Marketing MATH ^TM

An Analytical Framework for the

Art of Marketing

by Linda Sharp, CMC and Mei Lin Fung
Copyright, 1998

Summary

Up to now, the best way to tell how well a marketing investment would pay off was to look into a crystal ball. In many companies, sales and marketing departments have been at war. This has resulted in sporadic tracking of the most obvious metric -- leads. Now just as automation systems are making lead tracking viable, eBusiness is changing how marketing is done. Now, there is a need to track not just leads, but brand awareness and customer relationships as well.

Marketing MATH provides a strategic yet practical perspective to determining the return on investment (ROI) in marketing. Brand Building Scenario Analysis and Customer Lifetime Value concepts are combined to allow marketers to perform simulations and cost/benefit analysis at a detailed, yet intuitive level. Using mathematics to model prospect awareness, customer acquisition, customer retention and loyalty provides insights during marketing planning and practical benefits in terms of metrics and indicators during implementation.

Marketing ROI: An Oxymoron?

Yes, up to now. There are several reasons. Marketing has been considered an art. And not held accountable. With the value of awareness and customer satisfaction hard to calculate, the only way marketing success could be measured was with lead generation. Here sales and marketing departments often battled over whose responsibility it was to qualify leads, let alone track them. And even when leads were tracked, financial recording and computer power were not adequate. Early system attempts did not make it easy.

That's all changed. With the Internet, Activity Based Costing and new enabling technologies, the tracking problem is being tackled. Sales and marketing automation systems have improved communication and coordination, and more leads and transaction costs are beginning to be tracked consistently.

eBusiness Driving Need to Track Relationships

While this is good, eBusiness is driving another change at warp speed. eBusiness is forcing companies to take either a commodity or relationship stance in marketing. Commodity sellers won't even need leads. Customers will find them easily on the Web, using the comparison shopping sites that are springing up daily. For those who do not plan to be in the commodity business, brand awareness and the customer relationship will be increasingly critical.

In this environment, where 1: 1 marketing reigns, measuring marketing by leads alone won't give an accurate picture of how well the marketing effort is working. A new approach to Marketing ROI is required. One that tracks the value of the customer relationship from acquisition to retention. One that people can effectively plan with and act upon without losing the Art of Marketing, in an avalanche of data.

Brand Building Scenarios

Geoffrey Moore¹ outlined strategies for expanding a brand beyond the early initial customer base. Now brand building scenario analysis allows marketers to take the next step and look at the viability of various strategies in advance of investment -- instead of rushing to tactics. They can consider the likely profit from strategies for brand building such as "Getting to Market First," "Repositioning the Competition," or "Redefining the Industry" and design cost-effective tactical programs to carry them out. The very process of defining the scenarios provides valuable insights. What does it take to increase the value of the customer relationship? And how will that affect the bottom line?

Virtual Test Marketing "A Must"

No one can store in their head, let alone evaluate, the full range of tactics and timing required to execute a successful marketing program. To build awareness, generate leads, and satisfy customers, companies need to be able to evaluate complex tactical programs.

Marketing ineffectively implemented can result in prospects and customers who are dissatisfied, annoyed or who feel manipulated. A successful marketing program involves far more than choosing a series of tactics at the customer acquisition phase. The customer lifecycle must be modeled, from the first encounter, through to the last, in terms of not only cost, but with defined stages of awareness, revenue opportunity and customer satisfaction.

In performing scenario analysis using a closed-loop mathematical model of marketing, sales, and customer care, marketers can do a "virtual" test market of their strategies to build brand equity, market share, and customer share-the ultimate bottom line of marketing.


