Thomas Davenport is one of the best know voices in the field of business analytics. He has a book with Jinho Kim which discusses how individual business people can best manage their work in a world where analytics are a key part of many business strategies. The aim of the book is to enable managers and other people engaging with “quants” to best use the talents of the quants. To help create quantative analyse that is rigorous but also connected to business needs.
They map out their approach to quantative analysis in three stages. (This encompasses a total of six steps, I’ll concentrate on the stages, to avoid confusion between steps and stages). The first stage is Framing the Problem which includes problem recognition – why are we trying to do something? — and a review of previous findings – what do we already know?
The next stage is Solving the Problem – the actual analysis. They are keen to emphasize not to jump straight into trying to solve the problem. If you don’t know why you are doing the analysis, or what you already know, any analysis is likely to be highly ineffectual. The actual analysis includes choosing the model, data collection, and analysing the data using the chosen model. One of the strengths of the book is the numerous examples it gives to help the reader understand what is going on at each stage.
I was particularly pleased about the emphasis the authors placed on the final stage. They say, and I agree, that Communicating and Acting on the Results is just as important as the analysis. It isn’t enough to do some analysis; the analysis has to change an action to be worthwhile from a business perspective. Results presentation and generating action are key to success. Analysis without proper communication of the findings is a waste of time — it is great to see such major figures in business analytics emphasizing this point.
Read: Thomas H. Davenport and Jinho Kim (2013) Keeping Up with the Quants: Your Guide to Understanding and Using Analytics, Harvard Business Review Press
I recently published a short piece for WARC Best Practice on “How to set marketing metrics effectively”. The basic idea behind the piece is an explanation of how to decide upon what marketing metrics to use. This work introduces a new acronym that I’ve produced called the WAITA model. Hopefully this is easy to remember as the WAITA model, just like a server in a restaurant, helps you decide what you need.
The WAITA model covers five things to think about:
1) Who the metric is designed to help. Specifically, who is the person making a decision that the metric will be reported to. For example, a junior marketer will probably need the metric at a much lower level of granularity than a CMO.
2) The assumptions behind the metric. To use a metric effectively you must know what it is telling you, without knowing the assumptions you really can’t know what it means.
3) The ingredients, this includes the sources of data. Many of problem is uncovered by looking at where the data is coming from. This also includes the formula. “One should always expect to see the formula for a given metric being discussed. If the formula is not clearly documented ask for it. If the presenter can’t quickly access the formula or shows signs of not understanding the formula any recommendations cannot be well supported.” (Bendle, 2016).
4) The theory behind the idea. A number without any theory about what it means is a bit meaningless. We generally are looking for causal links — this metric is going up because of something else, i.e. good performance. Is this theory reasonable?
5) Finally, what actions can I take once I know the metric? A metric that doesn’t influence an action is a bit of waste of everyone’s time.
Hopefully the WAITA model will help people choose better metrics.
Read: Neil Bendle (2016) How to set marketing metrics effectively, WARC Best Practice, https://www.warc.com/Content/News/Setting_effective_marketing_metrics.content?ID=bb024f5d-b4ff-495d-a2a4-fd6dbe0a2c54&q=
It is hard to spend any time at a business school without hearing the phrase best practice. We teach students best practice, junior professors seek hints from senior folk on best practice, even schools regularly go through bouts of benchmarking to see if they are adopting best practice. Best practice essentially is something that gets the most out of what the school has, e.g., financial resources, time, students, staff.
One problem is that, if we are trying to do different things, my best resource allocation is likely to be different to yours. Thus, benchmarking may merely report on strategic decisions, for example to invest in staff not the building. In such cases benchmarking whether the building is best in class seems a bit pointless. The building is worse than some others because the strategic decision was made to allow it to be.
Another problem with a lot of benchmarking is that the idea of best practice is a pretty nebulous one even after correcting for the school’s strategic decisions. The target, best practice, is constantly moving when competitors take action. Indeed whenever you take action yourself you change the make up of the market itself so maybe the prior best practice you were aiming to emulate is no long best practice in the new market you have just helped create.
