W3D1

S P R I N G 2 0 1 6

Neil T. Bendle Charan K. Bagga

The Metrics That Marketers Muddle Despite their widely acknowledged importance, some popular marketing metrics are regularly misunderstood and misused. Here’s how to clear up the confusion that surrounds five common marketing metrics.

Vol. 57, No. 3 Reprint #57307 http://mitsmr.com/1LojUzZ

The Metrics That Marketers Muddle

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 gen-

er ates in consumers’ minds, and even harder to

determine the return on investment (ROI) from a spe-

cific 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 pur-

poses 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 un-

derstand when marketers are cherry-picking the data or

using inappropriate metrics. We believe that market-

ing’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’ per-

ceptions 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 mar-

keting metrics: market share, net promoter score, the

value of a “like,” customer lifetime value, and ROI. To

understand how managers view popular marketing

THE LEADING QUESTION How should companies measure the impact of their marketing efforts?

FINDINGS �Popular marketing metrics are regularly misunderstood and misused.

�This confusion undermines the marketing disci- pline’s reputation for delivering results.

�Marketers will have more influence if they apply metrics appropriately.

M A R K E T I N G

Despite their widely acknowledged importance, some popular marketing metrics are regularly misunderstood and misused. Here’s how to clear up the confusion that surrounds five common marketing metrics. BY NEIL T. BENDLE AND CHARAN K. BAGGA

SPRING 2016 MIT SLOAN MANAGEMENT REVIEW 73PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED. THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS AS ORIGINALLY PUBLISHED.

74 MIT SLOAN MANAGEMENT REVIEW SPRING 2016 SLOANREVIEW.MIT.EDU

M A R K E T I N G

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.

Market Share Market share is a hugely popular metric. In a sur-

vey of senior marketing managers, 67% found

market share based on dollars spent “very useful,”

and 61% found market share based on units sold

“very useful.”3 One explanation for why managers

value market share so highly probably has to do

with well-known research from the 1970s that sug-

gested a link between market share and ROI.4

However, the linkage may be less clear than most

managers would suspect, and studies have found

it is often correlational rather than causal.5 Not

surprisingly, there has been substantial academic

pushback on the value of market share as a useful

performance metric, epitomized in a 1989 article

by Boston Consulting Group founder Bruce D.

Henderson, in which he proclaimed that “market

share is malarkey.”6

Nevertheless, many managers continue to pay

attention to market share, and some vigorously

defend its value. Rather than having an endless

debate, many marketers have tacitly agreed to put

the discussion aside. Hence, market share remains

on management radar and continues to be taught

in MBA curricula with little discussion as to

whether it is an appropriate marketing objective in

any given market.

In our research, we found that there were usually

two ways managers used market share: as an ulti-

mate objective or as an intermediate measure of

success. Using market share as an ultimate objective

is hard to justify. Many managers believe that the

primary purpose of a business is to maximize share-

holder value, although for some the purpose is also

to serve the interests of nonowner stakeholders such

as employees and customers.7 However, increasing

market share isn’t a meaningful ultimate objective

for either of these groups: If the aim is to maximize

the returns to shareholders, increased market share

offers no benefit unless it eventually generates profits.

Despite this, we found that more marketing manag-

ers thought it was more important to prioritize

maximizing market share than to prioritize maxi-

mizing profitability.

Managers commonly argue that market share is

a useful intermediate measure — in effect, a leading

indicator of future success. In some markets, mar-

ket share probably does help increase future profits,

but this is not always the case: General Motors Co.

was the world’s biggest carmaker before filing for

Chapter 11 bankruptcy court protection in June

2009. Therefore, it is critical to understand the ex-

pected relationship between market share and

profitability in your specific market.

In some markets, bigger can be better; the most

obvious examples are markets with economies of

scale. Companies in such markets can reduce their

cost per unit by selling more — thus increasing

overall profits. If you think you are in such a mar-

ket, you should confirm that the economies of scale

you think exist actually do. Economies of scale do

not automatically apply to all markets. For exam-

ple, consulting does not get substantially cheaper

per hour to provide at higher volumes. Even when

greater size does bring benefits, marketers should

still measure size in terms of volume sold, as op-

posed to market share. Although market share is

related to volume, the two are not identical: When

the overall market size shrinks, market share can

remain stable or even rise as volume falls. For ex-

ample, Apple Inc.’s iPod continued to have a high

share of the market for dedicated MP3 music play-

ers, but the size of that market declined sharply

with the rise of smartphones.8 Further, measuring

volume is easier to calculate than market share.

