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					                                            MANAGEMENT

                                            S T R AT E G Y

                                            MEASUREMENT




M A N AG E M E N T AC C O U N T I N G G U I D E L I N E



Evaluating the
Effectiveness of
Internet Marketing
Initiatives

By
Marc J. Epstein
and
Kristi Yuthas




Published by The Society of Management Accountants of Canada, the American
Institute of Certified Public Accountants and The Chartered Institute of
Management Accountants.
                                                 N OT I C E TO R E A D E R S


     The material contained in the Management Accounting Guideline Evaluating the Effectiveness of Internet Marketing Initiatives is
     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 the AICPA, CIMA or The Society of Management Accountants of Canada and does not represent an official
     opinion or position of either the AICPA, CIMA or The Society of Management Accountants of Canada.




Copyright © 2007 by The Society of Management Accountants of Canada (CMA Canada), the American Institute of Certified
Public Accountants, Inc. (AICPA) and The Chartered Institute of Management Accountants (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 from The Canadian Copyright Licensing Agency (Access Copyright).
For an Access Copyright Licence, visit www.accesscopyright.ca or call toll free to 1-800-893-5777.


ISBN: 1-55302-196-7
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1. INTRODUCTION                                 organization’s name appear at the top
                                                of the list when a customer searches
Internet marketing (IM), or online
                                                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
                                                Internet marketing can include a range
great deal of IM activity is directed toward
                                                of other activities, such as marketing
driving customers to an organization’s
                                                through online games, mobile phones,
website, where they are encouraged
                                                or direct response television broadcasts.
to make purchases online or through
                                                And IM efforts can be directed not only
another channel. But IM encompasses a
                                                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
                                                public interest groups).
common IM activities include: preparing
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

CONTENTS                                        EXECUTIVE SUMMARY
Section                                Page
1. INTRODUCTION                           3    Though there have been many calls by corporate
2. PRIOR APPROACHES                            and academic leaders for the measurement of
   TO PERFORMANCE MEASUREMENT             6
                                               payoffs of Internet marketing, there has been
3. BUILDING A FINANCIAL
   PERFORMANCE PAYOFF MODEL                    little developed that provides managers with the
   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:
   COMPONENTS AND METRICS                17    necessary to prove success and to ignore the
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.




