Warren and Me

March 17, 2011 By Rick Shea Leave a Comment

While reading my good friend Warren Buffett’s 2010 letter to his Berkshire Hathaway shareholders, I found myself smiling and nodding on several occasions. Before I explain, I should point out that Warren and I are not actually friends; I just said that so you’d keep reading. I suppose it would be fair to say that I know Warren a lot better than he knows me, which is not at all.

The reason I referred to Warren as a friend, aside from the attention grabbing value of doing so, is that when I read his various comments about how he measures his company’s performance, I saw many parallels to my own views on measuring marketing performance. In that sense, we are friends. Here are a few examples featuring excerpts from Warren’s well crafted letter.

Example 1

  • Warren: “I believe that those entrusted with handling the funds of others should establish performance goals at the onset of their stewardship. Lacking such standards, managements are tempted to shoot the arrow of performance and then paint the bull’s-eye around wherever it lands.”
  • Me: Those managing marketing budgets have the same responsibility. Set performance goals up front so everyone is clear on how marketing spending will be judged. Selecting goals after the fact introduces a bias towards using metrics that prove marketing worked rather than determining whether it worked.

Example 2

  • Warren: “Our job is to increase per-share intrinsic value at a rate greater than the increase (including dividends) of the S&P 500.” … “The challenge, of course, is the calculation of intrinsic value. Present that task to Charlie (Vice Chairman, Charlie Munger) and me separately, and you will get two different answers. Precision just isn’t possible.” … “To eliminate subjectivity, we therefore use an understated proxy for intrinsic value – book value – when measuring our performance.”
  • Me: Marketing’s duty is to run programs whose objectives align with those of the organization. Any business exists to make money but, I don’t try to measure the exact financial ROI of each program because I feel that type of precision just isn’t possible. My proxy for ROI is to measure program results against their objectives, which should be focused on driving profitable customer activity and creating value for the business.

Example 3

  • Warren: In writing about how he values Berkshire, Warren explains why he doesn’t use net income as a metric. “Regardless of how our business might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.”
  • Me: Choose metrics that are reliable and meaningful, and above suspicion of being manipulated to tell the story you want to tell. You want the people that matter to trust that your numbers accurately reflect the truth, not your version of the truth.

Example 4

  • Warren: Berkshire uses a well accepted accounting standard (Black-Scholes) for valuing option contracts, a standard that Warren doesn’t seem to like because under certain circumstances it can produce “wildly inappropriate values”. On this, Warren writes “Part of the appeal of Black-Scholes to auditors and regulators is that it produces a precise number. Charlie and I can’t supply one of those.” … “Our inability to pinpoint a number doesn’t bother us: We would rather be approximately right than precisely wrong.”
  • Me: I love that last sentence! There is a natural inclination to want to measure marketing precisely but I don’t think a high level of precision is needed to make good decisions. If you can be approximately right at identifying which marketing programs were most and least effective at meeting their objectives and creating value for your business, then you can make very good decisions that will optimize your marketing effectiveness.

I was glad to read how Warren’s point of view aligns with my thinking on marketing measurement. Any good measurement process just needs to be right enough to be an effective decision support tool. We need to measure the right things well enough that we learn what we need to know to make better decisions.

Warren and I may not be friends, but he’s a guy that I’d love to sit down with, have a hamburger (he apparently loves hamburgers) and soak up any wisdom he’d like to share. Since that’s not likely to happen, I’ll have to make do with a pretty good letter from a wise man.

PS. If you’d like to read Warren’s full letter, you can find it at the Berkshire Hathaway website: http://www.berkshirehathaway.com/letters/2010ltr.pdf

Filed Under: Approach, Metrics Tagged With: Effectiveness, marketing, measurement, Metrics, ROI

Apples, Oranges and Bananas

January 20, 2011 By Rick Shea Leave a Comment

A funny thing happened yesterday on my way to the refrigerator.  I was working from home.  It was mid-afternoon and time for my snack.

