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MANAGEMENT STRATEGY MEASUREMENT MANAGEMENT ACCOUNTING GUIDELINE Evaluating the Effectiveness of Internet Marketing Initiatives By Marc J. Epstein and Kristi Yuthas Published byThe Society of ManagementAccountants of Canada,theAmerican Management Accountants.PublicAccountants andThe Chartered Institute of NOTICE TO READERS The material contained in the ManagementAccounting GuidelinE evaluating the Effectiveness of Internet Marketing isstiative designed to provide illustrative information with respect to the subject matter covered.It does not establish standards or preferred practices.This material has not been considered or acted upon by any senior or technical committees or the board of directors of either theAICPA,CIMA orThe Society of ManagementAccountants of Canada and does not represent an official opinion or position of either theAICPA,CIMA orThe Society of ManagementAccountants of Canada. Copyright © 2007 byThe Society of ManagementAccountants of Canada (CMA Canada),theAmerican Institute of Certified PublicAccountants,Inc.(AICPA) andThe Chartered Institute of ManagementAccountants (CIMA). All Rights Reserved. No part of this publication may be reproduced,stored in a retrieval system or transmitted,in any form or by any means,without the prior written consent of the publisher or a licence fromThe Canadian Copyright LicensingAgency (Access Copyright). For anAccess Copyright Licence,visit www.accesscopyright.ca or call toll free to 1-800-893-5777. ISBN:1-55302-196-7 MEASUREMENT EVALUATINGTHE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES 1.INTRODUCTION organization’s name appear at the top Internet marketing (IM),or online of the list when a customer searches the Internet for a particular product marketing,means using the Internet to or service.In addition to these basics, market and sell goods and services. A great deal of IM activity is directed towardternet marketing can include a range driving customers to an organization’s of other activities,such as marketing through online games,mobile phones, website,where they are encouraged or direct response television broadcasts. to make purchases online or through another channel.But IM encompasses a And IM efforts can be directed not only to customers,but also to employees, broad and growing range of strategies investors,and other stakeholders (i.e. for interacting online with customers trading partners,stockholders,media and and with other stakeholders.The most common IM activities include:preparing public interest groups). an organization’s website,placing IM is advancing rapidly.Both producers advertisements on the web,sending and consumers gain new capabilities email messages,and engaging in“search every day as technology marches forward engine marketing” – efforts to have the and companies rush to create innovative CSUNMTMENRYS EXECUTIVE Section Page 1. INTRODUCTION 3 Though there have been many calls by corporate 2. PRIOR APPROACHES and academic leaders for the measurement of TOPERFORMANCE MEASUREMENT 6 payoffs of Internet marketing,there has been 3. BUILDING A FINANCIAL little developed that provides managers with the PERFORMANCE PAYOFF MODEL FOR INTERNET MARKETING 8 guidance they need to evaluate Internet marketing 4. THE INTERNET MARKETING success.It is no longer acceptable to make these FINANCIAL PERFORMANCE expenditures without the rigorous analysis PAYOFF MODEL IN DEPTH: necessary to prove success and to ignore the COMPONENTS AND METRICS 17 5. IMPLEMENTING THE FINANCIAL analysis in formal ROI calculations.It is also PERFORMANCE PAYOFF MODEL: unacceptable to continue to approve these A COMPREHENSIVE EXAMPLE 30 expenditures without formal evaluations of past 6. CONCLUSION 37 successes and failures. 7. BIBLIOGRAPHY 38 This guideline provides both measures and a management control framework for implementation of Internet marketing initiatives and develops tools and techniques that are appropriate for measuring the financial returns.It also provides tools and techniques for improved planning and control (evaluation) of Internet marketing expenditures. 3 MANAGEMENT STRATEGY value offerings.Internet advertising alone brings in demonstrate financial returns,these marketers MEASUREMENT $12 billion in revenue,and the industry continues have (a) gained power in securing resources and to grow every month. And the numbers are (b) improved their capacity to effectively allocate growing so rapidly that reliable data is difficult tthose resources. obtain.The total spending on Internet advertising has,however,led to a decrease in advertising Importance of Measuring IM Payoffs spending in other media.Some say Internet This Guideline combines best practices from advertising is increasing at a 40% annual rate and marketing,e-commerce,and information technology faster in the U.K.than in NorthAmerica.Partly to develop a method for measuring IM payoffs. because most British media is nationwide,rather than local and regional advertising as in North Measuring IM performance has become a top America,U.K.Internet advertising has increased priority for both marketing and financial managers for four reasons: to 10-15 percent of ad spending and increases monthly.