The right metric is important

In business, it is important to know the current position you are in, and where you are headed to. That can only be the case if you start measuring. Almost every business is aware of it, but sometimes we are too caught up with measuring, so much so that:

• it does not accurately reflect the real situation
• it hinders business growth

Take for example marketing expenditure. Marketing should be seen as an investment, because its goals (customer retention, customer satisfaction, advertising awareness) should lead towards increased profits. So the best way is to use Return on Investment (ROI).

Now let's dive into a specific example. In the 80's when AT&T's monopoly was just broken up, the marketing ROI was measured. But what is the exact measure? Cost of marketing campaign v.s. total revenue from customers. In most cases it should be fine, but one need to take into account that:

• AT&T is in a monopoly position
• The other notable competitors, Sprint & MCI, have relatively poor quality. So much so that without doing anything AT&T can easily retain 95% of its customer base

Thus, the simple ROI metric above may lead to the wrong conclusion that minimal marketing expenditure is optimal due to its high ROI.

It is always very important to take into account:

• why the metric is in place (i.e. what are we trying to achieve)
• the external environment, and how the metric will shape the business direction
• finally the bottom line of long-term increased revenue and reduced cost (profit)