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Value Above Cost: New Customer-Focused Metric Aims to Measure ROMI
Whether you’re a CMO or Assistant Brand Manager or somewhere in between, you most
likely are feeling the pressure to measure marketing ROI. While the business world has
learned over the past generation to accurately measure and improve nearly everything
they do, the marketing profession is still searching for that Holy Grail metric that will
effectively measure the value of marketing.
In his new book, Value Above Cost: Driving Superior Financial Performance with
CVA®, the Most Important Metric You’ve Never Used, author Donald E. Sexton
introduces his new metric, Customer Value Added (CVA®) and addresses the impact of
marketing efforts on an organization’s financial performance.
In 2008, The Conference Board found that only 19% of organizations claim to be making
good progress in measuring marketing ROI. Today’s marketing managers are feeling the
pinch not only from external forces but also internally from their organizations which are
reasonably asking questions such as:
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What is the return on our marketing efforts?
What would our sales or profits be if we cut back on the marketing budget?
Why should we increase efforts in marketing?
In fact, the Association of National Advertisers (ANA) found that relatively few
managers (13%) are satisfied with their ability to estimate the return on their marketing
efforts, and relatively few (10%) believe that they can forecast the impact of a 10 percent
cut in the marketing budget
A survey by Financial Executive Magazine further supports these findings. It found that
about 60% of finance managers have doubts about marketing forecasts and only 35% are
willing to believe the marketing numbers.
The results of these and similar surveys supports the reality that today’s intensely
competitive environment makes it increasingly difficult to determine marketing
accountability. Marketing returns are affected by a wide variety of marketplace factors
such as knowledgeable customers, aggressive competitors, shifting macro trends and
technological changes.
June 26, 2009
Marketing Matters
In his book, Sexton suggests that a Customer Value Added® metric—the difference
between the value an organization provides customers and the cost of providing that
value—can help bridge the confidence gap.
CVA® = Perceived Value Per Unit – Variable Cost Per Unit
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Total net value per unit created as perceived by customer
Associated with contribution, profit, and cash flow
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Net value shared by the producer, resellers, and customer
CVA® is the net value to society created by an organization. The higher the CVA®, the
more economically successful the organization. The lower the CVA®, the less successful
the organization.
In his book, Sexton notes, “Marketing managers seem to believe that the evaluation of the
return on the marketing investment is important. In 2006, members of the CMO Council
placed issues involving marketing ROI as three of their top five concerns. A 2007
Conference Board survey found nearly 80 percent of the respondents considered
marketing ROI and marketing metrics among their most important challenges.”
He also asserts that the lack of progress in measuring marketing ROI is reflected in the
budgeting process. According to ANA and other studies, nearly two-thirds of marketing
budgets are set based on history (last year’s budget).
In his chapter on “Organizing to Manage CVA®,” Sexton cites several reasons for this
lack of progress including:
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Lack of clarity as to what marketing return is. Many managers report that
there is no definition of marketing ROI within their organization.
Lack of time devoted to marketing return. Time spent on marketing return
is one of the most useful predictors of progress, but many organizations have
not even started to develop systems to examine marketing return.
Lack of motivation for people to work on marketing return. Relatively
few compensation or recognition systems seem to encourage work on
marketing return.
Lack of skills and resources. Many organizations feel they do not have the
appropriate data or the appropriate analytical skills to evaluate marketing
return.
Lack of cooperation between marketing and finance. Marketing and
finance silos still seem to be the reality in many organizations.
June 26, 2009
Marketing Matters
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Inertia. Many managers seem comfortable with what they are currently doing
and neither feel the pressure to change nor have the time to change their
approaches.
Sexton offers an interesting perspective on how to think about the return on marketing
activities. He suggests that by evaluating marketing efforts using a customer value added
metric that has a direct relationship to contribution, marketers can begin to better
understand how their branding and marketing efforts impact an organization’s financial
performance.
June 26, 2009
Marketing Matters