I rose from my desk, went downstairs and walked my appetite into the kitchen, but stopped short of opening the fridge door.  I paused, wondering what to eat.  With the Christmas eating marathon still fresh on my mind, and around my waist, I was looking for a healthy snack, likely a piece of fruit, but which one?

My choice of available fruit came down to an apple, an orange and a banana.  I considered my options.

  • Apples: Are high in pectin, a fibre which has a long list of health benefits, the flavonoids reduce diabetes risk, and they taste refreshing.
  • Oranges: The antioxidants offer protection from all sorts of disease, the vitamin C supports the immune system, and they taste great.
  • Bananas: The potassium lowers stroke risk, the vitamin B6 keeps the nervous system in top shape, and they are more filling than the other two.

Hmmm…  They’re all good, I thought, but in different ways.  While as fruit they have their similarities, they are each designed to meet different objectives.  How do I compare them?  How do I choose?

Naturally, as you might expect, my first big decision of 2011 reminded me of the problem marketers face when trying to decide which of a group of marketing programs was most effective.  Deciding which piece of fruit or marketing program was most effective depends heavily on my objectives related to eating, or on the marketer’s objectives related to each program.

One of the challenges in comparing Marketing Program (or fruit) A to B to C is that they each have different objectives.  That means, the right metrics to measure each program might be quite different from the metrics to measure the other programs.  This fact makes comparison very difficult. As they say; it’s like comparing apples to oranges.

To make this comparison easier, you need to focus on comparing how effective each marketing program is at doing whatever it is supposed to do. Let’s start with the last six words of that sentence.

Step 1:  Decide which metrics to use. Answer two simple questions about each program:

  • Who are you targeting?
  • What do you want them to do?

For example, consider the different metrics you might use to measure:

  • A public relations campaign to raise awareness among non-customers
  • An email program to incent loyalty and improve customer retention
  • An online contest to add email addresses to your customer database and incent referrals to non-customers

Step 2:  Level the playing field. This is the part where you compare the relative effectiveness of programs measured with different metrics:

  • Create a standard scorecard for your business. This becomes your template.  Your scorecard needs to have the flexibility to measure all types of marketing programs, and accommodate all types of metrics.  For a simple program you might need 5 to 10 metrics, whereas for a complex one you might need 30 to 40.
  • Customize your template to create a scorecard for each program. Some metrics will appear on each program’s scorecard, while others will vary from one scorecard to the next, given that the programs each had different objectives.
  • Score each metric according to how it performed vs. its objective.  (actual/objective X 100%) This is the pivotal step that converts all metrics into one common metric, in this case a percentage.  Working with a common metric enables scoring each one and totaling your scores for each scorecard.

That last step is critical to enabling you to compare programs with differing metrics.  Instead of figuratively looking at apples, oranges and bananas and trying to figure out which is better, now you’re just looking at fruit, with a simple comparable rating for each. Then rank them, and you’ll know which programs were best and worst at meeting their objectives and delivering the results you wanted.

To solve my little dilemma yesterday, I suppose I could have created a Fruit Measurement Scorecard, based on my specific eating objectives at that moment, to give me a way to rate and rank three different pieces of fruit, but that would have been a bit weird.  OK, a lot weird.  Anway, I was hungry, there just wasn’t time.

Oh, if you’re wondering which fruit I chose, without a scorecard to assist me, I caved and ate the last piece of blueberry pie.  Hey, those blueberries are loaded with antioxidants!

 

 

 

Filed Under: Approach, Metrics Tagged With: comparison, Effectiveness, marketing, measurement

Don’t Ask Me

December 16, 2010 By Rick Shea Leave a Comment

I didn’t do anything wrong, shady or inappropriate, but my final grade in Calculus II was probably higher than it should have been. In the mid-70s, Calculus II was part of my CEGEP studies at Champlain College on Montreal’s south shore.

