9

Make It Credible: Convert Data to Monetary Value and Identify Intangible Measures

Rod Tidwell: Whatcha gonna do, Jerry?

Jerry Maguire: Show me the money!

Rod Tidwell: Unh! Congratulations, you’re still my agent.

JERRY MAGUIRE (1996) BY CAMERON CROWE

Global Engineering Company (GEC) is a major developer of low-power, high-definition (HD), and ultra-HD video compression and image processing solutions. The company produces system-on-chip (SoC) video chips and offers six different types of products to original design manufacturers and original equipment manufacturers nationwide through its direct sales force of 80 field salespeople. The company’s products are used in a variety of professional and consumer applications, which include IP (internet protocol) security cameras, automotive cameras, flying cameras, sports cameras, wearable cameras, and broadcast infrastructure solutions. Some of GEC’s target customers are GoPro, a leading maker of wearable sports cameras, and Ubiquiti Networks, a leading maker of IP security cameras. The field salespeople of GEC are responsible for both selling the products and providing professional services and technical support after customers’ purchases.

In the past year or so, however, Michael, the vice president of sales at GEC, has noticed some changes. While the company is still growing, the rate of growth has started to slow down. Meanwhile, many of the company’s competitors have grown at a much faster pace in this lucrative industry.

Another disturbing trend also draws his attention. GEC has been losing new business at an increasing rate. Finally, and this is the greatest concern for Michael, there are increasingly more complaints from customers about late orders, poor product quality, and lower levels of customer service quality than in the past. Michael is uncertain about how to improve the performance, so he decides to conduct some analyses.

Michael first reviews business records, and the data confirm his concerns. Specifically, the annual growth rate of GEC has dropped from 12 percent three years ago to 5 percent today, while the industry still grows at 10 percent annually. Similarly, both the number of contracts lost and the number of customer complaints doubled compared with the numbers three years ago. Additionally, the sales force turnover rate has increased from 10 percent per year to 30 percent per year.

His analyses also reveal the following:

1.   Many GEC managers have strong science and engineering backgrounds, and they are comfortable hiring marketing specialists and salespeople with similar capabilities and experiences. Their training focuses more on the technical features of the products offered by GEC rather than a discussion with the customer.

2.   Most customers are satisfied with GEC’s established products, but unhappy with the company’s new products because “they are too complex.” Customers also complained that they are unable to get technical support from GEC salespeople, their phone calls were “never” returned, and their service requests were “never” answered. Some customers were asking why GEC did not hire more salespeople.

3.   According to company sales reports, GEC salespeople have been working hard. Many salespeople complain that since the new products offered by GEC have become increasingly complex and there are strong demands from customers for technical support, they are struggling to balance providing personal selling and technical support services.

4.   Industry data show that major competitors such as Ambarella, Maxim Integrated, Texas Instruments, and NXP Semiconductors N.V. have created in-house customer support centers to provide technical support and coordinate service efforts. Other companies such as Infineon Technologies AG and STMicroelectronics have established national key account teams to provide better service to important customers.

Michael understands that he is facing a tough situation and feels like his platform is on fire. Therefore, he hires a performance consulting firm for help. The consulting firm uses a systematic approach to assess the situation, analyze causes, and design solutions. It has also developed tools and techniques for all stages of the performance improvement process. Working as partners with consultants from the firm, Michael and members from different departments of GEC implement a marketing performance improvement project. This project involves multiple solutions, which include an internal marketing program to educate employees on the importance of customer focus. Michael also creates a national key account team and a customer service center, and he modifies the employees’ performance evaluation criteria and reward scheme to reflect new priorities, as part of the efforts to address GEC’s marketing performance issues systemically.

The marketing performance improvement project generates encouraging results and closes the performance discrepancies across the board. Six months after implementing the solutions, sales revenues of GEC’s new products increase by 10 percent. Also, marketing data show that the number of contracts lost and the number of customer complaints are reduced by 30 percent and that the sales force turnover rate has been reduced by 20 percent. Michael is thrilled by the numbers and wants to place a monetary value on the outcomes before discussing the results with the CEO and other board members of GEC.

To ensure the credibility of the estimates, Michael understands that he needs to answer the question, “How much of this improvement is actually caused by the project?” Using suggestions from the consulting firm, Michael isolates the effects of the marketing performance project by utilizing estimations from participants, customers, and managers. This analysis follows the procedures introduced in Chapter 8 and increases the credibility of the estimations.

Michael is glad to see that the outcomes reflect improvements in multiple dimensions of marketing performance, including financial, activity, customer, and talent. All these dimensions are critical to GEC’s strategies and organizational goals. Recall the marketing performance FACTs model discussed in Chapter 3. However, he still wants to place a specific monetary value on the total contribution of this important marketing performance improvement project. After all, both the CEO and CFO care about value and return on investment. Michael is wondering how he can convert improvements, such as the reduced number of complaints and lower employee turnover rates, to monetary value. Additionally, he is wondering how to estimate the total costs to calculate the ROI of the marketing performance improvement project.