Bringing the Discipline of Mathematics and Finance to the Art of Marketing

By defining specific stages of the customer lifecycle in terms of Awareness, Lead Quality, and Customer Satisfaction, we are able to provide an analytical framework for evaluating strategy. The Marketing MATH framework also helps marketers define and address practical problems faced day-to-day by businesses:

• How to attract prospects most likely to become very satisfied, profitable customers
• Where to find a win/win profitable position with existing customer relationships
• When to tell someone they are no longer wanted as a customer

Using the concept of Customer Lifetime Value, ² it is possible to derive the Net Profit from the stream of customer purchases over the lifetime of that customer. The net profit will consist of revenues less cost of goods and services, less the customer relationship enhancing activities that are performed to keep the customer loyal. By defining the net profitability of a customer, we can balance the cost of customer acquisition against customer contribution to profits, and determine how much is the right amount to spend to acquire a customer in any customer segment as well as the amount to spend to keep them satisfied. The profit from satisfied customers making a steady stream of repeat purchases is more likely to be greater than the profit from a customer who only makes a single purchase.

Metrics, a Valuable By-product

The stages defined during planning also provide a forecast of what to expect during implementation. Measuring actual results against the forecast metrics allows marketers to drive intelligently into the new millenium, with antennae tuned to the leading indicators.

In summary, we have found that the Marketing MATH framework provides a valuable perspective from which to value the strategies that experienced marketers intuitively recommend. The modeling and simulation process provide many valuable insights and metrics for implementation.

Reference

1. Geoffrey Moore Crossing the Chasm Reprint 1995, Harper Business

2. For a complete description of Customer Lifetime Value, look at Strategic Database Marketing 1996, Arthur M. Hughes, Probusiness Publishing Co., Chicago. The concept is widely used in consumer marketing, for example, in financial services and the retail industry.

Authors' Background

STRATIX Marketing MATH™ has been developed by Mei Lin Fung and Linda Sharp in a strategic alliance between their two companies, MLF Associates, Inc. and STRATIX. Quantification comes naturally to Fung and Sharp. Both are mathematicians turned marketers. Fung has concentrated more in the sales and finance arena; Sharp, in marketing and market research. Creating an analytical framework that reflects a new way of thinking about marketing math was a logical step for them, one that took advantage of, and integrated their skill sets.

Mei Lin Fung

Drawing upon her expertise in scenario planning, simulation and sales force automation, Mei Lin Fung is the STRATIX Marketing MATH designer. She is the subject matter expert for sales and finance. With this project Fung is realizing a career long goal to integrate sales and marketing in a meaningful way.

Fung is principal of MLF Associates, Inc. Her consulting assignments have covered Marketing Automation, Decision Support Reporting, Marketing Business Planning and Alliance Building. Clients have ranged from start up to Fortune 500, all have been innovators in developing and using technology.

She has held Sales Finance and Marketing front-line positions at Intel and Oracle. She was Director of Business Planning for Oracle's US Indirect Sales Channels. At Oracle she was a key player in the setup and development of Oracle's pioneering Telesales and Telemarketing Division, which revolutionized the way business software is sold today. While at Intel, she specialized in Sales Forecasting: International and Distribution Channel. She underwent apprenticeship in Scenario Analysis working at Shell Australia

Mei Lin earned the degrees of MS (Management) from MIT and BS (Honors) in Mathematics from the Australian National University. At MIT, she studied under Fischer Black and future Economics Nobel prize winners: Franco Modigliani and Robert Merton.

Linda Sharp, CMC

Sharp is President of STRATIX. She is a nationally recognized expert in marketing strategy, strategic alliances, brand building, strategic positioning, targeting research, market action planning/implementation, and project management. Considering her conceptual skills, not surprisingly, she holds a BS in mathematics from Oregon State University with a focus on abstract algebra. She is a Certified Management Consultant (CMC).

Over the last 25 years in her own marketing firms, she has worked across the breadth of industry, but with special focus on information technology, energy, and environmental industries and their convergence. Clients in these sectors have included AT&T, AMD, EPRI, Chevron, Brown and Caldwell, Grace Sierra, and the environmental practice of Coopers & Lybrand. A reoccurring theme for her has been to help companies through the throes of massive change. She has done so in the electric, railroad, and telecommunications industries-and now in marketing.