(NewYorkTimes 12-4-06) New ways 1) IM is important to corporate stakeholders to segment markets,personalize experiences,and First,both marketing and financial managers respond to expressions of interest create both recognize that online marketing makes up an opportunity and complexity for organizations and increasingly large component of the organiza- their customers. And the impact of online marketing tion’s value proposition. A large and growing extends far beyond customers.Organizations’ number of consumers worldwide turn to the external and in-house websites are becoming Internet for research,purchase,and service primary centers for managing relationships with support.But IM initiatives don’t only affect employees,trading partners,stockholders,and the media. consumers.Organizational websites are an important source of information and inter- Amidst this whirlwind of activity,managers action for investors,employees,trading partners, responsible for online marketing feel increasing public interest groups,and other stakeholders. Interest in IM activities is expanding beyond pressure to both predict and demonstrate the marketing departments,as top management is payoffs from Internet marketing investments. Although opportunities proliferate,resources now treating these activities with increased available to take advantage of them are more importance. tightly controlled than ever.The same forces that 2) IM is different than traditional marketing create opportunities – technology,globalization, Being different than traditional marketing,IM deregulation – also create intense competition in offers new ways of interacting with customers many industries.Competing effectively requires and other stakeholders. A rich and broad great care in implementing strategy and allocating range of information and services can be resources.In earlier days,organizations were willing to liberally fund experimental Internet provided through online formats,which can be“pulled” by users as needed,rather than marketing.But today,IM managers,like other “pushed” to interested and uninterested managers,are required to back up requests for stakeholders throughtraditional offline formats. funds with a strong business case that promises This providesboth opportunities and challenges. success. And they must make good on those Organizations mustofcus more attention on promises by showing their investments deliver financial returns.So,measuring and reporting on facilitating two-way communications.When they do,they can provide offerings customized these financial returns is critical for both resource to unique stakeholder needs. And they can allocation and performance evaluation.It is critical reverse the traditional flow of marketing by to senior general managers,senior financial allowing users to participate in product design, managers,and marketing managers. pricing,and distribution decisions. Fortunately,tools and techniques for tracking 3) IM financial returns requires evaluation performance are emerging rapidly,and the As the demand for effective IM increases, relationship between organizational action and developing the capacity to evaluate financial market response is increasingly possible to trace. returns becomes increasingly important.The For some online marketers,pressure to demon- dot-com bust led to greater emphasis on strate results has generated significant change. rationalizing Internet-related expenditures,and They no longer just count the number of times IM faces pressures to rationalize its own users click on an ad or view a particular web page. Now,many are able to track a full range of results, activities on two competing fronts.Supporters say that IM complements existing marketing including financial ones.Because they can now 4 EVALUATING THE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES strategies by opening new markets,providing can track and direct performance to pursue novel benefits to customers,and reducing the organizational strategies efficiently and demand on salespeople and other organizational effectively. assets.Opponents argue that IM is too costly, and can lead to an unfocused marketing Objectives strategy or to one split between online and As demands and opportunities for online market- offline channels,forcing each to compete for ing grow,organizations devote more and more the same customers.Evaluating the financial resources to these efforts.In turn,this increases returns of IM can assist in this debate. the need for ways to evaluate performance. Until recently,these views could not be For top executives,the desire to demonstrate resolved,because IM activities and outcomes measurable results from these sometimes risky were considered too difficult to measure. and unpredictable investments is compelling. Many organizations lack sustained IM experience Currently,however,marketing executives lack the that will allow them to predict and monitor comprehensive frameworks that would enable customer response.In the IM universe, them to systematically measure the payoffs of experience is still hard to come by.Rapid developments in technology lead to increased Internet marketing.Financial managers,who have user expectations,while marketers are expertise in management control and performance measurement,often lack the data about Internet allocating more resources to developing new plans and activities that would enable them to skills,capabilities,and offerings.This leaves devise effective measurement schemes.Conse- fewer resources for measuring and managing performance. quently,payoffs of Internet marketing are rarely measured,ROI for most investments