The 5 Most Misunderstood and Misused Marketing Metrics
Here’s how to avoid all the confusion when it comes to market share, net promoter score, the value of a “like,” customer lifetime value, and ROI.
How much does a "like" on Facebook really matter? And how important, really, is increasing your company's market share?
Answers to these questions are important to marketers for obvious reasons. If a marketer knew the exact value of a "like," she'd be better able to demonstrate (to decision makers) that time and money should be spent on Facebook promotions. What's more, she'd be better able to demonstrate her own value to the organization.
Here's the problem: Marketing metrics are regularly misunderstood and misused. The MIT Sloan Management Review recently polled business leaders (non-marketing and marketing managers) about the five best-known metrics--market share, net promoter score, the value of a "like," customer lifetime value, and ROI--and found that the terms are widely used incorrectly. And some marketers (perhaps even worse) are deliberately misusing them, to prop up their own business value.
Here are the findings about each metric--and what you can do to avoid confusion.
1. Market Share.
Many managers lean on market share as a valuable metric, despite a seminal Harvard Business Review essay debunking blind, categorical reliance on it. The MIT Sloan authors point out: "Increased market share offers no benefit unless it eventually generates profits. Despite this, we found that more marketing managers thought it was more important to prioritize maximizing market share than to prioritize maximizing profitability."
For some real-world examples of how irrelevant market share can be, look no further than General Motors, which was the world's biggest automaker before filing for bankruptcy in 2009. Likewise, Apple's iPod sustained its a high share of the market for MP3 players--but it didn't matter once the overall size and profitability of that market declined (as soon as everyone began loading music onto their smartphones).
So, when is market share relevant? Mainly if there's a direct connection between market share and profitability in your market. For example, a bigger market share can motivate partners to give your company more favorable terms in deals. Retailers treat Coca-Cola differently than they treat smaller companies, because retailers may need the entire variety of Coca-Cola products more than they need any single product from a smaller brand.
2. Net Promoter Score.
On the surface, it's easy to grasp why NPS is important: It's a metric that provides a quick understanding of how enthusiastic your customers are. What company wouldn't want more promoters and fewer detractors?
But as the MIT Sloan authors point out, happy customers don't always translate to profits. They note that NPS advocates have often described a customer's value to Apple strictly in terms of how much that customer spends on Apple products. But in so doing, those NPS advocates ignore how much Apple might be spending in order to serve that customer. Likewise, in product categories where demand is more or less inelastic--think about utilities--you'll boost your NPS if you cut your prices or spend more money on customer-service initiatives. Those moves will make your customers happier and more likely to recommend you. But those moves will also eat into your profits.
So when is NPS most relevant? Primarily if you believe that monitoring your levels of customer service will improve your customer service. The authors admonish: The NPS metric, by itself, won't be enough. You need to combine it with other cultural initiatives that will motivate higher levels of customer service. And you need to prevent your company from spending irresponsibly to boost its NPS.
3. The Value of a "Like."
If consumers "like" a brand on Facebook, it might be because of a lifetime worth of experiences with the brand. That seems obvious. But sometimes marketers will use "likes" as a means to justify the company's social media strategy. In reality, the "like" may have nothing whatsoever to do with that strategy. Some "likes" may come from customers who've been using the product since before Facebook existed.
So how important are "likes," in reality? It behooves managers to investigate whether their Facebook popularity existed prior to any social media marketing effort. "Digital marketers can run fairly simple controlled, randomized experiments to understand the impact of their actions," write the authors.
4. Customer Lifetime Value.
CLV is the present-day value of cash flows from an existing customer relationship. Marketers use CLV to help them decide how much to spend on marketing to acquire new customers--or to potentially increase the retention rate of current customers.
So where does the confusion come in? In their surveys, the authors learned that a common point of confusion was whether to include customer acquisition cost in the CLV calculation. Their advice? Don't include it.
That doesn't mean the cost of customer acquisition is not important. But in reality, CLV usually measures the value of customers who were acquired long ago. "The acquisition costs have therefore already been incurred," note the authors. "Even if the company made a mistake in acquiring a customer and the acquisition costs exceeded the customer's value, knowledge of this cannot change the earlier acquisition decision. Acquisition costs are 'sunk' and should be ignored when making forward-looking decisions."
Making this mistake can have significant consequences. For instance, a profitable customer can appear to have the same value as an unprofitable customer, if the former cost much more to acquire.
5. Return on Investment.
The authors found ROI could be manipulated by marketers, if they cherry-picked which projects to include in the calculation. As an example, they presented a scenario in which there were two equal-sized investments: One with an ROI of 40 percent, another with an ROI of 30 percent.
The 30 percent ROI is still quite profitable--just less so than the first one. Which means that continuing to make both investments would lead to greater total profits--with an average ROI of 35 percent. By contrast, choosing only the 40 percent ROI investment would lead to lower profits--despite the gaudy ROI. "As logical as this sounds," they write, "a large percentage of the marketing managers we surveyed incorrectly said that choosing a portfolio of the highest ROI investments was the same thing as choosing the highest total profits."
In other words, the lesson for ROI is the same as it is for the other four metrics: Don't let your devotion to a given metric blind you to the real bottom line--which is, as always, your company's profitability.