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A big challenge for marketing is demonstrating its business value. As the finance function becomes more powerful within companies, some see marketing’s influence as declining.1 One major reason for marketing’s diminishing role is the difficulty of measuring its impact: The value marketers generate is often difficult to quantify. For example, Target Corp., the Minnesota-based discount retailer, positions itself as fashionable yet affordable. It is difficult to assign a dollar value to the image Target generates in consumers’ minds, and even harder to determine the return on investment (ROI) from a specific advertisement promoting that image.
Although marketing metrics aren’t perfect, they might be more useful if people understood what the different measures actually mean. We have two purposes for this article: First, to clarify marketing metrics so that managers select the right metrics and use them appropriately; and second, to help senior managers understand when marketers are cherry-picking the data or using inappropriate metrics. We believe that marketing’s influence will increase if marketers use metrics more effectively. Fortunately, many marketers are receptive to this view and are doing excellent work in this field, such as new metrics that link customers’ perceptions about products and brands to their actual purchase behavior.2 Our aim here, however, is not to endorse any new approaches — but rather to encourage appropriate and consistent use of popular marketing metrics.
In this article, we assess five of the best-known marketing metrics: market share, net promoter score, the value of a “like,” customer lifetime value, and ROI. To understand how managers view popular marketing metrics, we conducted interviews with marketers and administered surveys to managers. (See “About the Research.”) We found that both marketers and nonmarketers agreed that well-defined metrics are critical to effective marketing. However, despite their widely acknowledged importance, popular marketing metrics are regularly misunderstood and misused.
1. See D.M. Zorn, “Here a Chief, There a Chief: The Rise of the CFO in the American Firm,” American Sociological Review 69, no. 3 (June 2004): 345-364; and F.E. Webster Jr., A.J. Malter, and S. Ganesan, “Can Marketing Regain Its Seat at the Table?” working paper 03-113, Marketing Science Institute, Cambridge, Massachusetts, 2003.
2. S. Srinivasan, M. Vanhuele, and K. Pauwels, “Mind-Set Metrics in Market Response Models: An Integrative Approach,” Journal of Marketing Research 47, no. 4 (August 2010): 672-684; and K. Pauwels, S. Erguncu, and G. Yildirim, “Winning Hearts, Minds, and Sales: How Marketing Communication Enters the Purchase Process in Emerging and Mature Markets,” International Journal of Research in Marketing 30, no. 1 (March 2013): 57-68.
3. P.W. Farris, N.T. Bendle, P.E. Pfeifer, and D.J. Reibstein, “Marketing Metrics: The Definitive Guide to Measuring Marketing Performance,” 2nd ed. (Upper Saddle River, New Jersey: Pearson Education, 2010).
4. R.D. Buzzell, B.T. Gale, and R.G.M. Sultan, “Market Share: A Key to Profitability,” Harvard Business Review 53, no. 1 (January-February 1975): 97-106.
5. D.M. Szymanski, S.G. Bharadwaj, and P.R. Varadarajan, “An Analysis of the Market Share-Profitability Relationship,” Journal of Marketing 57, no. 3 (July 1993): 1-18; and R. Jacobson, “Distinguishing Among Competing Theories of the Market Share Effect,” Journal of Marketing 52, no. 4 (October 1988): 68-80.
6. In this article, we do not aim to definitively show the connection (or lack of connection) between market share and profitability. Our aim is more modest: To show that the causal path is not as clear as managers may believe — making it important to not assume that market share and profitability always go together. For an example of academic pushback, see R. Jacobson and D.A. Aaker, “Is Market Share All That It’s Cracked Up to Be?” Journal of Marketing 49, no. 4 (autumn 1985): 11-22; for “market share is malarkey,” see B.D. Henderson, “The Origin of Strategy,” Harvard Business Review 67 (November-December 1989): 139-143.
7. For competing views, see, for example, M. Friedman, “The Social Responsibility of Business Is to Create Profits,” New York Times Magazine, Sept. 13, 1970, 32-33, 122, 126; and R. Phillips, R.E. Freeman, and A.C. Wicks, “What Stakeholder Theory Is Not,” Business Ethics Quarterly 13, no. 4 (October 2003): 479-502.
8. S. Cole, “Apple’s iPod Continues to Lead an Ever-Shrinking Market of Portable Media Players,” Dec. 19, 2013, http://appleinsider.com.
9. Possibly the staunchest critic is J. Scott Armstrong, a marketing professor at the Wharton School, who has authored several papers addressing the problems of chasing market share; see J.S. Armstrong and F. Collopy, “Competitor Orientation: Effects of Objectives and Information on Managerial Decisions and Profitability,” Journal of Marketing Research 33 (May 1996): 188-199; and J.S. Armstrong and K.C. Green, “Competitor-Oriented Objectives: The Myth of Market Share,” International Journal of Business 12, no. 1 (2007): 117-136. For a theoretical explanation of how competitor orientation can persist even in markets that reward profit-maximizing companies, see N. Bendle and M. Vandenbosch, “Competitor Orientation and the Evolution of Business Markets,” Marketing Science 33, no. 6 (November-December 2014): 781-795.