is not 4) Evaluating IM is possible and beneficial calculated,and spending continues to grow Evaluating IM is possible,and calculating payoffswithout the insight and discipline applied to other is increasingly demanded by and beneficial to organizational investments. organizations that invest in online marketing. The purpose of this Guideline is to help In many ways,IM is becoming a closed-loop system,in which marketing initiatives can be organizations better manage and evaluate their planned,executed,and tested almost immediately. Internet marketing investments.It has the For example,a company can briefly post an following objectives: online ad and track consumer responses in real •T o provide a general model that identifies the time.This allows the organization to directly Internet marketing inputs,processes,and compare financial returns to the investment outputs that lead to financial returns (outcomes) that generated them.Pepsi NorthAmerica for the organization. documented that“Call UponYoda,” an ad •T o provide guidance in understanding how campaign placed onYahoo web pages frequented organizational and Internet marketing bybuyers of 12 and 24 packs of soda,substantially strategies translate into actions and results. increased sales from the demographic (Wall Street Journal 4-17-06). •T o provide examples of Internet marketing metrics that can be used to track and manage In most cases,of course,outcomes of IM are Internet marketing performance. more complex.For example,consumers who don’t respond to an ad can still develop a •T o provide an application of ROI to evaluating favorable image of the brand through this IM that recognizes that Internet marketing investments produce both financial flows and exposure. And customers holding a favorable valuable intangible assets. image are open to future purchases of the product both online and in stores more often •T o provide a simple comprehensive example, than are others exposed to similar marketing using a hypothetical company,of how to put inducements. the approach developed in this model into Understanding of both the short and long-term action. payoffs associated with IM investments can Through these objectives,the guideline provides a benefit organizations enormously.Marketers systematic approach for (a) planning and justifying and other managers who understand these Internet marketing initiatives,(b) tracking the payoffs can better allocate scarce marketing ongoing results of investment decisions,and resources among many competing IM initiatives. (c) evaluating effectiveness after initiatives have And after initiatives are funded,these managers been completed. 5 MANAGEMENT STRATEGY Target audience (a) what options within Internet marketing were MEASUREMENT The target audience of this Guideline is those available,and (b) the costs and benefits of each professionals in the private,public and not-for-profition relative to the corporation’s marketing goals.Many corporations proceeded experimentally, sectors who plan and evaluate Internet marketing gaining experience through trial and error.In this investments.The guideline can be helpful to rapidly changing environment,reliable metrics for managers who want to understand how Internet marketing strategies affect an organization’s evaluating performance were rare,and managers corporate image and profitability.It can be useful tolied on gut instinct to drive Internet marketing financial professionals,general managers,Internet decisions. marketing managers,and marketing managers When marketers were pressured to demonstrate seeking to better understand how resources the impact of IM programs,many began by using allocated to online marketing can ultimately measures that were very easy to capture and contribute to higher levels of organizational per- understand,such as the number of website hits formance. And it can provide guidance and tools or percentage of users who clicked on an ad. for accounting and financial professionals who These measures were very useful for examining are challenged with providing discipline and trends in traffic patterns,but the impact of this transparency to this less predictable and rapidly traffic on sales and other marketing objectives evolving field.Finally,it can be helpful to CEOs, was little understood.Standardized approaches CFOs,and other organizational decision makers for capturing and summarizing website behavior struggling to identify,document,measure, were eventually developed to help make sense of communicate,or evaluate the profitability of web traffic and patterns.Resulting web analytics investments in Internet marketing. tools allowed marketers to develop a more sophisticated and in-depth understanding of website user behavior.Metrics,such as number 2.PRIOR APPROACHES TO of unique visitors and the amount of time they PERFORMANCE MEASUREMENT spent viewing web pages,provided marketers with Approaches to evaluating the performance of new insights into who was accessing the site and Internet marketing tend to fall into two general how they were using it. categories.The first and most prevalent approach is a customer activity-based approach.In this But even armed with a high level of detail about approach,known as the‘clicks-and-hits’ approach, how customers were interacting with the company via the web,marketing managers often lacked the the organization tracks IM-related user behavior, information and processes