In some settings, market share can be a proxy for

power. Depending on the setting, relative size can

matter, and having a bigger market share can en-

courage others to treat your company more

favorably. For example, when it comes to dealing

with retailers, a category leader such as Coca-Cola

may be able to negotiate better deals than a weaker

brand can; retailers need Coke on their shelves

more than they may need a smaller brand. A similar

logic applies to network goods, which are products

for which the benefit to consumers increases when

more people use them. For example, Facebook’s

ABOUT THE RESEARCH To better understand confu- sion about marketing metrics, we conducted two surveys. Our goal was two- fold: (1) to understand how these marketing metrics are used and understood, and (2) to develop ideas to help marketers unmuddle their metrics. The first survey was administered to a sample of 170 U.S. managers from all functions across a variety of industries using an online panel. For the second sur- vey, we surveyed 50 marketing managers in the United States who worked in business-to-business or business-to-consumer indus- tries. The average number of direct reports of the manag- ers in this sample was 7.9, and the average annual budget they managed was around $750,000. We also drew on information from surveys that we had con- ducted for other purposes, as well as the current litera- ture. To better understand usage and potential prob- lems, we discussed the five metrics with marketing man- agers and senior executives, read online content by con- sultants, and studied how academic literature and teaching materials shaped managers’ views on metrics.

SLOANREVIEW.MIT.EDU SPRING 2016 MIT SLOAN MANAGEMENT REVIEW 75

value to its members increases when more of its

members’ friends use it. Overall, though, the re-

search on the relationship between profits and

market share is ambiguous. There is no general

rule; the importance of market share varies from

market to market.

Market share has other complications. For in-

stance, figuring out who your competitors are in a

given market can be a judgment call. Consider, for

example, the changing product categories offered

by computer makers. Do high-end tablets compete

in the laptop market? Microsoft Corp. claims that

its Surface Pro 4 tablet computer can “replace your

laptop.” A company’s market share in a given cate-

gory depends on how the company defines the

market: To increase market share, it can redefine

the market to exclude a competitor.

Additionally, because market share is about rel-

ative rather than absolute success, market share

objectives can drive companies to initiate unprofit-

able attacks on competitors.9 In many industries,

price wars have had devastating effects on profits.

Unmuddling Market Share We suggest a simple set of rules to determine the appropriate use of the

market share metric. First, don’t use market share

as either an ultimate objective or as a proxy for ab-

solute size. Second, consider the perspective of

other businesses. Will they behave more favorably

toward your company if your market share in-

creases? Next, consider the consumer. If you cannot

explain in simple terms how the consumer will

benefit from industry consolidation, your product

is not a network good, and increased market share

will not matter to consumers. Finally, analyze

whether market share drives profitability in your

industry. For example, does higher market share

lead to increased profits? Bear in mind that this is

different from assessing whether market share and

profits are correlated. Companies with superior

products tend to have high market share and high

profitability because product superiority causes

both. This means that the two metrics are corre-

lated — but it does not necessarily mean that

increasing market share will increase profits. (See

“Should You Use Market Share as a Metric?”) Using

market share as a metric of success simply because

other companies do can be counterproductive.

Net Promoter Score Since 2003, the net promoter score (NPS) has be-

come one of the most widely used marketing

metrics. Companies in industries as diverse as tele-

communications, banking, and car rental have

embraced NPS as a way to monitor their customer

service operations. Consumers answer a simple

question (How likely is it that you would recom-

mend X to a friend or colleague?) on a scale from 0

to 10, with 10 being the most positive. Customers

who answer 9 or 10 are considered promoters;

those who answer 6 or less are rated as detractors.

The score is the percentage of promoters minus the

percentage of detractors.