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  S T R AT E G Y
                   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 to   those 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 North America. Partly
                                                                           to develop a method for measuring IM payoffs.
                   because most British media is nationwide, rather
                                                                           Measuring IM performance has become a top
                   than local and regional advertising as in North
                                                                           priority for both marketing and financial managers
                   America, U.K. Internet advertising has increased
                                                                           for four reasons:
                   to 10-15 percent of ad spending and increases
                   monthly. (New York Times 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             consumers. Organizational websites are an
                   the media.                                                 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.
                   pressure to both predict and demonstrate the               Interest in IM activities is expanding beyond
                   payoffs from Internet marketing investments.               marketing departments, as top management is
                   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             provided through online formats, which can
                   willing to liberally fund experimental Internet            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 through traditional offline formats.
                   funds with a strong business case that promises            This provides both opportunities and challenges.
                   success. And they must make good on those                  Organizations must focus more attention on
                   promises by showing their investments deliver              facilitating two-way communications.When
                   financial returns. So, measuring and reporting on          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.        activities on two competing fronts. Supporters
                   Now, many are able to track a full range of results,       say that IM complements existing marketing
                   including financial ones. Because they can now
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   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
                                                        Internet marketing. Financial managers, who have
   developments in technology lead to increased
                                                        expertise in management control and performance
   user expectations, while marketers are
                                                        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 payoffs   without the insight and discipline applied to other
   is increasingly demanded by and beneficial to        organizational investments.
   organizations that invest in online marketing.
   In many ways, IM is becoming a closed-loop           The purpose of this Guideline is to help
   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       • To 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 North America               for the organization.
   documented that “Call Upon Yoda,” an ad              • To provide guidance in understanding how
   campaign placed on Yahoo web pages frequented          organizational and Internet marketing
   by buyers 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).                             • To 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           • To provide an application of ROI to evaluating
   favorable image of the brand through this              IM that recognizes that Internet marketing
   exposure. And customers holding a favorable            investments produce both financial flows and
   image are open to future purchases of the              valuable intangible assets.
   product both online and in stores more often         • To 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.
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  S T R AT E G Y
                   Target audience                                           (a) what options within Internet marketing were
MEASUREMENT                                                                  available, and (b) the costs and benefits of each
                   The target audience of this Guideline is those
                                                                             option relative to the corporation’s marketing
                   professionals in the private, public and not-for-profit
                                                                             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
                                                                             evaluating performance were rare, and managers
                   marketing strategies affect an organization’s
                                                                             relied on gut instinct to drive Internet marketing
                   corporate image and profitability. It can be useful to
                                                                             decisions.
                   financial professionals, general managers, Internet
                   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
                   2. PRIOR APPROACHES TO                                    website user behavior. Metrics, such as number
                                                                             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
                   the organization tracks IM-related user behavior,         via the web, marketing managers often lacked the
                   such as how many users click on an ad or visit            information and processes necessary to understand
                   (‘hit’) the website.                                      how user behavior data translates into increased
                                                                             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
                   performance outcomes.The remainder of this                This happened, in part, because organizations who
                   Guideline addresses this challenge by developing          first began to market over the Internet often
                   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.
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Many organizations are still stuck in this ‘clicks and    sometimes 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 this   estimating 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, the Audit            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
                                                          strategic objectives, and (b) provide quantified
levels in both print and online venues (Financial
                                                          models that plan and track Internet marketing
Times 10-3-06).
                                                          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 initial design, organizations lack either the
intention or the ability to systematically evaluate       Performance Models in Marketing,
the drivers and outcomes of IM effectiveness.             E-commerce, and Information Technology
Instead, organizations naturally gravitate toward
                                                          No widely used comprehensive payoff model for
adopting performance indicators used by industry
                                                          Internet marketing yet exists. However, several
peers, or they accept a set of performance
                                                          recent publications address the complex issues of
measures promoted by software vendors or
                                                          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,
                                                          One marketing framework proposes a “chain of
marketers have felt increasing pressure to
                                                          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
                                                          such as attitudes and intentions. Customer
evidence that investments are driving tangible
                                                          behaviors combine to produce market impact,
results.
                                                          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
                                                          In the e-commerce field, which overlaps and
are annual or other periodic measures that fail to
                                                          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
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  S T R AT E G Y
                   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
                                                                             marketing to generate value are growing rapidly.
                   performance, and (b) develop effective management
                                                                             Technological innovations are exploding, new ways
                   control systems to manage those factors.
                                                                             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
                                                                             of marketing.These trends, along with rapid
                   ROI of IT investments.
                                                                             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 significant
                                                                             toward understanding how general marketing
                   gap in the IM literature. It provides a concrete set
                                                                             impacts 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
                                                                             activities affect the bottom line. As competition
                   them. Marketing managers and financial professionals
                                                                             for capital across industry sectors and within firms
                   can use this approach to more effectively plan and
                                                                             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 financial      process 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
                                                                                that describes the drivers or leading indicators
                   presence and processes are driven by strategic
                                                                                of IM, IM activities, and marketing and financial
                   decisions at the highest levels of the organization.
                                                                                outcomes;
                   IM is an increasingly important tool for implement-
                   ing, evaluating, and managing organizational strategy.    2) Identify the linkages between 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 metrics to 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 on Amazon.com            4) Calculate ROI by comparing increases in
                   are titles that would not normally be found in a             the value of marketing assets and corporation
                   traditional brick-and-mortar bookstore.The                   profits to the costs of IM investments
                   overwhelming amount of goods available on the                (Exhibit 5).
                   Internet, and the fact that the Internet has created
                                                                             The Guideline also provides a comprehensive
                   many new markets beyond the reach of physical
                                                                             example to walk through that illustrates
                   retailers, makes it imperative for companies to
                                                                             these four steps.This example can be found
                   gauge the effectiveness of their online presence
                                                                             in section 5.
                   (Brynjolfsson, 2006).
                   Few large organizations are able to compete               Step 1: Develop the Internet Marketing
                   effectively today without carefully developed and                 Payoff Model
                   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