necessary to understand such as how many users click on an ad or visit how user behavior data translates into increased (‘hit’) the website. profits and business value.The same metrics have The second approach,which is evolving and been used across a broad variety of companies, becoming increasingly prevalent,can be described sites,and pages.For example,organizations using as a‘measurement-driven’ approach.This approach websites primarily for after-sales support have incorporates measures that go beyond user used exactly the same kinds of metrics as those behavior to combine more sophisticated analysis selling directly from the site.This is not due to a with rudimentary financial indicators.This section lack of available data.Many organizations using briefly describes these two approaches,and web analytics gather and store vast amounts of concludes with a discussion of the primary information and develop large,complex databases challenge each faces – lack of a systematic to house it.But much of that information is never framework to link organizational and IM strategy, used. Internet activity,and marketing and financial This happened,in part,because organizations who performance outcomes.The remainder of this first began to market over the Internet often Guideline addresses this challenge by developing such a framework,including relevant measures. lacked a clearly formulated strategy.In addition, the rapidly-changing Internet environment made ‘Clicks-and-hits’ Approach it difficult for marketers to formulate clear expectations about the impact of IM activities. In the earliest days of Internet use,marketing Lacking such clarity,organizations in the early managers were not required to demonstrate stages of Internet marketing were unable to plan effectiveness of Internet marketing expenditures. the best ways to measure success;it was therefore Marketers rushed to establish an Internet impossible for them to determine precisely what presence without sufficiently understanding data to gather and how to process it. 6 EVALUATING THE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES Many organizations are still stuck in this‘clicks andometimes arbitrarily assign values to various hits’ paradigm.They gather and increasingly report intermediate actions,and use those to calculate on metrics relating to how often the organization’s returns.For example,organizations may estimate web pages are viewed and what users click on the value of a visit to a particular web page by when they visit,but they lack the ability to link thistimating the number of visitors who will data to purchasing behavior and other desired become customers,and then multiplying that marketing and financial outcomes.Evaluation of number by the average value of all customers to Internet marketing expenditures must focus on estimate returns.ROI calculations such as these whether profit and shareholder value has increased, often fail to (a) consider the strategic or tactical rather than merely counting potential customers objectives of the page,and (b) carefully explore visiting a website.Steps are now being taken to how the mechanisms through which these visitors better measure the effectiveness of advertising convert to customers,and how and when these expenditures.In the United Kingdom,theAudit customers generate profits for the corporation. Bureau of Circulations is discussing with publishers What the‘clicks and hits’ and‘measurement-driven’ and media buyers how to base advertising rates, approaches have in common is their failure to using a recently developed“consolidated media (a) link performance measures to the organization’s report,” that attempts to measure readership levels in both print and online venues (Financial strategic objectives,and (b) provide quantified Times 10-3-06). models that plan and track Internet marketing investments from intermediate outcomes to financial results.To contribute to an organization’s ‘Measurement-driven’ Approach competitive advantage,Internet marketing activities When success metrics aren’t customized to must be aligned with the general organizational accommodate specific organizational objectives, strategy,as well as with the strategic objectives of and when they aren’t built into IM activities the marketing and information technology functions. during initialdesign,organizations lack either the intention orthe ability to systematically evaluate Performance Models in Marketing, the drivers and outcomes of IM effectiveness. E-commerce,and InformationTechnology Instead,organizations naturally gravitate toward No widely used comprehensive payoff model for adopting performance indicators used by industry peers,or they accept a set of performance Internet marketing yet exists.However,several measures promoted by software vendors or recent publications address the complex issues of defining and measuring marketing performance ad agencies. (e.g.Clark,2001;Gupta and Lehman,2005;LaPointe, These generic metrics certainly provide some 2005;and Farris,et al.2006),and others that useful information,but they often fail to provide discuss the financial payoffs and ROI of marketing sufficient insight into the organizational value investments (Ambler,2003;Lenskold,2003). IM activities provide.In recent years,however, marketers have felt increasing pressure to One marketing framework proposes a“chain of marketing productivity” with sequential linkages. demonstrate