After a disastrous mid-term exam, I needed either a big comeback or a small miracle to salvage a decent final grade.  While licking my mid-term exam wounds, I resolved to play less road hockey and maybe even study a little.  Then, right after the mid-term, the mother of all academic miracles arrived in the form of a teachers’ strike.

I played a lot of road hockey during the strike, and occasionally I studied.  The strike was eventually settled during the last week of the semester.  I remember walking nervously back into the last class to see what would happen.  I knew my not so vast knowledge of calculus was likely less vast than it had been at the mid-term, and I was worried that the mid-term results would stand as my grade.

Then, it happened. Our teacher explained that there was no point in giving us a final exam, since we hadn’t covered any new material following the mid-term.  Instead, he asked us to pull out a single sheet of paper, write down what grade we each wanted for the course and explain why we deserved it.

All that fresh air and exercise from playing Canada’s national sport had prepared me well for my Calculus II final exam.  With my brain uncluttered by calculus theory, I was thinking clearly and presented my case.

I explained how in recent years I had tended to start slowly in my math courses, with poor mid-terms always followed by sensational final exams, which was true, even if “sensational” might have overstated the case slightly.  I calculated my average grade in my recent math courses and asked for a grade of 70%, which was slightly lower than my recent average.  My teacher accepted my self-evaluation and I got my 70%.

What lesson can we learn from this? That writing skills are more important than math skills?  That playing road hockey is a great way to prepare for an exam?  Actually, I was thinking more about the wisdom of letting self-interested people grade themselves and how this applies to marketing measurement.

When a company wants to measure its marketing, should we ask the marketers to grade themselves? Perhaps no more than a Calculus II teacher should ask his students to grade themselves.  Although I still feel my logic was sound, I’m pretty sure I was biased in creating my scoring process at the end of the course, for the purpose of justifying the grade I wanted.

Here are a few tips to minimize bias in your marketing measurement:

  • Decide on a measurement process before you do your marketing. Before you do any more marketing, if you don’t have a measurement process, or don’t like the one you have, start by creating a new process.  We all know that a fair employee performance evaluation process involves starting the year with clear goals and having a method for scoring results against those goals so you can fairly award merit increases and bonuses.  Treat marketing measurement the same way so everyone knows marketing’s goals and how the results will be evaluated.
  • Involve key functional areas in creating your measurement process. Since one of marketing’s underlying purposes is to improve the overall performance and health of your company, the measurement process needs input from all key functional areas.  For example, suppose the objective of a specific program is to influence customers to order earlier ahead of your busy period, which will mean you can staff more appropriately, operate more cost effectively and manufacture more efficiently.  Then the departments affected need to be part of creating the measurement process and identifying the right performance metrics and objectives.
  • Ask the marketers, but remember their natural bias. If I just spent $100,000 on a marketing program, and the CEO asks me if it worked, I’m going to try to find a way to prove that I spent the $100,000 very wisely.  I can’t help it.  I’ll want to prove that it worked, as opposed to assess whether it worked. It’s in our human nature to have a positive bias towards our own performance, especially when trying to survive and succeed in a dog eat dog corporate environment.  Still, marketers must play a key role in developing an unbiased measurement process.
  • If you’re the marketer, why not take the lead and ask others. By taking the lead, you can show your willingness to be held accountable, and by creating a process up front, you can avoid much of the bias that comes from creating a measurement process after the fact.  Inviting others in the organization into the process further eliminates bias by making sure that interests other than yours are being taken into consideration.  That will also help keep you out of an awkward conflict of interest position, and any perception that you might be biased.

I caught a break back in CEGEP and basically got to pick my final grade.  It was a bit like going in front of the judge, pleading not guilty, and hearing the judge say, “OK, that’s good enough for me!”.  If as my CEO you want to know how well I’m performing as your VP Marketing, my advice to you is to remember that I have a natural bias towards giving myself a good grade, so don’t ask me!

Filed Under: Objectivity Tagged With: bias, Effectiveness, marketing, measurement, objective
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