported by several specific metrics relevant to the tactics at
hand link strategy and tactics, so any member of the team can see how individual marketing tactics are
important to overall strategy. Whether online, offline or blended, the use of the metrics discussed here
allows marketers to understand where their efforts are succeeding and where their efforts need to be
refined. Marketers can only manage what they can measure; hopefully, the near future will see the use of
marketing metrics viewed as a strength of the marketing practice.

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 Page 14 9B14A040

EXHIBIT 1: METRIC CALCULATIONS AND POPULARITY

Metric Formula Popularity

Index35
Abandonment Rate Individuals dropping out of the purchase process at a particular stage 24%
Individuals entering that stage of the purchase process
All Commodity Volume Sales of retail outlets carrying a given brand 22%
Sales of all relevant retail outlets
Average Basket Size Dollar sales 26%
Number of sales transactions
Average Items Carried Average number of the brand’s SKUs available at retail outlets carrying the NA
brand
Average Unit Retail Dollar sales 51%
price (AUR) Unit sales
Brand Awareness Potential customers who demonstrate awareness 62%
Potential customers
Brand Equity Numerous measurement approaches,36 typically involving the brand’s: 41%
A) Differentiation, B) Awareness, C) Preferences, D) Price Premium
Brand Preference Potential customers who indicate preference 45%
Potential customers
Cannibalization Existing product sales lost 24%
New product sales

Note: Can be calculated with either dollar or unit sales.

Clickthrough Rate Clickthroughs 35%
Impressions
Conversion Number of sales transactions 33%
Traffic
Cost per Click Online promotion costs 27%
Clickthroughs
Cost per Thousand Advertising cost 28%
Impressions (CPM) Impressions in thousands
Customer Acquisition Marketing tactic expenses 32%
Cost New customers acquired
Customer Lifetime Annual margin 39%
Value Customer acquisition cost
1 Annual % retention Annual % cost of capital

Note: All components of this formula are per customer.

Customer Satisfaction Consumer survey 67%
Distribution Number of retailer outlets carrying a given brand 43%
Percentage Number of relevant retail outlets
Gross Margin Sales price COGS 80%
Percentage Sales price
Gross Margin Return Gross margin dollars 16%
on Inventory Average inventory value at cost
Investment (GMROII)
Initial Markup (IMU) Unit retail price NA
factor Unit cost to retailer
Inventory Turns 12 month retail sales 43%
12 month average inventory at retail price

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 Page 15 9B14A040

EXHIBIT 1 (CONTINUED)

Market Share Company or product revenue 64%

Dollar share:
Total market revenue

Company or product units

Unit share:
Total market unit sales

Net Promoter Score Percentage promoters - Percentage detractors 19%

Note: On a scale from 0 to 10, promoters indicate 9 or 10 when asked, “How

likely is it that you would recommend our company to a friend or colleague?”
Detractors indicate 0 to 6.
Payback Period Upfront costs 41%
Annual contribution

Note: This calculates payback period in years. The payback period can also be
calculated in days or months by using daily or monthly contribution in the
numerator.
Percent Sales on Deal Sales with discount 23%
Total sales

Note: Can be calculated with either unit or dollar sales.

Percentage of Sales Revenue from new products 38%
from New Products Total revenue
Product Superiority Number of potential customers preferring product after trial 47%
Number of potential customers trying product
Profit Revenue – Costs 84%
Purchase Intentions Potential customers who indicate purchase intentions 40%
Potential customers
Return on Investment/ Net profit ROI: 80%
ROMI Incremental costs ROMI:
49%
Sales Total Revenue 79%
Sales per Square Foot Retail sales NA
Retail square footage
Same-store Sales Current year sales Previous year sales NA
Previous year sales
Share of Shelf Brand s shelf space 19%
Total category shelf space

Note: Shelf space is typically measured using number of facings (positions

visible to the customer on a fully stocked shelf).
Share of Voice Brand or company promotional expenses 25%
Total category promotional expenses
Share of Wallet Brand or retailer sales per customer 18%
Total category sales per customer

Note: Can be calculated with either dollar or unit sales.

Traffic Count of all people entering a retail outlet NA
Unique Site Visitors Count of each distinct viewer of the website 37%

Source: Created by authors.