David Stewart and Robert Winsor (2016) make this point in considering the changing nature of marketing. They discuss the Red Queen hypothesis; which is based upon the Red Queen in Alice’s Wonderland who says that in order to stay still (compared to everything else) you must constantly keep moving. According to Stewart and Winsor: “… the Red Queen hypothesis condemns any given marketing activity or strategy to a limited life span over which it can be effectively leveraged.” (Stewart and Winsor, 2016, page 255). They tie this thinking back to best practice saying “…it is largely unrealistic to seek standardised solutions or “best practice” in marketing strategy. In marketing, definitions of competitive success must be bounded within highly unique contexts, and are typically based upon transitory, evolving and relative strategies.” (Stewart and Winsor, 2016, page 255).
The basic message is that you should keep trying to improve but will never have the comfort of achieving best practice.
Read: David W. Stewart and Robert D. Winsor, 2016, Marketing Organization and Accountability, In Accountable Marketing: Linking Marketing Actions to Financial Performance, Edited by David W. Stewart and Craig T. Gugel, Routledge, MASB
Roger Sinclair shows the value of experience when he surveys the history of reporting on brands. He describes a time when firms would add brand values to their balance sheet. The challenge was there was no recognized method for doing this so firms just used whatever method they fancied. That lack of agreement on method to use meant it seemed like firms were just trying to mislead investors. This led to the issuance of “a “cease and desist” order” (Sinclair, 2016, page 168) in the UK and others countries followed suit.
Sinclair clearly has sympathy with the ultimate goal of those who were told to cease and desist. He, correctly, notes that market value has become increasingly detached from the values in financial accounting statements. In essence, it is hard to see why anyone would pay too much attention to the financial statements given a lot of the more important details about the firm’s assets aren’t entered onto them.
He also points out the obvious problem at the moment that although brands mostly aren’t classed as assets, sometimes they are — and this has nothing to do with their value. A brand is added to a balance sheet when the brand is acquired. Thus, an acquired brand is recorded but a brand of exactly the same value that was internally generated is not. My experience suggests accountants see the problem with this weird double standard — many just think allowing internally generated brand values to be recorded will be a worse problem.
Even when brand values are recorded they tend to only be adjusted down, if values increase they stay the same on the balance sheet. Sinclair suggests that there is a perfectly good accounting procedure to increase the value of brands when they go up — accretion. (“The term accretion is the opposite of impairment“, Sinclair, 2016, page 174). Again accountants don’t tend to like increasing values but not increasing the value of strengthening does mean that the recorded brand values can become increasingly meaningless over time.
The sides are quite a way apart on balance sheet recognition but it is a great debate to have.
Read: Roger Sinclair, 2016, Reporting on Brands, In Accountable Marketing: Linking Marketing Actions to Financial Performance, Edited by David W. Stewart and Craig T. Gugel, Routledge, MASB
Marc Fischer explains common methods of brand valuation. One of the problems he highlights is that there are so many methods — different companies have their own proprietary valuation systems. He groups these into three main approaches; a cost-based approach, a market-based approach and an income/DCF-based approach.
A cost-based approach determines the value of a brand according to its inputs. When it costs more to create then the brand is more valuable. “While cost-based measures are attractive due to the objective and easy collection of data, they are heavily criticized for their theoretical weakness.” (Fischer, 2016, page 187). The problem is that there is little reason to think that what it cost to create a brand is a good proxy of brand value.
A market-based approach suggests that what people will pay is the value of the brand. “Unfortunately, there does not exist a liquid market of brand transactions” (Fischer, 2016, page 187). In essence the market-based approach is theoretically better but very hard to deploy as we don’t really have many market values to use for comparison.
An income/DCF-based approach values a brand based upon a projected stream of cashflows that arose because of the brand. Again this is great in theory but challenging to do in practice. Even if you can accurately project the future cashflows of a firm how do you decide what percentage of the cashflows will arise only because of the brand? “Major concerns exist about subjectivity and uncertainty”. (Fischer, 2016, page 187).
After outlining the problem Fischer offers his own valuation system. No system is perfect but with so many people working on valuations let us hope that they continue to improve.
Read: Marc Fischer, 2016, Brand Valuation in Accordance with GAAP and Legal Requirements, In Accountable Marketing: Linking Marketing Actions to Financial Performance, Edited by David W. Stewart and Craig T. Gugel, Routledge, MASB
Jim Meier, (an executive at MillerCoors), is an expert on getting marketing and finance to work together. He has written a fascinating chapter on the problems of doing this. The portrayal of marketers through the eyes of finance people is amusing, if sadly true. Marketing is seen as being “..fraught with subjectivity, murkiness, and fluffiness” (Meier, 2016, page 152). Meier worries that what marketers measure is often quite divorced from financial outcomes. Even if the measures used are useful, “the trail goes cold before it reaches a true financial destination” (Meier, 2016, page 154). In return finance people are seen as having a “lack of understanding of what truly matters” (Meier, 2016, page 153).