• • • 

The opening story illustrates an important trend, as executives and managers attempt to convert the hard-to-measure business outcomes of their programs to money. Across industries, executives, consciously and subconsciously, want marketers to show them the money.¹ To show the real money, marketers need to convert the improvement in impact measures that are attributable to the program (after isolating the effects of the program) to monetary values, which are then compared with program costs to calculate ROI. The monetary value is a way, if not the only way, for marketers to show executives the importance of business impact measures typically not converted to money. This represents the ultimate level in the five-level evaluation framework. In this chapter, we will demonstrate how marketers can develop monetary values, which can be used in the ROI calculation later.

Why Convert Data to Monetary Values?

It is not always clear to marketing managers why we need to convert business impact data to monetary values. After all, we can claim our marketing programs to be successful as long as we are able to demonstrate that the benefits created by our program exceed its costs, after isolating the effects properly. For example, an improvement in customer satisfaction, employee loyalty, product quality, or service quality could represent a significant benefit linked directly to a marketing program. However, this may not suffice for many executives, administrators, and sponsors, because they require actual monetary value corresponding to a marketing program. It is therefore in the interests of the marketing professionals to take the extra step of converting improvement to money.

Converting Improvement to Money Normalizes the Definition of Value

According to the FACTs framework described in Chapter 3, marketing performance has four important dimensions, reflecting the financial, activity, customer, and talent aspects of marketing outcomes. However, in the eyes of most executives, monetary value is still one of the primary criteria of success. Normalizing values from all dimensions into a common measure makes the process of resource allocation less difficult and defines value in a more impressive way.

Converting Improvement to Money Highlights the Contribution of Marketing

For some marketing programs, the business impact is more understandable and an easier way to highlight the contribution of marketing when it is stated in terms of monetary value. For example, consider the impact of a program aimed at improving an organization’s customer relationship management (CRM) system.² Since a CRM system involves many departments and employees, the marketing program is likely to have an impact on most parts of the organization. The best and least confusing way to understand the value of this marketing program is to convert the outcomes and performance, at all dimensions, to monetary values.

Converting Improvement to Money Clarifies the Cost Issues

With the drive to gain sustainable competitiveness and to improve the efficiency of marketing management, awareness of the costs related to processes and activities is essential. Based on our experience, marketing programs may benefit an organization either through increasing revenue or through cost reductions or cost avoidance. Therefore, it is essential to understand the cost of a problem and the payoff of the corresponding solutions. Also, clarifying cost issues associated with marketing performance issues is important for budgeting and organizational operations.

Five Key Steps in Converting Data to Money

Converting data to monetary values involves the following five steps:

1.   Focus on a unit of measure. First, we must define a unit of measure. The unit of measure can be a unit of product sold, one customer complaint resolved, one sales proposal submitted, or one error avoided. The unit of measure can also be time, such as the time to develop a new product, to deliver a product, or to process a customer request.

2.   Determine the value of each unit. The second step involves placing a value (V) on the unit identified in the first step. We will describe multiple techniques in this chapter and provide an array of approaches for making this conversion.

3.   Calculate the change in performance data. The third step of this approach involves calculating the change in marketing performance data. We label this incremental change as ∆, denoting that it is the performance improvement directly attributable to the marketing program, represented as the Level 4 business impact measure.

4.   Determine the annual amount of change. We then annualize the ∆ value and develop a value for the total change in the marketing performance data for one year (∆P). For most short-term solutions, we only use the first-year benefits, even when the marketing program produces benefits beyond one year. This practice ensures our estimation to be conservative and credible.

5.   Calculate the annual value of the improvement. As the fifth step, we calculate the total value of improvement by multiplying the annual performance change (∆P) by the unit value (V) for the complete focal group. We then compare this value for annual program benefits with the costs of the marketing program to calculate the ROI.³

We use an example to demonstrate how we may use the five-step process to convert data to monetary values. In our example, a trucking company developed a marketing program to address a customer satisfaction crisis, as the company was experiencing an excessive number of complaints caused by inadequate or improper deliveries. Six months after program implementation, the total monthly number of customer complaints had declined by 25. After isolating the effects and following the five-step approach, we are able to calculate the total monetary value of the marketing program to be $228,000. We show details of the steps in Box 9.1.

Methods to Convert Impact Measures to Money

The five steps to convert a business impact measure to monetary value are straightforward and easy to understand, but the challenge is to follow them properly in complex situations. Out of the five steps, many marketers find Step 2, determining the value, to be particularly challenging. In the following sections, we discuss a variety of techniques that can be used to determine value. These techniques range from standard monetary values to the use of conservative estimates.