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 Page 16 9B14A040

ENDNOTES
1
www.msi.org, accessed June 19, 2014.
2
Monica Franco-Santos, Javier Marcos and Mike Bourne, “The Art and Science of Target Setting,” IESE insight, 2010;
“Setting Goals That Others Will Pursue,” Manager’s Toolkit: The 13 Skills Managers Need to Succeed, Harvard Business
School Press, 2006.
3
Janice Koch, “The Challenges of Target Setting, Balanced Scorecard Report,” Article Reprint No. B0707D, 2007.
4
Edwin A. Locke, Karyll N. Shaw, Lise M. Saari, and Gary P. Latham., “Goal Setting and Task Performance: 1969-1980,”
Psychological Bulletin 90 (1), 1981, pp. 125-152.
5
Lisa D. Ordonez, Maurice E. Schweitzer, Adam D. Galinsky, and Max H. Bazerman, “Goals Gone Wild: The Systematic
Side Effects of Overprescribing Goal Setting,” Academy of Management Perspectives, 23 (1), 2009, pp. 6-16.
6
Tim Ambler and John H. Roberts, “Addressing Marketing Performance: Don’t Settle for a Silver Metric,” Journal of
Marketing Management, 24 (7-8), 2008, pp. 733-750.
7
http://blogs.windows.com/windows_phone/b/wpdev/archive/2012/01/11/windows-phone-2011-retrospective.aspx, accessed
June 19, 2014.
8
Adapted from Roger Best, Market-Based Management, Pearson, 2012.
9
Richard Miniter, “The Myth of Market Share, Crown Business, 2004.
10
Armstrong J. Scott, and Kesten C. Green, “Competitor-oriented Objectives: The Myth of Market Share,” International
Journal of Business, 12 (1), 2007, pp. 115-134.
11
http://travelsort.com/blog/current-amex-retention-bonus-offers, accessed June 19, 2014
12
Frederick F. Reichheld, “One Number You Need to Grow,” Harvard Business Review, 81 (12), 2003, pp. 46-55.
13
Timothy Keiningham, Sunil Gupta, Lerzan Aksoy and Alexander Buoye, “The High Price of Customer Satisfaction,” MIT
Sloan Management Review, 55 (3), 2014, pp. 37-46.
14
Claes Fornell, Michael D. Johnson, Eugene W. Anderson, Jaesung Cha and Barbara Everitt Bryant, “The American
Customer Satisfaction Index: Nature, Purpose, and Findings,” Journal of Marketing, 60 (4), 1996, pp. 7-18.
15
Keiningham, op. cit.
16
theacsi.org, accessed June 19, 2014.
17
Paul W. Farris and Tania de la Pena Calderon, “Conceptual Models of How Advertising Works to Persuade Individuals,”
Darden Technical Note #UV2935, 2013.
18
Joep W.C. Arts, Ruud T. Frambach and Tammo H.A. Bijmolt, “Generalizations on Consumer Innovation Adoption: A Meta-
Analysis on Drivers of Intention and Behavior,” International Journal of Research in Marketing, 28 (2), 2011, pp. 134-144.
19
David A. Aaker, Managing Brand Equity, The Free Press, 1999.
20
www.interbrand.com/en/best-global-brands/2013/Best-Global-Brands-2013-Brand-View.aspx
21
Thomas Kamber, “The Brand Manager’s Dilemma: Understanding How Advertising Expenditures Affect Sales Growth
during a Recession,” Journal of Brand Management, 10 (2), 2002, pp. 106-120.
22
www.oaaa.org/outofhomeadvertising/mediacomparison, accessed June 19, 2014.
23
www.forbes.com/sites/gregpetro/2012/12/11/retails-big-question-is-the-price-right/, accessed June 19, 2014.
24
www.theglobeandmail.com/life/food-and-wine/wine/why-you-pay-52-for-a-15-wine-in-a-restaurant/article11919459/,
accessed June 19, 2014.
25
www.forbes.com/sites/matthewcarroll/2012/02/22/how-fashion-brands-set-prices/, accessed June 19, 2014.
26
www.mckinsey.com/insights/marketing_sales/the_power_of_pricing, accessed June 19, 2014.
27
Image reproduced with permission from company.
28
www.ic.gc.ca/eic/site/retra-comde.nsf/eng/qn00282.html?Open&pv=1, accessed June 19, 2014.
29
www.footlocker-inc.com/pdf/2012/pr_2012_fl_Investor_Meeting30612_supplement.pdf, accessed June 19, 2014.
30
www.forbes.com/sites/maggiemcgrath/2014/06/10/radioshack-same-store-sales-plunge-dragging-stock-down-with-them/,
accessed June 19, 2014.
31
Image reproduced with permission from company.
32
www.forbes.com/sites/barbarathau/2014/05/20/apple-and-the-other-most-successful-retail-stores-by-sales-per-square-
foot/, accessed June 19, 2014.
33
Gerard J. Tellis, Unrelenting Innovation: How to Create a Culture for Market Dominance, John Wiley & Sons, 2012.
34
www.asymco.com/2010/10/19/60-percent-of-apples-sales-are-from-products-that-did-not-exist-three-years-ago/, accessed
June 19, 2014.
35
The popularity index is calculated by taking the mean of measures related to popularity from the three published sources
below. Sources report slightly different measures (e.g., percentage of firms using the metric, percentage of firms giving the
metric their top importance rating), thus, the index should only be interpreted as a measure of relative popularity. Since not
all metrics were reported by each source, scores from each source are normed for equivalence such that the index can still
be calculated without bias when a metric is not reported in all three sources. Where popularity of metrics included in Exhibit
1 is not available, very closely related metrics’ popularity is substituted where available.
Paul W. Farris, Neil T. Bendle, Phillip E. Pfeifer and David J. Reibstein, Marketing Metrics: The Definitive Guide to
Measuring Marketing Performance, Pearson Education, 2010;
Tim Ambler, Marketing and the Bottom Line: The Marketing Metrics To Pump Up Cash Flow, Pearson Education, 2003.
Chris Styles and Michael Withford, “What Value Marketing? A Position Paper on Marketing Metrics in Australia,” Australian
Marketing Institute, 2004.
36
Farris, Bendle, Pfeifer and Reibstein, op. cit.
i
Wes Nichols, “Advertising Analytics 2.0,” Harvard Business Review, 91 (3), 2013, pp. 60-68.
ii
Chief Marketing Officer Survey, February 2014, cmosurvey.org, accessed June 19, 2014.
iii
Donna L. Hoffman and Marek Fodor, “Can You Measure the ROI of Your Social Media Marketing?” MIT Sloan
Management Review, 52 (1), 2010, pp. 41-49.

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