“If you can’t measure it, you can’t manage it” said Peter Drucker. This statement applies as much to the income producing function as it does to every other part of business. However, the statement does not say that “If you can measure it, you can manage it”, Measuring the performance of all the customer related and income generating functions does not guarantee good management, but is an indicator of management performance.
But what does “measuring performance” mean? The assumption seems to be that everyone knows and understands the term, but when asked to explain performance measurement, the majority of people will give a variety of differing answers. When measuring business performance, the clear definition of the terms and measurements used is fundamental to the intelligent understanding of the processes and actions for getting and retaining business profitably.
The Chartered Institute of Marketing defines marketing as being “All those management functions which anticipate and satisfy customer demand profitably.” Thus marketing is a management function and not another term for advertising, promotion or selling, although these are constituent parts.
Commercial managers are responsible for producing sustainable profitable income for the long term, by anticipating and satisfying customer requirements. Their performance will be judged not only on the amount of profitable income generated, but how efficiently assets have been used and costs minimised in its production.
Before measuring the marketing performance of any business, all the marketing terms, measurements and acronyms that are used should be clearly defined and understood. Clear definitions focus the mind on what is to be measured as well as the value and purpose to which such measurements may be put. If measurements and their meaning are not clearly understood, the resulting management decisions will be questionable. For example, while the word “Metrics” often appears as a generic term when speaking of measurement, “Metrics” refers to the standards for measurement, providing target values that a company must achieve to reach a certain level of success. By contrast, “Measurements” refers to the raw outcome of a quantification process, such as a company’s numbers, ratios and percentages. “Benchmarks” on the other hand, are the standards against which all others values are judged. Therefore, in most cases, “Benchmarks” are used to establish the value of the metrics to be used for measuring satisfactory performance at any particular time.
For the commercial manager, marketing performance may be summed up in two principle indicators; the Optimum Marketing Performance (OMP) and Marketing Contribution. The OMP expresses the overall marketing performance by directly relating revenue with marketing investment, while Marketing Contribution, expresses marketing output as derived from the revenue generated less the direct and indirect costs incurred by marketing activity.
The term “Return on Investment” (ROI), is often confused with the term “Return on Marketing Investment” (ROMI), but these terms should not be interchangeable. Return on Investment (ROI), refers to the net income divided by the capital employed. However, the American Marketing Association identified at least six other interpretations of ROI currently in use : Incremental sales revenue, the Ratio of cost to revenue, the cost per sale generated, changes of financial value of sales generated, cost of new customer, and cost of old customer retention. The term “Return on Marketing Investment,” (ROMI) is generally used to measure the financial performance of specific marketing activities such as an exhibition or advertisement. Because it is difficult to identify which sales are attributable to which activity, ROMI is generally limited to measuring specific marketing investments, and is not readily applied to the marketing function as a whole.
Measuring performance of the customer related activities which collectively produce the income, requires the commercial manager to identify those metrics which are fundamental to the business.
The first questions that the commercial manager should ask are;
* Are we making income and how much?
* Are we making profits and how much?
* From where do the profits and the costs arise?
* Is the market growing or shrinking and at what rate?
* Are sales and profits growing in line with or different from the market?
Answers to these questions provide the initial framework on which more detailed analysis of marketing performance may be made.
The most effective way of measuring performance is by measuring output. In many businesses, the first measures of marketing are involved with sales, usually in terms of volume, value and customers. These areas are easy to measure, and having a true and tangible output that is quantifiable, are of fundamental importance. By contrast, measurements of customer perceptions may only be done by subjective surveys which have limited importance.
Measuring marketing performance is an essential indication of recent past and current performance, in order to identify where resources and assets are used to best effect, but future performance is dependent on the staff involved who have to deliver it.
The commercial manager will rightly be judged on the measurements of performance, but that performance will be dependent on the ability of the staff involved to achieve their objectives. Only effective leadership and management of the commercial manager can direct and motivate the staff, to maximize marketing performance to achieve the business objectives.
Drucker never said it and never would have said it. The saying is attributed to Lord Kelvin: “I often say that when you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot measure it, when you cannot express it in numbers, your knowledge is of a meagre and unsatisfactory kind; it may be the beginning of knowledge, but you have scarcely, in your thoughts, advanced to the stage of science, whatever the matter may be.”
• Lecture on “Electrical Units of Measurement” (3 May 1883), published in Popular Lectures Vol. I, p. 73
Drucker’s attitude was clear: everything that counts cannot be counted. Here he is writing in Management: Tasks, responsibilities, Practices Page 487-498.” …the measurable results are things that have happened; they are in the past. There are no facts about the future…..measurable events are primarily inside events rather than outside events….
A balance between the measurable and nonmeasurable is therefore a central and constant problem of management and a true decision area.”