the effectiveness of their Internet (Rust et al.2004) Marketing managers engage in activities to managers outside the marketing tactical actions that lead to customer responses function.They are increasingly pressed to provide evidence that investments are driving tangible such as attitudes and intentions.Customer results. behaviors combine to produce market impact, measured by financial results such as increased In the general marketing field,this resulted in revenues and margins,or by market share. And widespread reporting of three primary accounting financial results affect shareholder value.These measures:profit,sales,and cash flows (Clark,1999). and other recent writers have used this analysis to More recently,organizations have turned to try to demonstrate how marketing expenditures various forms of ROI measurements to justify lead to increased shareholder value. their spending decisions.Often,these ROI measures are annual or other periodic measures that fail to In the e-commerce field,which overlaps and encompasses many IM activities,much has consider the long-term nature of many marketing been learned about the elements that lead to investments,such as those geared primarily toward e-commerce success.Epstein [2004,2005] studied creating brand awareness. the successes and failures of 32 corporations and Both the amount of returns and amount of invest- their e-commerce initiatives,and finds significant ments are difficult to measure,and organizations differences in their ability to drive,define,and 7 MANAGEMENT STRATEGY measure e-commerce success.He further finds the Internet,and demands for online functionality MEASUREMENT that e-commerce initiatives result in improved are increasing for all organizations. financial performance for organizations that both At the same time,opportunities for using Internet (a) link e-commerce processes and financial performance,and (b) develop effective management marketing to generate value are growing rapidly. control systems to manage those factors. Technological innovations are exploding,new ways of managing relationships with customers and In the information technology (IT) arena,Epstein other stakeholders are being developed,and and Rejc [2005,2006] have developed the most methods for monitoring and managing IM invest- comprehensive payoff model to date.Like the ments are becoming more sophisticated. model provided in this Guideline,their IT payoff Globalization,outsourcing,and reduction in model outlines the drivers and measures of success,transaction costs have increased the importance and provides a basic method for calculating the ROI of IT investments. of marketing.These trends,along with rapid technological advancements,have increased the The IM payoff model developed in this Guideline importance of IM as a component of marketing incorporates and builds upon elements of prior activity. work on measuring effectiveness in marketing, Although increasing attention has been directed e-commerce,and IT.In doing so,it fills a significantoward understanding how general marketing gap in the IM literature.It provides a concrete setimpacts financial returns,most organizations still of IM performance measurement concepts and know little about how their online presence and tools,along with a rigorous method for applying them.Marketing managers and financial professionalsactivities affect the bottom line. As competition can use this approach to more effectively plan and for capital across industry sectors and within firms intensifies,and the demand for an effective Internet evaluate the performance of their IM programs. presence continues to grow,organizations must become more critical and systematic in evaluating 3.BUILDING A FINANCIAL and managing their IM activities. PERFORMANCE PAYOFF MODEL This Guideline builds a process for evaluating the FOR INTERNET MARKETING financial performance of Internet marketing.The Building a payoff model for evaluating the financialrocess includes four steps: performance of IM begins with an analysis of the 1) Develop the IM payoff model(Exhibit 1) drivers and objectives of IM activities.Online presence and processes are driven by strategic that describes the drivers or leading indicators decisions at the highest levels of the organization. of IM,IM activities,and marketing and financial outcomes; IM is an increasingly important tool for implement- ing,evaluating,and managing organizational strategy.) Identify the linkagesbetween components As information technology and marketing of the model to determine how investments sophistication increase,and value chains become in IM activities produce financial returns increasingly dispersed geographically,the role (Exhibits 2-4); of IM will continue to expand.In addition the 3) Define metricsto plan,and monitor importance of effective IM initiatives will continue performance for,each component of the to increase.For example,research shows that model (Exhibits 6-10). 