Marketing Accountability

Tom's Ten Data Tips - October 2006

Marketing Accountability refers to a fundamentally new way in which we view marketing expenses. Whereas marketing budget used to be seen as an expense, nowadays it is seen rather as an investment in the relationship with customers. With this new perspective, marketing expenses have come under the same kind of scrutiny we place other investment decisions: what's the ROI?

Under the current accounting standards (and even suggested revisions), companies are not allowed to consider their customer base as an asset in their books. Yet this is exactly how companies consider their customers, and how stockmarkets value companies. This imbalance is the result of rapid changes in how we look at marketing and finance and accounting's struggle to keep up with these new realities.

1. The "New Generation" Of Marketers Is Taking Over

It is about a decade or so that this "new" view on marketing has been around. Consequently, only very recently are these new views an integral part of the college curriculum. This new generation of marketers is now entering the workforce and changing the rules.

The further up the corporate hierarchy, the more value is placed on well-founded, highly accountable business plans. It's exactly here that the new generation of marketers excel. Now they are upsetting traditional career paths based on seniority and old boys networks.

2. Customer Profitability Measures Are Not Optional

Calculating profitability at the customer level can be horrendously difficult. This holds in particular when there are many and diverse product groups, and allocation of (fixed) costs is non-obvious.

However, the alternative that is most commonly chosen, is not to calculate customer profitability. A good second is to have 'some' measure with known and huge discrepancies with 'true' profitability (this number is then ignored at will). As a result, it is impossible to discriminate between customers on a rational basis. Noble as this may appear, socialism has no place in good business practice (at least not in this form J).

3. Accountability Implies "Numbers", But We Don't Know Which Numbers Yet

Because "new marketing" comes from 'new' realities, we have no standard way of representing business facts. But definitions are extremely important! They are the embodiment of our "view" of the world, and thus are the building blocks of our 'new accounting model'.

By changing definitions, we change our view of reality, and it becomes near impossible to follow trends and make results truly accountable. We're in the midst of this challenge. Marketing and IT need to work in close cooperation to bridge this gap, and they both need to take responsibility.

4. Acquisition, Retention And Churn Form A System Of Dynamic Complexity

The customer lifecycle is mostly treated as a linear causal chain. This is not only incorrect, but harms business enormously by actively distorting the view on the market. One of the most egregious examples of this misrepresentation appears in mobile telco's at the moment. All parties are fighting like crazy to "buy" new customers from the marketplace through deep promotions. Consequently, customers who stay loyal are thieves of their own pocket. This reinforces a mutually unbeneficial situation.

System dynamics have been around for decades, and have a rigid foundation in mathematics. There is simply no excuse not to employ the appropriate modeling technique. Lack of analyst familiarity is one of the worst excuses in light of the fact that these techniques have proven huge financial success many times.

5. You need To Understand The Data In Order To Use Them Intelligently

Part of the disconnect I often see in some of my client organizations stems from the fact that business stakeholders and database people do not "understand" each other well. IT people have traditionally been the "owners" of customer databases, and may have been less than keen to 'educate' their internal clients as to the possibilities as well as limitations of their systems (marketing often doesn't mind this situation either).

This situation harms IT's effectiveness and marketing's ability to profit from some of their most precious resources (data). Since proprietary customer data are sometimes one of the few sustainable sources of competitive advantage, what better reason could there be to cooperate more fruitfully?

6. What Is A Customer, Anyway?

It never ceases to amaze me how many of my client organizations have unclear definitions of what a "customer" really represents in their database (see also tip #5). Consequently, when you ask a basic question like "how many customers do we have with characteristic XYZ?" it can be surprisingly hard to find consensus among the database people.

However, the real killer to me comes when I am then discussing the number of customers with marketers and IT people: they have very different notions about these numbers, and often both are right! The difference usually stems from marketing's 'naive' perception that customers are simply "people" J. Metadata on customer definition are adamant to share a common view on reality.

7. "Forward" And "Backward" Looking Metrics Do Not Blend Very Well

Customer value is sometimes defined in retrospect, that is as historical profitability, or as a projection, customer Life Time Value (or something equivalent). It is important to realize that although they are both profitability numbers, they serve very different purposes.

LTV serves a function in marketing planning (see tip #8), but not in evaluating past performance, for several reasons. One evaluates the past by comparing what should have happened given targets and competitors' performances with what actually occurred. If you use LTV (or NPV) calculations to assess past performance you take credit towards expected outcomes that have yet to occur. And as we all know, the future is fundamentally unknowable. But worse, the expected results are as much a function of assumptions than anything else. Many forecasts are possible, none of which can be measured.

8. Customer LTV Is Only Useful For Strategy (Comparing Alternative Futures)

Since LTV is a projection , its value is heavily dependent on assumptions about the future. At any given moment in time, these can be agreed on, and then it makes sense to compare different strategies with respect to their projected outcomes. Strategies affect portfolio composition, which in turn affects embedded value.

However, comparing LTV's calculated at different moments in time makes much less sense. The assumptions about the future will have changed, based on changing conditions (e.g. interest rates, market growth, etc.). Therefore LTV's will have changed without any underlying 'fundamental' change in customer characteristics.

9. Business Alignment Between Analysts And Marketers Is Key

What alignment implies is that the organizational structure ensures that mutual goals and targets are shared. This can be extremely challenging when "facts" about the business affect people's careers. Database people need to work in close cooperation with their internal clients, yet at the same time maintain their professional independence.

Probably the ugliest example in my career I encountered recently when analysts at a client were willing to 'make the numbers look good'. Willingly and knowingly distorting reality under "political pressure" is not only stupid but unethical as well. And although it is remarkably easy (tempting?) to fool shareholders in the short run, in the long run you accelerate sinking your own ship.

10. Customer Equity - Does It Exist?

One of the new terms in vogue these days is customer equity. What is implied is that a future income stream from existing customers can be counted on much like a dividend from a blue chip stock. This "model" of reality is fundamentally flawed.

Customers can not be owned, not even in the metaphorical sense. The best one can hope to achieve is renting customers from the marketplace. By acquiring the right customers, investing in the relationship, and providing superior value, the customer will grant her business. Lean operations then provide an opportunity to create value for both customers and shareholders.

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