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Exhibit 1: Internet Marketing Payoff Model: Antecedents and Consequences of
           Investments in Internet Marketing

   INPUTS                         PROCESSES                                    OUTPUTS                 OUTCOMES

Organizational
& Business Unit                                                    Intermediate         Final
strategy                                                           Outputs              Outputs
structures
systems                                                                            Marketing
resources                                                                          Assets
                                        Websites               Awareness
                                                               and                 Customer
                                        Search                 perceptions         Value
Marketing                               marketing
strategy                                                       Attitudes and       Brand Equity       Shareholder
                                        Ads and public         intentions                             Value
structures                                                                         Knowledge
                     Internet           relations
systems                                                                            Base
                     Marketing                                 Value
                                        Relationship           provisions
                     strategy
                                        marketing
                     structures                                                    Financial
                                                               Channel
                     systems            Mobile and             optimization        Flows              ROI
                     leadership         ubiquitous
Information                             marketing              Market              Increased
Technology                                                     information         revenue
strategy                                Marketing
structures                              research                                   Accelerated
                                                                                                      Corporate
systems                                                                            cash flows
                                                                                                      Profitability
                                                                                   Reduced
                                                                                   revenue
                                                                                   volatility
External                                                                           Lower costs
Environment
                          ▼                                                        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,
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  S T R AT E G Y
                   Intermediate Outputs:                                 exploring these relationships by answering the
MEASUREMENT                                                              questions in Exhibit 2.
                   Marketing objectives pursued through IM
                   Intermediate outputs include customer impacts,        Exhibit 2: Four Critical Questions on
                   such as awareness and perceptions, along with
                                                                                    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:
                   1) marketing assets that generate organizational            How can IM processes produce these outputs?
                   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 trust   that 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
                   Financial flows affected by IM include revenues and   strategies, structures, and systems that are carefully
                   costs. Revenues flow from products and services,      aligned with those of other key units, and are
                   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
                   of working and fixed capital, and reduction in        organization are aware of the broader objectives
                   corporate risk.                                       and of their own roles in moving the company
                                                                         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
                   the form of increases in marketing asset values and   can ask “What are IM’s desired outputs?” Outputs
                   profit flows to the corporation. ROI calculations     refer to the performance the IM manager hopes
                   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
                   To use 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 users free “podcasts” – audio

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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 providing public relations information that                         to enhance ROI through their IM investments.This
engenders positive public attitudes and intentions                     question has received far too little attention from
(an intermediate output) toward the organization.                      general, financial, and Internet marketing managers,
McDonalds, for example, uses its website to                            but is imperative for understanding how IM deliver-
promote lower calorie food 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 exercise and                          managerial actions and decisions. As shown in
nutrition (Business Week 8-7-06). Each organization                    Exhibit 1, final output objectives for IM include
should carefully identify the outputs it seeks to                      both marketing assets and financial flows. 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
                                                                       when marketing and financial managers evaluate
processes produce these outputs?” Many
                                                                       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: Marketing Assets 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




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  S T R AT E G Y
                   Marketing assets generated by IM include customer         For ROI calculations, the value of these assets is
MEASUREMENT        value, brand equity, and the knowledge base. (For a       the incremental increase in value attributable to
                   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,
                                                                             ledge base) produced through IM can translate into
                   customer value refers to future sales margins that
                                                                             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
                                                                             costs, lower capital requirements, and reduce risk.
                   and organization. Brand equity has value when
                                                                             To use 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
                                                                             financial payoffs. Sample metrics for the marketing
                   knowledge base refers to the actionable value of
                                                                             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 Marketing Assets