Standard Monetary Values

The first technique is using standard value, which is a monetary value assigned to a unit of measurement acceptable to executives and key stakeholders. Often, standard values are the measures that matter to marketing and the organization, that reflect problems or improvement opportunities, and that correspond to one or more dimensions of marketing performance we discussed in the FACTs framework. In Table 9.1, we show a list of sales and marketing measures that are often calculated and reported as standard values.⁴ As you can see in the figure, some of these measures are related to financial performance (e.g., sales revenue and profit margin), customer performance (e.g., retention rate and churn rate), and activity performance (e.g., workload and inventories).

TABLE 9.1 Examples of standard values from sales and marketing

Many internal marketing programs focus on improving talent performance, measures of employee-related improvement. Examples of talent performance measures include time saved, productivity improved, and employee turnover rate reduced. There are two ways we may utilize the standard value technique to determine the value creation. First, we can use employees’ compensation, including salary and commission, to convert employee time to monetary value. For example, an internal marketing program implemented in a sales department saved an average of 74 minutes per day for a salesperson based on the estimates. Based on the average salary plus commission and bonus for a typical salesperson, the time of 74 minutes could be worth $31.25 per day, or $7,500 per year. The second way considers the fact that talent performance of employees may have profound effects on other dimensions of marketing performance such as financial or customer outcomes. For example, a marketing performance improvement project conducted by Sinotrac in China reduced the time an average salesperson spends in one retail store by 12 minutes. Because of this improvement, this salesperson is able to visit more stores and sell more merchandise, translating into $1,150 additional sales revenue for the client per year.

Using Historical Costs and Records

When standard values are not readily available, we have several alternative strategies for converting data to monetary values. One of them is using historical costs from records, which is a strategy that relies on identifying the appropriate records and tabulating the proper cost components for the item in question. Historical records can indicate the cost of a measure and the value of a unit of improvement. For example, historical data may show how much one customer complaint or 1 percent of employee turnover costs the organization. We can then use the historical costs to convert customer complaints and employee turnover reduction to monetary values.

Using Input from Internal and External Experts

When historical cost data are not available, we may consider inputs from experts on the marketing program to convert data items to monetary values. We can find internal experts in the departments in which the data originate. Internal experts are individuals who have knowledge of the situation and have the confidence of management. They must be willing to provide both the estimates and assumptions behind them. If we have reason to believe that the internal experts are biased regarding the measures or if the measures are not available, we can seek input from external experts. These external experts can be consultants, professionals, and suppliers in a particular area. For example, we may invite CRM experts to provide estimates on a marketing program addressing customer relationship issues.

Using Values from External Databases

For some measures, it may be appropriate to use the cost (or value) estimates based on the work and research of other individuals or institutions. This technique utilizes external databases that contain studies and research programs focusing on the cost of data items. The good news is that many databases include cost studies of data items related to marketing programs, and most are accessible on the internet. Data are available on the costs or value of customer complaints, customer lifetime value, brand equity, service quality, service failure, service recovery, new product failures, employee turnover, and even employee satisfaction. The challenge is to find a database with studies or research on a particular marketing program. Ideally, we will use data that originated from a similar setting in the same industry, but that is not always possible. Sometimes, data from other industries or organizations are appropriate and sufficient with potential adjustments to suit the focal marketing program.

Linking with Other Measures

If none of the standard values, records, experts, or external studies is available, we still have other feasible alternatives. One technique is known as linking with other measures. This method attempts to find a relationship between the focal measure and some other measures that can be easily converted to a monetary value. This technique involves first identifying existing relationships that show a strong correlation between one measure and another with a standard value and then estimating the monetary value of the focal measure indirectly but reliably. An example related to the talent performance of marketing outcomes is the negative correlation between job satisfaction and employee turnover. Suppose that after implementing an internal marketing program to enhance job satisfaction, we need to find a value to reflect changes in job satisfaction measures. Although a standard value for job satisfaction improvement is not available, we are aware of a predetermined relationship between increases in job satisfaction and reductions in turnover that directly link the two measures. Using standard data or external studies, we can determine the cost of turnover. Therefore, through the connection between turnover and job satisfaction, we can immediately convert a change in job satisfaction to a monetary value, or at least an approximate value.

Using Estimates from Customers, Participants, and Management

If none of the techniques we have introduced is available, as a last resort, we may rely on subjective estimates from customers and participants of internal marketing programs to convert the data to monetary value. This technique is appropriate when these individuals are capable of providing estimates of the cost (or value) of the unit of measure that has improved as a result of the marketing programs. To use this approach, it is important to provide customers and participants with clear instructions, along with examples of the type of information needed. The advantage of this approach is that the individuals, including both customers and participants, are most closely connected to the improvement and therefore may be able to provide the most reliable estimate of its value. Similar to isolating program effects, when we use subjective estimates to convert measures to monetary values, we need to make adjustments to reduce and control the error in those estimates.