Frederick F. Reichheld, the business strategist

who pioneered NPS, has argued that NPS is not just

a metric but also a system that allows managers to

use the scores to shape managerial actions.10 Advo-

cates explain that the feedback is the source of

many potential benefits. For example, a senior ex-

ecutive we interviewed argued that adopting NPS

facilitated cultural shift at his company from one

that was highly bureaucratic toward one that was

more customer-centric.

One of the strongest selling points of NPS is its

simplicity. It’s easy for managers and employees to

understand the goal of having more promoters and

fewer detractors. However, there are weaknesses in

SHOULD YOU USE MARKET SHARE AS A METRIC? Should market share be an important marketing metric for your company? Consider the following questions.

Is market share an ultimate objective?

Advice: Don't use market share as an ultimate objective.

Is market share a proxy for size?

Advice: Use a size metric instead, such as sales volume.

Is market share a proxy for power? or

Do consumers gain when the industry consolidates?

Advice: Test if market share drives profits in your market.

What theoretical reason (network goods/power)

supports this idea?

Advice: Don't rely on market share as a key metric.

Yes No

Yes No

Yes to either question No to both questions

76 MIT SLOAN MANAGEMENT REVIEW SPRING 2016 SLOANREVIEW.MIT.EDU

M A R K E T I N G

how the theory has actually been presented to man-

agers. In Reichheld’s original article, NPS was

described as “the one number you need to know to

grow.”11 It was associated with “profitable growth”

(which implies bottom-line growth). However, the

supporting evidence relied on revenue growth (in

other words, top-line growth). In another example

in the net promoter literature, a customer’s worth

to Apple has been described as the customer’s

spending, ignoring the costs associated with serv-

ing the customer.12

Unfortunately, it’s easy to imagine how to in-

crease the net promoter score while destroying

even top-line growth. For instance, in product cat-

egories where the demand is relatively inelastic

(such as utilities), slashing prices will likely in-

crease the net promoter score because customers

will be happier and recommend the company. Yet,

under this scenario, revenue (as well as profitabil-

ity) will decline.

Another problem with NPS as a metric is the

classification system. The boundaries between

scores of 6 and 7 (detractors and passives) and 8

and 9 (passives and promoters) seem somewhat ar-

bitrary and culturally specific. Grouping customers

into categories eliminates potentially useful infor-

mation. For example, a customer who says that the

likelihood that he or she will recommend some-

thing is 0 is probably a more active detractor than a

customer with a rating of 6. By grouping different

types of detractors in the same bucket, companies

lose the opportunity to explore the differences.

Given these problems, it is difficult to justify the

theory of the NPS metric over a simple 0 to 10 scale,

or to explain why NPS works any better than other

metrics that capture different facets of the cus-

tomer experience. Academics have been slow to

embrace NPS, and many have suggested to us that it

is overhyped. So far, we have not seen any rigorous

studies that would prove to academics’ satisfaction

that NPS is superior to other metrics from the fam-

ily of customer experience measures. Without a

compelling theory supporting the superiority of

NPS, its value can only be justified on practical

grounds. The argument is essentially: “We are not

sure exactly why NPS works, but it seems to work,

and that’s good enough for us.”

Interestingly, more than half of the marketing

managers that we surveyed thought there was

“strong scientific support for the claim that the

NPS metric is more effective than all other cus-

tomer satisfaction metrics.”

However, a rigorous examination of NPS’s ef-

fectiveness relative to other customer satisfaction

scores failed to confirm its superiority.13 In our

view, advocates for NPS have not sufficiently re-

sponded to this and similar criticisms.14 Reichheld

and his coauthor have suggested that criticism of

NPS comes from consultants and academics wed to

traditional satisfaction measures and dismiss the

critics as “net pro-moaners.”15 Still, the basic criti-

cisms remain inadequately addressed. Many

managers use NPS in the belief that it’s based on

widely accepted academic research, even though

the evidence supporting NPS is actively disputed.

One reason for the lack of resolution surround-

ing NPS is that academics have focused on testing

the metric. They have found that it’s much more

difficult to test the broader claims of NPS as a sys-

tem. At the root of the problem is the difficulty of

establishing a control group: You can’t have one

group of companies that adopts the NPS system

and an identical group of companies that doesn’t.