30-40 percent of book sales made onAmazon.com 4) Calculate ROIby comparing increases in are titles that would not normally be found in a traditional brick-and-mortar bookstore.The the value of marketing assets and corporation profits to the costs of IM investments overwhelming amount of goods available on the (Exhibit 5). Internet,and the fact that the Internet has createdThe Guideline also provides a comprehensive many new markets beyond the reach of physical retailers,makes it imperative for companies to example to walk through that illustrates gauge the effectiveness of their online presence these four steps.This example can be found in section 5. (Brynjolfsson,2006). Few large organizations are able to compete Step 1:Develop the Internet Marketing Payoff Model effectively today without carefully developed and managed IM programs.Even very small organizations Exhibit 1 provides a typical detailed IM payoff are increasingly expected to have a presence on model.This model is a standard systems model 8 EVALUATING THE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES Exhibit 1:Internet Marketing Payoff Model: Antecedents and Consequences of Investments in Internet Marketing INPUTS PROCESSES OUTPUTS OUTCOMES Organizational Intermediate Final & Business Unit Outputs Outputs strategy structures systems Marketing resources Assets Websites Awareness Customer Search and marketing perceptions Value Marketing Attitudes and Brand Equity Shareholder strategy Ads and public intentions Value structures Internet relations Knowledge systems Marketing Value Base strategy Relationship provisions structures marketing systems Channel Financial leadership Mobile and optimization Flows ROI Information ubiquitous Increased Technology marketing Market revenue strategy Marketing information structures research Accelerated cash flows Corporate systems Profitability Reduced revenue volatility External Environment Lower costs ▼ Lower ▲ working capital Lower fixed ▲ capital Feedback Loop Reduced risk ▼ that includes inputs,processes,outputs,outcomes, structures,and systems.The strategies,systems, and feedback loops.The model shows corporate and structures of the organization and its business and environmental drivers of IM (inputs),the units,and those of its marketing,e-commerce,and primary activities of Internet marketing managers information technology functions are important (processes),and potential consequences of these drivers of Internet marketing success.Outside activities to customers and the organization factors such as consumer demographics and (outputs and outcomes).Financial professionals, technological developments also influence IM. marketing and Internet marketing managers,and Processes: general and business unit managers can easily use this model to more effectively allocate resources Activities and initiatives undertaken within the and evaluate the outcomes of IM expenditures. IM function Basic components of the model are as follows: IM formulates its own strategy,structures,and systems which grade a variety of IM activities. Inputs: Standard IM pursuits include websites,search Influences and drivers of IM activity outside the marketing,ads and public relations,relationship IM function marketing,mobile and ubiquitous marketing (explained below),and marketing research. Organization and business units devise and allocate resources to implement strategies, 9 MANAGEMENT STRATEGY Intermediate Outputs: exploring these relationships by answering the MEASUREMENT Marketing objectives pursued through IM questions in Exhibit 2. Intermediate outputs include customer impacts, such as awareness and perceptions,along with Exhibit 2:Four Critical Questions on Internet Marketing Payoffs attitudes and intentions.IM can also be used to provide valuable information and services to How does IM support the strategic goals stakeholders,contribute to channel optimization, of the organization? and gather valuable market information. Final Outputs: What are the desired outputs for IM? Financial objectives pursued through IM Final outputs sought by organizations include: How can IM processes produce these outputs? 1) marketing assets that generate organizational value over a long period of time,and 2) financial flows that are realized as these assets contribute to profits in the short run. How do IM outputs contribute to the long-term financial performance of the organization? Marketing assets developed through IM include: a) customer value – the present value of future The first question“How does IM support the sales margins without future investments, strategic goals of the organization?” helps ensure b) brand equity – future benefits relating to trustthat IM managers recognize how their own in and reputation of corporate brands,and strategies and actions are integrated with those c) the knowledge base – the value of usable of other units,and with the organization’s overall information. objectives.The IM function should develop strategies,structures,and systems that are carefully Financial flows affected by IM include revenues andaligned with those of other key units,and are costs.Revenues flow from products and services, accelerated cash flows and predictable revenue designed to best respond to external forces. streams.Cost reductions can be achieved through Coordinating strategies in this manner helps ensure reduced product and selling expenses,lower costs that various business and functional units within the organization are aware of the broader objectives of working and fixed capital,and reduction in and of their own roles in moving the company corporate risk. toward their accomplishment.Such coordination Outcomes: leads to improved cooperation among units, Financial results for the corporation including increased sharing of information and other resources. Outcomes represent the financial returns from IM investments.Returns on investments in