10. F. Reichheld and R. Markey, “The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World” (Boston: Harvard Business Review Press, 2011).
11. F. Reichheld, “The One Number You Need to Grow,” Harvard Business Review 81, no. 12 (December 2003): 46-54.
12. R. Owen and L.L. Brooks, “Answering the Ultimate Question: How Net Promoter Can Transform Your Business” (San Francisco, California: Jossey-Bass, 2009).
13. T.L. Keiningham, B. Cooil, T.W. Andreassen, and L. Aksoy, “A Longitudinal Examination of Net Promoter and Firm Revenue Growth,” Journal of Marketing 71, no. 3 (July 2007): 39-51.
14. G. Pingitore, N.A. Morgan, L.L. Rego, A. Gigliotti, and J. Meyers, “The Single-Question Trap: The Net Promoter Score Has Limitations in Predicting Financial Performance,” Marketing Research 19, no. 2 (2007): 9-13.
15. Reichheld and Markey, “The Ultimate Question 2.0,” 231.
16. Ibid, 259.
17. “The Value of a Facebook Fan 2013: Revisiting Consumer Brand Currency in Social Media,” white paper, Syncapse, New York, April 17, 2013, p. 4.
18. D. Zarrella, “How to Calculate the Value of Your Social Media Followers,” November 26, 2012, http://blog.hubspot.com.
19. R. Venkatesan and V. Kumar, “A Customer Lifetime Value Framework for Customer Selection and Resource Allocation Strategy,” Journal of Marketing 68, no. 4 (October 2004): 106-125.
20. There are many problems with assessing CLV, but we are not able to address all of them here, primarily for reasons of space. In brief, when used as a prediction of the future, CLV measurement is challenging. For example, it can be extremely difficult to project for customers with whom the company does not have a contract or even a regular amount of revenue. It is tough to know whether a customer has been retained but is an irregular purchaser, or whether the customer will never buy again. Discount rates are hard to estimate and, given that they change with risk, should theoretically differ between customers. The problems of calculation can be especially challenging given customer heterogeneity. Further, even if you can calculate CLV, what to do with it can be a challenge, as differentially serving customers can be controversial. For further discussion of these issues, see, respectively, J. Romero, R. van der Lans, and B. Wierenga, “A Partially Hidden Markov Model of Customer Dynamics for CLV Measurement,” Journal of Interactive Marketing 27, no. 3 (August 2013): 185-208; P.S. Fader, B.G.S. Hardie, and K. Jerath, “Estimating CLV Using Aggregated Data: The Tuscan Lifestyles Case Revisited,” Journal of Interactive Marketing 21, no. 3 (2007): 55-71; P.S. Fader and B.G. Hardie, “Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity,” Marketing Science 29, no. 1 (January-February 2010): 85-93; and C. Homburg, M. Droll, and D. Totzek, “Customer Prioritization: Does It Pay Off, and How Should It Be Implemented?” Journal of Marketing 72, no. 5 (September 2008): 110-130.
21. P.E. Pfeifer, M.E. Haskins, and R.M. Conroy, “Customer Lifetime Value, Customer Profitability, and the Treatment of Acquisition Spending,” Journal of Managerial Issues 17, no. 1 (spring 2005): 11-25.
22. There is an active stream of research on sunk costs and the fact that people inappropriately consider sunk costs in their decisions, thus exhibiting sunk cost bias. One of the most popular demonstrations of sunk cost bias involves coaches in the NBA giving more time than players’ performance warrant to players picked earlier in the draft. The argument is that draft pick “cost,” an early pick, is sunk, yet coaches continue to give these players court time to justify that cost. See B.M. Staw and H. Hoang, “Sunk Costs in the NBA: Why Draft Order Affects Playing Time and Survival in Professional Basketball,” Administrative Science Quarterly 40, no. 3 (September 1995): 474-494.
23. Note that marketing ROI and return on marketing investment are similar but applied solely to marketing investments. See N.T. Bendle, P.W. Farris, P.E. Pfeifer, and D.J. Reibstein, “Marketing Metrics: The Manager’s Guide to Measuring Marketing Performance,” 3rd ed. (Upper Saddle River, New Jersey: Pearson FT Press, 2015); and P.W. Farris, D.M. Hanssens, J.D. Lenskold, and D.J. Reibstein, “Marketing Return on Investment: Seeking Clarity for Concept and Measurement,” Applied Marketing Analytics 1, no. 3 (summer 2015): 267-282.
24. “CMO Survey Report: Highlights and Insights,” The CMO Survey, Durham, North Carolina, 2014.
25. See T. Ambler and J.H. Roberts, “Assessing Marketing Performance: Don’t Settle for a Silver Metric,” Journal of Marketing Management 24, no. 7-8 (2008): 733-750; and J.D. Lenskold, “Marketing ROI: The Path to Campaign, Customer, and Profitability” (New York: McGraw Hill, 2003).