Therefore, the question of most interest to manag-

ers — “Wi l l i m p l em en t i n g t h e N P S s ys tem

improve our company’s performance?” — is also

the most difficult to answer. Thus, critics of NPS

have not been able to definitively show that NPS

doesn’t work; nor have supporters definitively

shown that it does work.

A customer who says that the likelihood that he or she will recommend something is 0 is probably a more active detractor than a customer with a rating of 6.

SLOANREVIEW.MIT.EDU SPRING 2016 MIT SLOAN MANAGEMENT REVIEW 77

Supporters of NPS want it to work and treat it as

a viable way to incorporate customer feedback into

their companies’ strategies. Opponents bristle at

the hype surrounding the metric and think there

are better alternatives. How bold claims should be

is a debate as old as marketing itself. We might

compare NPS to Guinness, the popular Irish stout,

which was once marketed as being “good for you.”

Guinness and NPS may both have wonderful quali-

ties, but that doesn’t mean one should believe

everything said about them.

Unmuddling NPS The value of NPS may depend upon whether a manager sees it as a metric or as a

system. The metric by itself has limited theoretical

or empirical justification, and we see no reason to

favor it over other customer satisfaction metrics or

combinations of metrics. To be fair, NPS’s advo-

cates agree that the metric itself is not what provides

NPS most of its value. Reichheld and Markey them-

selves write: “Fight the temptation to let it [NPS]

become just a score.”16 (See “Should You Use Net

Promoter Score?”)

The Value of a “Like” Measuring the value of social media activities is im-

portant and challenging. New approaches are being

developed all the time, and they have the potential

to aid our understanding of how social media cre-

ates value. One such metric that is popular among

digital marketers is the value of a “like” on social

media. This value is typically calculated by deter-

mining the average value of customers who are fans

on social media (in other words, the value of a cus-

tomer who publicly endorses your company). Then

you subtract the average value of customers who

are not fans on social media (in other words, the

value of a customer who is not publicly endorsing

your company). Of course, there are important dif-

ferences between fans/follows/“likes,” and so forth,

but our recommendations are deliberately broad to

accommodate use across many social media plat-

forms. In sum, the metric measures the simple

difference in value between two groups of custom-

ers: fans on social media versus nonfans.

Marketers seem to assume that the difference in

customer value between fans and nonfans is attrib-

utable to the company’s social media strategy. An

overwhelming majority of marketing managers in

our survey saw a link between their social media

spending and the value of a “like.” Syncapse, a

social media strategy firm, suggests that when as-

sessing the value of a Facebook fan, “marketers

must understand the measurable differences be-

tween users who have ‘liked’ or Fanned a brand

versus those who have not.”17 However useful this

is, it does not mean that the cause of the differ-

ences in users’ value is attributable to a company’s

social media strategy.

SHOULD YOU USE NET PROMOTER SCORE? Although the simplicity of net promoter score (NPS) is appealing, the metric has limited support from academics.

Marketers seem to assume that the difference in customer value between fans and nonfans is attributable to the company’s social media strategy.

Do you expect that simply monitoring your NPS will improve performance?

Advice: The NPS metric alone cannot fundamentally alter

performance. NPS advocates recommend that the metric be

used as part of a system to change company culture.

Are you attempting to change organizational culture to be

more customer-centric?

Advice: Implementing NPS or a similar metric as part of a

complete system may have value in shifting your

organization's culture. Consider how adopting a clear

metric would benefit your organization.

Advice: Consider why you think NPS

is the best approach. Other metrics may be more suitable.

Yes No

Yes No

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M A R K E T I N G

The reason that social media strategy shouldn’t

be seen as the driver of value difference between

fans and nonfans is because customers who are so-

cial media fans will differ from nonfans for reasons

unrelated to the company’s social media strategy.

For example, fans are probably more active on so-

cial media, more technologically literate, and

typically younger. Our experience suggests that

fans are often more favorable toward a brand to

start with than nonfans are. Indeed, this is proba-

bly what motivated them to affiliate in the first

place.

The difficulty here is attributing causation.

If consumers “like” a brand on Facebook because

of their previous favorable experience with the

brand, the company’s social media strategy may

have added little; it simply identified higher-value

customers, as opposed to increasing the value

of any customer. Since social media spending

probably didn’t cause the difference, the difference

in value between a customer who is a fan and a

customer who isn’t a fan shouldn’t be used as a

benchmark for marketing spending on social

media campaigns.

