Why does marketing have such low credibility among CFOs? Much of it has to do with the lack of metrics. There’s a way to fix this, but that will come from somewhere else.
Mark Jeffery, author of Data-Driven Marketing (Wiley, 2010) and professor at Kellogg School of Management, writes that of 252 enterprise companies with $53 billion in marketing budgets, 80% do not use data for decision making (page 5). Those 252 companies spend an astonishing $42 billion without any meaningful decision making. No wonder CFOs are frantic.
No Control Group
Jeffery reports that 70% of marketing departments do not use controls (p. 33). Without a control, you can’t tell if the change was due to the campaign. Let’s say a marketing campaign produces a 12% increase in sales. It also wins Best Ad of the Year. Everyone loves it. Good, right?
No, actually, you don’t really know anything about the campaign. It’s possible the market changed (new craze by consumers, a key competitor fails, etc.) so sales would have gone up 12% if nothing had been done. Worse yet, it’s possible that sales could have gone up 20%, but the campaign was so lousy that it lowered sales to only 12%. Without a control group, you have no idea if the campaign had a positive or negative effect.
Insufficient Data for Statistical Significance
Many case studies or tests use only a few dozen or a few hundred samples. This means the +/- margin of error is so large that the results can be misleading.
For example, a company asks 24 housewives to try a product. Five love it. That’s 20%, so they can expect to get 20% of the market. The company launches a campaign. It flops. Why?
With a data set of only 24, the margin of error is 20%, which means it could range from 40% to… zero. To get a value with better confidence, the margin of error has to be +/- 3%, which requires 1,067 samples or more. This means practically all of those studies in marketing, sociology, psychology, and so on which use 50-100 college students are worthless. (To make it worse yet, they didn’t use control groups.)
Marketing Doesn’t Do Numbers
One reason is the lack of basic mathematical skills among many marketing people. Jeffery writes that 55% of marketing executives say their staff don’t understand basic marketing metrics. Many people go into marketing or sales because they’re good at talking with people, but they’re poor at mathematics.
A few years ago, I was presenting results to a client team. I said there were 100 leads and ten sales, which is a 10% conversion rate. The VP of marketing said “Wait, how did you calculate that?”
Here’s the real laugh: he had an MBA.
Although advertising is a $609 billion dollar industry, the number of books on LTV, CPL, CPA, and similar could easily fit on a small bookshelf. The mathematics isn’t difficult; in fact, it’s mostly basic arithmetic. But marketing people don’t do numbers.
Marketing Doesn’t Want Numbers
There’s a deeper reason for marketing to avoid metrics. Most marketing teams are paid by activity, not the results. If they look busy (“hey, we did 403 campaigns and spent $200m last quarter!”), they get paid. In fact, it is not in their interest to track results. It might show their work had no effect (or worse, their project lowered the results.)
The same applies to sales. Sales people are generally rewarded for volume (the number of units), not revenues. This gives them a strong incentive to offer products at the lowest possible price. Jeffery writes that studies show some salespeople with the highest volume are often the least profitable and indeed, may produce negative results for the company. A smart salesperson knows the quickest way to make a sale is to offer the lowest price as fast as possible. They don’t negotiate: they give it away. They get points for the Bermuda vacation, but the company makes very little profit.
How to fix this? Change the system from activity to results based on metrics.
This will be difficult to achieve because (let’s be honest here) most organizations are either bureaucratic or political.
- Bureaucratic organizations use authoritarian top-down decision-making, where there is no incentive for staff to make improvements (innovation is seen as not obeying and thus punished.)
- Political organizations are dark labyrinths of fiefdoms, personal loyalty, and backstabbing. These are run by powerful, charismatic leaders.
- Many organizations are a combination of bureaucratic and political: on the surface, it’s a formal structure, but in reality, a hidden political system is in control.
That means sales and marketing, on their own, won’t change the system. Not only is there no incentive: metrics is actually a threat.
There’s a ground for hope. Rational companies (which are based on data-driven decision making) will win. Why? It’s simple. The engine of US business is now financial, not industrial. Companies are now often managed by private equity firms. This means VCs, angels, investors, financial managers, and CFOs use metrics and data to measure and evaluate all aspects of a company: investments, production, delivery, distribution, support, maintenance, repairs, and so on. Even HR is now measured by metrics. The last dark closet of a company is sales and marketing. It’s time for CFOs and investors to demand metrics from them.