How to better spend your marketing budget

The new marketing metrics that are giving customer-focus businesses an unfair advantage.

How to better spend your marketing budget

There is an important area of business that is going through a significant evolution in its effectiveness - yet for some reason, very few people are talking about it.

Marketing - long seen as the useless department where 'creative-types' spend their days drinking strong cocktails and wasting the company's money on silly thinks like ads 'that nobody really cares about' and poor-quality, branded pens - is getting an exciting scientific makeover.

In recent years the holy grail of marketing metrics became the much-lauded Net Promotor Score (NPS).

The NPS is a measure that gauges how consistently a firm turns customers into advocates, by tracking and analyzing three segments: (1) promoters, customers who are so pleased with their experience that they recommend your brand to others; (2) passives, customers who feel they got what they paid for but nothing more and who are not loyal assets with lasting value; and (3) detractors, customers who are disappointed with their experience and harm the firm’s growth and reputation.

Simple maths here: Subtract the number of detractors from the number of promotors, while ignoring the passives and you get your Net Promotor Score.

However - if only accurately assessing the quality of your customers and your performance in servicing them were so easy.

By itself, the NPS metric has some serious flaws

Even though a lot of companies place a lot of value on their Net Promotor Score - there are a number of serious problems with the measure; it's easily manipulated, it doesn't actually tell you anything of value, it's backward-looking, it relies on the reliability and honesty of your sample audience, it gives you no indication of what needs to be fixed to improve.

It's overused and a lot of brands that are frankly shit at customer service - are able to somehow fool themselves into believing that they are less shit thanks to the metric.

FFS - Telkom probably has a NPS of 63 which they get excited about.

Which is unfortunate because the biggest leap forward that marketing has ever had was the NPS metric that could for the first time, help to convince accountants (the gatekeepers who sign off marketing budgets) that the company's marketing efforts were actually worthwhile.

So the founders of the NPS went back to the drawing board - and have now come up with Net Promotor 3.0.

The dawn of accounting-based marketing metrics

Earned growth is the accounting-based counterpart to NPS that aims to provide a 'clear, data-driven connection between customer success, repeat and expanded purchases, word-of-mouth recommendations, a positive company culture, and business results.' [Stay with me here]

A company's earned growth rate measures the revenue growth generated by returning customers and their referrals.

Warby Parker, the direct-to-consumer pioneer in prescription eyeglasses, earns almost 90% of its new customers through referrals.

How to calculate earn growth with new customer-centric accounting

Earned growth has two elements. The first is the back-for-more component captured by a battle-tested statistic called net revenue retention (NRR), which is used in several industries. Once you have organized revenues by customer, you can determine your NRR. Simply tally this year’s revenues from customers who were with you last year, divide that amount by last year’s total revenues, and express that figure as a percentage.
The second component is earned new customers (ENC). It is the percentage of spending from new customers you’ve earned through referrals (as opposed to bought through promotional channels). This component will take a bit more effort because firms must ascertain why new customers have come on board.  
The sooner you have a reasonable estimate of revenues from ENC, you can better focus your customer acquisition investments—and justify more investment in delighting current customers. Firms today undervalue referrals. They treat them as icing on the cake rather than an essential (perhaps the most essential) ingredient for sustainable growth.

Besides undervaluing their current customers, marketers also tend to be completely besotted with strategies to try acquire new customers through traditional and digital promotions.

These strategies are increasingly becoming way too expensive and in many cases are not the best way to go about improving the performance of the business.

The promise being offered by Net Promotor 3.0 is a break away from actioning the wrong marketing activity.

With an intense focus on customers, and the ability to measure how well its products and services are resonating with them, brands are far more quipped to succeed by targeting the right people in the right way. Saving money; amplifying impact.

A huge opportunity to upgrade the business dashboard

Almost universally companies value the wrong metrics.

Simply tracking revenue, profitability and market share doesn't give you any indication of the future health of the underlying business.

Transforming a business' metrics of success towards the measuring of the health of the relationships that it has with its customers is of far great use to better strategy design and decision-making.

Now what?

Now is the time to upgrade your marketing dashboard and better spend your marketing budget based on more accurate and relevant metrics.

As a strategic advisor I have done this for quite a few companies over the years - I would be more than happy to offer advice and guidance as to how to do it and link it to a relevant growth strategy. Feel free to get in touch to chat about it.


More:

A new lens on marketing
Things have changed - marketing’s time is now.
Net Promoter 3.0
Since its introduction, in 2003, the Net Promoter System, which measures how consistently brands turn customers into advocates, has become the predominant customer success framework. But as its popularity grew, NPS started to be gamed and misused in ways that hurt its credibility. Unaudited, self-re…
Winning on Purpose: The Unbeatable Strategy of Loving Customers: Reichheld, Fred, Darnell, Darci, Burns, Maureen: 9781647821784: Amazon.com: Books
Winning on Purpose: The Unbeatable Strategy of Loving Customers [Reichheld, Fred, Darnell, Darci, Burns, Maureen] on Amazon.com. *FREE* shipping on qualifying offers. Winning on Purpose: The Unbeatable Strategy of Loving Customers
Are You Undervaluing Your Customers?
Leaders recognize that they should manage their businesses to maximize the value of the customer base. But too often, earnings pressures result in cost-cutting measures that hurt customers. Loyalty-leading companies operate differently. They create systems for measuring customer value and invest in…
The Dubious Management Fad Sweeping Corporate America
NPS—or net promoter score—is a measure of customer satisfaction that has developed a cultlike following among CEOs. An increasing number of companies use it to develop new products and assign bonuses. It also may be misleading.