In addition to the confusion over causation,

“value” must be clearly defined in order to calculate

the value of a “like.” Marketers often measure

customer value based on revenue instead of

contribution; our research found that a majority of

marketers surveyed made this error. If a marketer is

trying to establish the relationship between social

media efforts and the value of customers, it is in-

correct and misleading to use “average sale price”18

to measure value. Since revenue ignores costs, such

a calculation overstates customer value.

Unmuddling the Value of a “Like” Managers shouldn’t automatically assume that differences in

value between two groups of customers were

caused by social media marketing activity. When

there are differences, managers need to investigate

whether they existed prior to the social media

marketing effort. Digital marketers can run fairly

simple controlled, randomized experiments to

understand the impact of their actions. For exam-

ple, to see how coupons offered on social media

can change behavior, marketers could assign

different coupons to different customer groups

randomly and then study the differences in behav-

ior. (See “Should You Use the Value of a “Like” as a

Metric?”)

Customer Lifetime Value Customer lifetime value (CLV), which is the present

value of cash flows from a customer relationship,

can help managers make decisions regarding invest-

ments in customer relationships.19 For example, a

marketer might use CLV to decide whether to spend

marketing dollars to acquire new customers or to

increase the retention rate of existing customers.

CLV can be difficult to calculate because it often re-

lies on the ability to predict future customer

retention rates.20 However, we think one major

source of confusion among marketers — whether

to include customer acquisition cost in the CLV

calculation — can be easily avoided. CLV is easier

to understand, and in our view more useful, if

marketers don’t subtract the acquisition cost from

their calculation of CLV before reporting it.21 To be

sure, customer acquisition costs are a major item

in marketing budgets. Such costs should affect de-

cisions as to whether to pursue prospective

customers. But this does not mean that acquisition

costs need to be subtracted from CLV before the

value of the customer is reported.

CLV is often used to measure the value of

SHOULD YOU USE THE VALUE OF A “LIKE” AS A METRIC? Social media spending should not be justified by an observed difference in customer value that may not have been caused by social media spending.

Are you using revenue to measure customer value?

Advice: Don't. Instead, also consider estimated costs attributable to serving the

customer to ensure you don't overvalue customers gained.

Are you using value of a "like" to help determine social media spending?

Advice: Don't. Differences in customer value exist independently of marketing efforts.

Advice: To understand social media marketing's impact, run

randomized experiments.

Yes No

Yes No

For all companies

SLOANREVIEW.MIT.EDU SPRING 2016 MIT SLOAN MANAGEMENT REVIEW 79

customers who have already been acquired. The ac-

quisit ion costs have therefore already b een

incurred. Even if the company made a mistake in

acquiring a customer and the acquisition costs ex-

ceeded the customer’s value, knowledge of this

cannot change the earlier acquisition decision. Ac-

quisition costs are “sunk” and should be ignored

when making forward-looking decisions.22

Many marketers persist in subtracting acquisi-

tion costs before reporting CLV, which results in

several ongoing problems. The majority of market-

ers we surveyed thought that customers with the

same value going forward had the same CLV. How-

ever, this is not true when acquisition costs are

subtracted from CLV before CLV is reported. A

highly profitable customer can appear to have the

same value as a less profitable customer if the highly

profitable customer cost more to acquire.

Most marketers we surveyed also thought that

you could calculate the financial value of a compa-

ny’s customers by adding up the individual CLVs.

However, this is not true if acquisition costs are

subtracted before reporting CLV. When subtracting

acquisition costs before reporting CLV, you do not

report the current value of the company’s custom-

ers but their value less acquisition cost. To see why

this matters, it helps to draw a parallel with other

(noncustomer) company assets. Imagine that a

company is selling an old machine. In this scenario,

the company’s managers would expect to receive

the machine’s current value, not the current value

less what the company paid to buy the machine

when new.

