Recently, Ron Shevlin penned another outstanding post on The Financial Brand, this time about measuring marketing effectiveness. Ron lamented that too often marketers find it a “daunting task” to measure their effectiveness. That got me to thinking.
Marketing expense is actually deployment of capital (expense not incurred ends up as capital on the balance sheet). Marketers need to deploy capital with the same degree of acumen an investment advisor would. Bank stockholders should demand it; credit union boards should too—their members are not second-class citizens to bank stockholders.
A blunt “butter knife” approach can be used to yield results as to the effectiveness of marketing investment.
Start by defining “marketing dollars” as direct expense associated with the marketing department; salary, benefits, promotional, customer retention and acquisition related expenses. Forget allocations and shared expenses. The objective is to create ownership and accountability over this expense bucket.
From a strategic perspective, marketing dollars should be doing three things: helping grow loan balance, helping grow low cost relationship deposit balance and helping generate non-interest income. Growing accounts and customers/members are valuable tactical objectives, but the results needed for long-term prosperity are balance growth and non-interest income generation.
Because the strategic priorities just listed contain two balance sheet categories and one income statement category a little creativity is in order to develop a meaningful overall marketing effectiveness metric. Fortunately, non-interest income can be “grossed up” into an asset balance earning the net interest margin via the following:
Balance Equivalent Non-Interest Income = Non-Interest Income / Net Interest Margin Percent
This produces a measure of strategic volume per marketing dollar which is defined as:
(Average Loan Balance + Average Relationship Deposit Balance + Balance Equivalent Non-Interest Income) / Marketing Dollar
The top part of the ratio captures the effectiveness of the investment in operations, the bottom part of the ratio factors in the efficiency in which it was obtained. It can be monitored and trended on a four quarter rolling basis to eliminate seasonality. A standardized net interest margin (say 3.00%) can be used to eliminate the impact of interest rates as well.
Mike Higgins is a performance management consultant to the financial services industry based in Kansas City. He can be reached at (913) 488-4506 or firstname.lastname@example.org.