IM take Once strategic goals are defined,the IM manager can ask“What are IM’s desired outputs?” Outputs the form of increases in marketing asset values andrefer to the performance the IM manager hopes profit flows to the corporation.ROI calculations compare these returns to the costs incurred by to achieve.They include both intermediate and IM to generate them. final performance outputs.For some organizations, the purpose of Internet marketing is simply to Together,these components combine to make promote sales (a final output) by providing value up the IM payoff model.Within the model,the (an intermediate output) to customers.For components are linked sequentially.Feedback example,a company may seek to increase in-store loops ensure that the components are redefined sales by providing features of value to customers, in response to performance outcomes. such as store locators and maps.Due Maternity, a San Francisco company that sells hip clothes to Step 2:Identify Linkages pregnant women,has promoted online and in-store Touse the performance model effectively, sales by adding features on its website such as a marketing managers must take a view that baby-name finder,a photo-sharing service,and a recognizes the relationships between the various wish list that customers can give to friends and components of the model.IM managers can begin family (Wall Street Journal 9-25-06). Apple provides iPod usersfree“podcasts” – audio 10 EVALUATING THE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES programs that include anything from news to The final question: “How do IM outputs contribute music.Other organizations use the websites to the long-term financial performance of the primarily to increase brand equity (a final output) organization?” is critical for organizations seeking by providingpublic relations information that to enhance ROI through their IM investments.This engenders positivepublic attitudes and intentions question has received far too little attention from (an intermediate output) toward the organization. general,financial,and Internet marketing managers, McDonalds,forexample,uses its website to but is imperative for understanding how IM deliver- promote lower calorieofod and fruit options as ables translate into financial returns.It also provides well as its global campaign tied to the Olympics, important guidance and feedback to improve which stresses the importance of exceirse and managerial actions and decisions. As shown in nutrition (BusinessWeek 8-7-06).Each organization Exhibit 1,final output objectives for IM include should carefully identify theoutputs it seeks to both marketing assets and financial fws. Although achieve through its IM initiatives. the financial flows are readily visible as part of the organization,the value of marketing assets is Having determined these final outputs,marketers realized over time,and as a result,is often ignored can ask the tactical question: “How can IM processes produce these outputs?” Many when marketing and financial managers evaluate financial performance. organizations rush prematurely into IM activities, such as the enhancement of website functionality, Exhibit 3 shows the relationship between market- or initiation of an email campaign.Unless such ing assets and financial flows.Financial flows affect decisions are (a) driven by a clear understanding profitability each period through an increase in of the organization’s strategies,and (b) designed revenue.In addition,market capitalization and to achieve the desired outputs,IM processes will shareholder value can be enhanced by increases in lack coherence and effectiveness.Marketing marketing assets (customer value,brand equity, managers must specifically identify the outputs and knowledge base) that produce future they seek and expect from every IM initiative. corporate financial flows. Exhibit 3:Final Outputs:MarketingAssets and Financial Flows IM generates a sequence of financial flows that accrue to the organization over time Financial Flows Financial Flows Financial Flows Financial Flows Financial Flows Current Period Period 2 Period 3 Period 4 Period 5 … The current value (discounted future value) of future flows is captured in the marketing assets Financial Flows Financial Flows Financial Flows Financial Flows Financial Flows Current Period Period 2 Period 3 Period 4 Period 5 … Marketing Assets customer value brand equity knowledge base 11 MANAGEMENT STRATEGY Marketing assets generated by IM include customer For ROI calculations,the value of these assets is value,brand equity,and the knowledge base.(For a the incremental increase in value attributable to MEASUREMENT detailed description of each of these components, current IM activities.Future flows to be realized and examples of how they can be measured,refer are discounted to their current values. to the section of this Guideline entitled:The Exhibit 4 provides examples of how marketing Internet Marketing Financial Performance Payoff assets (customer value,brand equity,and know- Model In Depth:Components and Metrics.) Briefly, customer value refers to future sales margins that ledge base) produced through IM can translate into financial flows.In addition to generating higher will be captured without further IM expenditures. revenues and enhancing the ability to manage the Brand equity refers to the effect that brand know- revenue stream,these assets can lower operating ledge has