What’s more, when you subtract acquisition

cost from CLV before reporting it, the CLV is con-

tingent on other people’s choices. For example,

let’s assume that an acquisition campaign costs

$100 to target two customers, A and B. If the com-

pany only succeeds at acquiring customer A, then

the acquisition cost for that customer is the full

$100; if the company acquires both customers, the

$100 cost can be split ($50 each). Therefore, the

reported value of customer A will change signifi-

cantly based on extraneous factors that have

nothing to do with customer A; customer B’s deci-

sion to sign on (or not) impacts customer A’s

lifetime value. It doesn’t make sense to tie a cus-

tomer’s value to the marketer’s past success in

targeting other customers. (See “How Should You

Calculate Customer Lifetime Value?”)

Unmuddling CLV Marketers often use CLV to help them decide whom to target in acquisition cam-

paigns. To these marketers, we recommend basing

CLV on the value of the customer relationship —

not the value of the customer relationship less the

acquisition costs. You can still evaluate customer

acquisition campaigns without incorporating ac-

quisition costs into CLV. To do so, calculate the CLV

of a prospective customer. Then compare the CLV

of the prospective customer to her estimated acqui-

sition cost. All else being equal, the greater the

positive difference between the targeted customer’s

HOW SHOULD YOU CALCULATE CUSTOMER LIFETIME VALUE? When calculating customer lifetime value (CLV) to determine the value of a customer as an asset, subtracting acquisition costs can distort the picture.

CLV is easier to understand, and in our view more useful, if marketers don’t subtract the acquisition cost from their calculation of CLV before reporting it.

Are you interested in the value of your customers for forward-looking decisions?

Advice: Use CLV, but do not subtract customer acquisition

costs when calculating it.

Are you trying to assess whether certain potential

customers are worth acquiring?

Advice: Estimate CLV and compare this to the estimated acquisition cost per customer.

Advice: When historically reviewing marketing campaigns, compare CLV to acquisition costs,

but keep the metrics separate.

Yes No

Yes No

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M A R K E T I N G

CLV and that customer’s acquisition cost, the more

attractive the acquisition campaign.

Return on Investment Return on investment is a popular and potentially

important metric allowing for the comparison of

disparate investments.23 A critical requirement for

calculating ROI is knowing the net profit generated

by a specific investment decision. Most of the mar-

keters we surveyed suggested that it was enough to

know total profits and the investment to calculate

ROI. However, this is incorrect; to calculate ROI ac-

curately, you need to be able to estimate the fraction

of profits attributable to the investment. As it is

often hard to find the baseline — that is, what the

profit would be if the investment had not been

made — it can be difficult to calculate the incre-

mental profit.

What’s more, ROI can be manipulated by

cherry-picking the best projects: Being very selec-

tive might reduce total profits but increase the

average ROI. In order to maximize ROI, you would

invest only in the project with the highest return,

even though maximizing net profit would require

doing multiple projects. To illustrate, consider two

potential investments of equal size. The first one

has a ROI of 40%, the second a ROI of 30%. The

second investment is still highly profitable — just

not as attractive as the first. Making both invest-

ments would lead to a greater total profit, with an

average ROI of 35%. By contrast, choosing only the

higher-return project would mean lower total

profits, despite its 40% ROI. As logical as this

sounds, a large percentage of the marketing man-

agers we surveyed incorrectly said that choosing a

portfolio of the highest ROI investments was the

same thing as choosing the highest total profits.

We would argue that the biggest challenge with

ROI isn’t a technical deficiency but confusion over

how it is used. In the 2014 CMO Survey,24 20%

of respondents said they didn’t measure their mar-

keting ROI. However, the responses from top

marketers who said they did measure ROI were of

greater concern. Fully one-fifth of the top market-

ers said they measured ROI using customer surveys,

even though that’s not possible: Consumers don’t

have the data (such as marketing investments and

profits) to allow for ROI calculations. Another fifth

of the respondents said they measured ROI using

managerial judgment. This is also problematic be-

cause ROI is not subjective, but a metric with a

specific definition.

Our survey also confirmed widespread lack of

consensus over whether ROI is indeed a financial

metric: More than half of the marketers we sur-

veyed thought that ROI could be calculated using

nonfinancial marketing data. When marketers

resist using consistent definitions of measures such

as ROI, it makes it more difficult to persuade non-

mar ke t ing execut ives that claims re g arding

marketing’s impact are credible.