After outlining the problems Meier explains what actions were taken at MillerCoors. One idea was seeding finance people throughout the organization. Allowing these distributed finance staff, “mini-CFOs”, a chance to better understand what will help other disciplines perform their roles. MillerCoors is even examining the possibility of valuing brands periodically to better highlight the effect of decisions on these hard to measure intangible assets. These assets are crucial to the success of a firm like MillerCoors but can be missed if one concentrates only on numbers that get reported in company financial accounts.
To be clear it isn’t just finance people that need to change. For marketers understand and influence finance decisions “does necessitate that the organization take steps to “financialize the marketers” but not to an extreme in which they are converted into de facto accountants.” (Meier, 2016, pager 163). The point is a good one, to influence finance decisions it is not enough to plead for finance people to understand marketing, marketers need to try to understand finance. It is a tough challenge for the discipline but one that I think/hope will be very worthwhile.
Read: James Meier, 2016, Creating a Partnership Between Marketing and Finance, In Accountable Marketing: Linking Marketing Actions to Financial Performance, Edited by David W. Stewart and Craig T. Gugel, Routledge, MASB
V Kumar (the editor of the Journal of Marketing) and student Sarang Sunder have undertaken a review of the use, and potential use, of Customer Lifetime Value (CLV) in the Consumer Packaged Goods (CPG) industry. They talk about the problems that CPG marketers have when attempting to focus on their customers. The firms need to know, “… what is the value of a customer? How can it be measured? Also, how does [CLV] apply to the CPG industry?” (Kumar and Sunder, 2016, page 69).
The authors outline a number of different ways that have been used to assess customer value. All have challenges, for instance, Share of Wallet, Tenure, or Past Customer Value. They argue that CLV, given it is forward looking, has benefits over other “metrics” that assess merely historic data, as historic data shows what the customer has contributed not what they will contribute.
The major challenge in the CPG industry is the lack of contracts. CLV is more easily applied to cell phone contracts, cable bills, and other regular contractual and pseudo contractual relationships. In CPG industries it is often hard to know if a customer is still a customer. If the customer didn’t buy dishwasher detergent this week have they ceased to be a customer of their regular brand or have they simply got enough detergent already at home? Additional complications, such as customers buying competing products on the same shopping trip provide further methodological challenges for those estimating CLV in the CPG industries.
I particularly valued the author’s clarity over the forward looking nature of CLV. This means that only “future marketing costs” matter. “Marketing costs refer to the costs of campaigns, in store promotions, coupons, deals, and other discounts that are provided to enhance relationships, and encourage customers to make purchases with the focal brand.” (Kumar and Sundar, 2016, page 72).
CLV can be a helpful way of considering customer value. The CPG industry is one where CLV has notable challenges so it is useful to have advice on the application of CLV to this industry.
Read: “Customer Lifetime Value and Its Relevance to the Consumer Packaged Goods Industry” by V. Kumar, and Sarang Sunder, in Accountable Marketing: Linking Marketing Actions to Financial Performance, 2016, Routledge, MASB
One of marketing’s greatest challenges is that the benefits of marketing activities are often long term. Such long term benefits can be very tough to measure especially when lots of other activity is happening at the same time. For an analogy think about eating more vegetables, this is likely to be good for your health but the effects are uncertain and long term. Plenty of people don’t eat enough vegetables because the benefits are hard to assess yet the nasty taste of Brussel Sprouts is very easily assessed. Marketers thus have an interest in providing evidence of the long term benefits of their work. Dominque Hanssens of UCLA has put together a review of the evidence for the long term impact of a specific type of marketing — advertising. He notes six effects broken into two broad types of three effects.
“The first three – immediate effects, carryover effects, and purchase reinforcement – are primarily a result of consumers’ response to advertising and the product. The remaining three – feedback effect, decision rules, and competitive reactions – depend on corporate behavior, specifically organizational learning and the development of better advertising and marketing practices.” (Hanssens, 2016, page 97).