on stakeholder responses to the brand and organization.Brand equity has value when costs,lower capital requirements,and reduce risk. Touse the IM payoff model effectively,organizations customers buy more or provide word-of-mouth should carefully specify how IM outputs generate endorsements to other potential customers.The knowledge base refers to the actionable value of financial payoffs.Sample metrics for the marketing assets and financial flows are provided in Exhibit 9. customer and stakeholder information possessed by the corporation. Exhibit 4: Examples of Current Financial Flows Derived from MarketingAssets Marketing Assets Financial Flows CustomerValue Brand Equity Knowledge Base Capture untapped Generate additional Develop mass Increased revenue tcsooshizraenueo brand premiums capability Provide incentives Use customer Reduce time-to-market Accelerated cash and mechanisms for relationships to speed through online flows immediate purchases adoption of next- concept trials generation products Use dynamic pricing Target marketing to Time promotions Reduced revenue to manage demand loyal customers during to smooth demand volatility predicted slow periods Support sales through Reduce customer Eliminate product Lower costs online information sites turnover and support features that are not costs valuable to customers Ship directly to reduce Shift responsibility and Match production Lower working need for inventory risk for inventory timing to demand capital requirement possession management to major suppliers Shift in-store sales Pool inventories with Direct in-store sales to Lower fixed capital to online sales suppliers and customers products that generate requirement to reduce warehouse high contribution space across the supply margin per square foot chain of fixed space Eliminate customers Use trust in brand to Anticipate and respond Reduced risk with prior post-sales reduce unwarranted rapidly to stakeholder problems from lawsuits concerns promotion lists 12 EVALUATING THE EFFECTIVENESS OF INTERNET MARKETING INITIATIVES Step 3: Define Metrics as monetary changes or percentages.Even when When guided by a well formulated and clearly such measures are difficult to obtain or depend on rough estimates,they can provide a basis for articulated strategy,clear,consistent,and logical examining trends over time and can provide useful metrics are among the most powerful tools information to managers. available to successful online marketers.Metrics can be used to help implement plans,link actions For example,two metrics for the output to outcomes,and compare the effectiveness of ‘awareness’ are:the number of emails opened by diverse marketing choices. recipients,and the number of customers that The starting point for developing appropriate clicked on a promotional ad.These two metrics can provide different perspectives on the meaning metrics should be general agreement on each of‘awareness’;thus the choice of metrics helps element of the IM Payoff Model.Defining metrics clarify the objective,just as clear objectives can is generally an iterative process,in which the organization gradually clarifies its performance help in identifying appropriate metrics. Because IM goals and activities can vary dramatically, drivers and objectives through the process of forming consensus on how best to measure them. it is not possible to provide a list of metrics that can be used by most organizations.Measures are Metrics are useful to organizations in a variety context-specific,and to be relevant they must be of ways: customized to meet the unique dynamics of the organization.The lists of metrics provided in – They can help clarify and add specificity to the organization’s definition of success:the outputs exhibits 6 through 10 can be used as a starting and outcomes point for creative discussions about how best to capture and reflect the organization’s unique – They can help make visible the drivers of sets of activities and results.Some may be relevant success:the inputs and processes as shown,some may not be relevant to all – They provide a basis for communicating organizations,and many can be readily adapted to objectives and activities throughout the be useful for decision making. organization,which can foster cooperation among business units After identifying appropriate metrics,the organi- – They can provide a means to monitor and zation must apply and report them for improved internal decision making.Many organizations today reward performance in accomplishing are developing metrics dashboards. A dashboard objectives,and is a compilation of key metrics presented in a – They can provide feedback that enables better visual,easy-to-understand format.The dashboard predictions about the impact of initiatives and commonly contains between 3 and 20 metrics more effective allocation of resources. that are considered important for monitoring and This guideline provides a set of sample metrics for managing IM performance.The comprehensive example provided in section 5 includes a sample each item listed in the IM contribution model. These metrics are shown in exhibits 6 through 10. dashboard for a small IM project,which is shown The metrics presented here are but a small in Exhibit 14. sampling of the many and varied metrics that can be developed and customized for tracking and Dashboards are used for a variety of purposes,
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