Unmuddling ROI Although ROI may not be a per- fect metric, it is valuable to the extent that it can

facilitate communication with nonmarketing col-

leagues.25 To communicate effectively, marketers

must use terms in ways that nonmarketers can un-

derstand. Thus, a marketer should not use “ROI” to

refer to every activity that has a successful outcome.

A campaign to create awareness may have a positive

ROI, for example, but marketers can’t prove this

simply by pointing to higher levels of awareness. In

order to calculate ROI, there must be a return (a

profit associated with the investment) and an invest-

ment. Unless you have both, you cannot calculate

ROI. (See “Are You Using ROI Correctly?”)

Clarifying the Meaning of Metrics If the marketing profession is serious about ad-

vancing the marketing discipline’s reputation for

ARE YOU USING ROI CORRECTLY? Using ROI as shorthand for any favorable marketing outcome limits marketing’s credibility.

Are you assessing the financial return on an investment?

Have you estimated the incremental profits created by

the investment?

Advice: Don't call it ROI.

Advice: Divide incremental profits by

the investment to calculate ROI.

Advice: Never use total profits to calculate ROI. First, subtract

profits that would have occurred without the investment.

Yes No

Yes No

SLOANREVIEW.MIT.EDU SPRING 2016 MIT SLOAN MANAGEMENT REVIEW 81

delivering results, marketers need to be prepared to

improve measurement. To the extent that metrics

are used in marketing, they are often used inconsis-

tently. (See “The Do’s and Don’ts of Common

Marketing Metrics.”) The first step in unmuddling

metrics is clarifying what the metrics represent and

how they can be used.

Neil T. Bendle is an assistant professor of marketing at Western University’s Ivey Business School in London, Ontario, Canada. Charan K. Bagga is a visiting assistant professor of marketing at Tulane University’s A.B. Freeman School of Business in New Orleans, Louisiana. Comment on this article at http://sloanreview.mit.edu/x/57307, or contact the authors at [email protected].

REFERENCES

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 Ap- proach,” 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 Mar- keting 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 Relation- ship,” Journal of Marketing 57, no. 3 (July 1993): 1-18; and R. Jacobson, “Distinguishing Among Competing Theories of the Market Share Effect,” Journal of Market- ing 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 Mar- keting 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 Prof- its,” New York Times Magazine, Sept. 13, 1970, 32-33, 122, 126; and R. Phillips, R.E. Freeman, and A.C. Wicks,

THE DO’S AND DON’TS OF COMMON MARKETING METRICS The chart below summarizes important points to remember when using five popular marketing metrics.

DON’T DO

Market Share • Use market share as an ultimate objective

• Focus on beating the competition rather than securing profits

• Consider power in the market

• Evaluate whether you have a network good

• Use sales volume to judge size

Net Promoter Score • Treat NPS as the “one number you need to know”

• Assume that NPS, the metric, has widespread academic support

• See value in simple metrics

• Consider if implementing NPS or a similar system would improve your organization’s customer focus

Value of a “Like” • Use revenue as a substitute for profit when calculating the value of a “like”

• Remember that fans probably differ from nonfans independent of your social media strategy

• Run experiments to value your marketing activity

Customer Lifetime Value • Subtract acquisition cost from customer lifetime value before reporting CLV

• Appreciate that customers are an asset

• Base CLV on the value of the customer relationship

Return on Investment • Misuse the term ROI (for example, don’t call an increase in awareness evidence of ROI)

• Use the ROI formula: The marketing investment and the return associated with the investment must be clearly spelled out in dollar terms

82 MIT SLOAN MANAGEMENT REVIEW SPRING 2016 SLOANREVIEW.MIT.EDU

M A R K E T I N G

“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. Col- lopy, “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 Busi- ness” (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 Perfor- mance,” 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 Con- sumer 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 exam- ple, 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 is- sues, see, respectively, J. Romero, R. van der Lans, and B. Wierenga, “A Partially Hidden Markov Model of Cus- tomer 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, “Cus- tomer Lifetime Value, Customer Profitability, and the Treatment of Acquisition Spending,” Journal of Manage- rial 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 Market- ing 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 Cam- paign, Customer, and Profitability” (New York: McGraw Hill, 2003).

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