Consumer response is what one might typically think of as the impact of advertising. Immediate effects are the most obvious result of adverting. Consumers see an advertisement and buy. Carryover effects are simply effects that happen later. Purchase reinforcement helps retain customers.
Perhaps less obvious is the impact on corporate behavior. The feedback effect, raises advertising spending in the future because of current success which can be of benefit to the firm. (It is the equivalent of feeling better from eating your vegetables and so eating more vegetables). Decision rules are the impact of advertising on other elements of the marketing mix, the benefit the firm gains from its advertising that allow it to, for example, reduce price promotions. The final factor is competitive reactions, sometimes advertisers gain from competitor reactions, e.g. increased advertising, which enhance the category, e.g., “oh yes I must buy some detergent”. This can help all players in the industry.
Advertising’s impact goes well beyond its simple immediate effect. If marketers are to make better informed decisions about advertising spending we need a better idea of its full effects. Hanssens helps to provide more detail on this.
Read: “What is Known About the Long Term Impact of Advertising” by Dominque M. Hanssens in Accountable Marketing: Linking Marketing Actions to Financial Performance, 2016, Routledge, MASB
A major problem in marketing is that one often has only a general idea of what another marketer is speaking about. “Unfortunately, marketing still does not have that commonality of terminology” (Farris, Reibstein, and Scheller, 2016, page 46).
A marketer will talk of loyalty and we know that this is a good thing but what precisely they mean is often unclear. Do they mean repeat purchases? (These may be driven largely by availability). Do they mean a positive attitude towards the brand? (Which may have no observable effect). Or even willingness to recommend? (The recommendations may never be listened to).
What marketing lacks is a shared language. We may all be sharing interesting points but if the listener isn’t sure what exactly is being said it is hard for learning to take place. This leads to the conclusion that marketing needs is a common language. A dictionary where you can look up the definition of terms. You may not agree with a marketing colleague, but if they use a common language you at least know what they mean.
MASB have taken on the Common Marketing Language Dictionary project to supply a shared resource of definitions. They are providing definitions to common marketing terms, having started with relatively uncontroversial ones a few years back they are now progressing onto more challenging tasks. They are concentrating on operational definitions and not concepts or constructs. The operational definitions are at a more concrete level, they can be measured, whereas constructs are more general ideas at a higher level. Thus, loyalty will not have an operational definition but repeat purchase rate can have. When a marketer talks of loyalty one can ask, how do you plan to measure it? If they say repurchase rate, you will know what they mean.
To my mind this is critical work. MASB still have to “convince editors and reviewers of academic journals and business publications to refer to these dictionaries” (Farris, Reibstein, and Scheller, 2016). When I review I plan to argue for commonly used definitions.
Read: “Marketing’s Search For A Common Language” by Paul Farris, David J. Reibstein, and Karen Scheller, in Accountable Marketing: Linking Marketing Actions to Financial Performance, 2016, Routledge, MASB
Charles Duhigg’s book are always entertaining. The central thesis make me dubious but the stories are full of interesting observations. This is true of Smarter, Faster, Better.
I’m not a fan of some of the literature at the basis of the book so it would be a bit tough for Duhigg to fashion something that appealed to me from it. The stories however nicely illustrate a key points. The discussion of the making of Frozen helps show how the film got turned round into the megahit that it is today. The big changes in direction also may explain some of the puzzling plot twists that didn’t really seem to be properly foreshadowed. (That said I found the story of the doomed airline a bit much, I didn’t need to hear quite so much about it).
He has some interesting suggestions. He describes how “team leaders at Google make checkmarks next to people’s names each time they speak and won’t end a meeting until those checks are roughly equal.” (Duhigg, 2016, page 70). I think this advice could be useful, if you have a problem with some people always dominating discussions. That said there are obvious problems if team members really have nothing to say. You wait for them to make some irrelevant comments. Furthermore, some people are less talkative than others naturally and may feel nervous about being made to speak. Forcing them to say something for the sake of it seems a bit much.
The general point is that I’m all for good ideas to try, we can definitely be inspired by what others do well. That said people and teams differ. What works for you in one situation, what works for Google, won’t necessarily work for you in another situation.
Why not read Duhigg for fun stores and some ideas of things to try. That said I’m yet to be convinced there are secrets to being productive that you can apply off the shelf.
Read: Charles Duhigg, 2016, Smarter, Faster, Better: The Secrets to being Productive in Life and Business, Doubleday