In other situations, we may ask managers to review the estimates of customers, approve those of participants, and confirm, adjust, or reject those values. For example, a European pharmaceutical company designed a marketing program involving customer service representatives to reduce customer complaints. The program resulted in a reduction in complaints, but the company realized that it had to identify the value of a single customer complaint to determine the value of the improvement. Although customer service representatives knew certain issues surrounding customer complaints, their scope was limited, and their opinions might be biased. Therefore, the company asked its managers to provide the value. These managers had a broader perspective of the impact of a customer complaint, including the damage to the brand, and were able to provide estimates that were more accurate and reliable.

Guidelines for Selecting the Technique(s)

It is a blessing when we have so many techniques available, but it is a challenge to select one or more techniques appropriate for the situation and resources at hand. We have developed the following guidelines to help you with selecting a technique and finalizing the value. These guidelines come from our experiences with a variety of ROI evaluations. More detail on technique selection is available in the books and papers we’ve published.⁵

•   Choose a technique appropriate for the type of data.

•   Move from most accurate to least accurate.

•   Consider data source availability and time.

•   Use the source with the broadest perspective on the issue.

•   Use multiple techniques when feasible.

To Convert or Not to Convert Data to Monetary Values

To convert or not to convert, this is a decision that deserves marketers’ careful consideration at this step of the ROI Methodology. The assumption that each data item collected and linked to a marketing program can be and should be converted to monetary value is probably overly optimistic. It is especially dubious when highly subjective data, such as attitude change and perceived service quality improvement, are involved. This question posits potential risks for marketers. If the target audience and stakeholders sense that the estimates lack credibility, then they may find the whole process and the claimed contributions of our marketing programs questionable. To help marketers be better prepared to make this decision, we propose a four-stage test to deal with four important and sensitive issues. As illustrated in Figure 9.1, this test serves as a logical way to decide whether to convert data to monetary values or leave them as intangibles.

FIGURE 9.1 A four-stage test: to convert or not to convert

Identifying the Intangibles

In the ROI Methodology, we define intangibles as impact measures not converted to money because either the conversion would require too many resources, or the result would not be credible, or we choose not to convert the measures due to strategic reasons. Box 9.2 illustrates some typical examples from the vast number of possible intangibles in marketing.

The Importance of Intangibles

The way intangibles are defined may give people the impression that intangibles are not important. Unlike tangible assets, intangibles are invisible, difficult to quantify, and not tracked through traditional accounting practices. In contrast, tangible assets are required for business operations; they are readily visible, rigorously quantified, and routinely represented as line items on balance sheets. In reality, however, intangible assets are the key to competitive advantage and organizational success. As shown in Box 9.2, intangibles cover strategically important factors behind many well-known organizations’ success. A highly innovative company continually develops new products and creative services. An organization with a strong culture and committed employees can develop marketing effectiveness and customer loyalty. A company that fulfills its social responsibilities enjoys a favorable brand image and sustainable competitive advantage. Intangibles are not only increasingly important but also critical to organizations.

Some items in Box 9.2, such as customer satisfaction, are classic intangibles. The good news is that more data once regarded as intangible are now being converted to monetary values. Customer satisfaction is an example of this. Over a decade ago, few organizations knew how to estimate the monetary value of customer satisfaction. Now more firms have taken the extra step to link customer satisfaction directly to financial outcomes such as revenue, profit, and other measures. For some marketing programs, customer satisfaction has moved into the tangible category. Meanwhile, more executives recognize the importance of intangibles and invest in projects like green marketing and cause marketing, primarily for the intangibles. They intentionally include a string of intangibles on their scorecards, operating reports, key performance indicators, and other reporting systems, and highlight these intangibles to customers and stakeholders. For many organizations, intangibles have become the dominant investment in the business.

Measuring Intangible Benefits

As we discussed, in some marketing programs, intangibles are more important than monetary measures. Therefore, we should monitor and report these measures as part of the evaluation process. In practice, all marketing programs will produce intangible measures. We should also monitor and report them as supplemental evidence of value creation. Several approaches are available for measuring intangibles. If the intangibles are customer complaints and conflicts, we can count the numbers. Most intangibles, however, are not things that can be counted, examined, and seen in quantities, but scholars have developed a variety of measurement scales so that we can assign a quantitative value to almost any intangible. For example, to connect the intangibles to a marketing program, we may ask a simple question: To what extent did this marketing program influence each of these measures? A 5-point or 7-point scale can be used for collecting responses from customers, participants, or managers. Other approaches include connecting soft measures to hard measures and developing indexes of different values. More details of these approaches can be found in the literature.⁶