                                                Marketing Assets                                             Financial Flows

                    Customer Value             Brand Equity               Knowledge Base
                    Capture untapped           Generate additional        Develop mass                     Increased revenue
                    niches                     revenue through            customization
                                               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




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Step 3: Define Metrics                                 as monetary changes or percentages. Even when
                                                       such measures are difficult to obtain or depend
When guided by a well formulated and clearly
                                                       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
                                                       clicked on a promotional ad.These two metrics
The starting point for developing appropriate          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        help in identifying appropriate metrics.
organization gradually clarifies its performance
drivers and objectives through the process of          Because IM goals and activities can vary dramatically,
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
– They can help clarify and add specificity to the     organization.The lists of metrics provided in
  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-
                                                       zation must apply and report them for improved
– They can provide a means to monitor and              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
each item listed in the IM contribution model.         example provided in section 5 includes a sample
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       Dashboards are used for a variety of purposes,
be developed and customized for tracking and           including: developing performance targets,
managing IM performance. It is expected that           monitoring performance, evaluating variance
companies will select or adapt a small number of       between targeted and actual results, analyzing
these metrics for use in evaluating performance.       historical trends, and benchmarking performance
Section 5 presents an example of how to use a          against competitors.
set of integrated metrics to evaluate performance
for a small IM project.                                At its core, the metrics dashboard is a tool
                                                       for aligning strategic and financial objectives.
Both financial and non-financial metrics are needed    It provides greater transparency to IM goals and
to effectively measure IM performance. Some            activities, and shows causal relationships between
non-financial items such as market research activity   spending on marketing initiatives and their
are difficult to measure, and companies often          financial payoffs. Such analyses support a variety
avoid measuring these items. However, if the item      of managerial actions, such as identifying problems
plays a critical role in delivering organizational     and opportunities, developing and refining IM
value through IM, an attempt must be made to           strategy, structure, and systems, and driving
measure it, preferably in quantifiable terms such      innovations in products and processes.
                                                                                                                13
MANAGEMENT

  S T R AT E G Y
                   Step 4: Calculate Return on Investment                                   Brand equity refers to future financial flows
MEASUREMENT                                                                                 associated with the brand, which can result
                   Ultimately, to justify organizational investments in
                                                                                            from growth in market share, price premiums,
                   IM, marketers must be able to show increased
                                                                                            reduced cost of capital, reduced stakeholder
                   profits resulting directly from each IM initiative.
                                                                                            attrition, and other benefits accruing from the
                   Return on Investment (ROI) is perhaps the most
                                                                                            brand.
                   useful method in the marketing manager’s toolbox
                   today for demonstrating IM’s financial payoffs. ROI                      The knowledge base contributes to future
                   is widely used and understood by top managers                            financial flows to the extent that it contains
                   in the organization.When calculated properly, it                         information that can be used to improve
                   provides a clear and convincing evaluation of the                        marketing effectiveness and drive innovations
                   payoff of an initiative, campaign, or strategy. ROI                      in products and processes.
                   provides insights critical for both strategic and                    Current financial flows: the value of the
                   tactical decision making. It can be used both to                     financial flows accruing from marketing assets that
                   evaluate past performance and to guide future                        are realized in the current period.
                   investment.
                                                                                           Revenues result from current sales to
                   In most organizations, calculating the ROI for                          customers and affiliates, accelerated cash flows,
                   Internet marketing has proven challenging.                              reduction in the volatility of revenue streams,
                   Comprehensive models for calculating ROI have                           or enhanced ability to manage them.
                   not been available, and the simple models that                          Current costs include current cost of sales
                   have been used are often incomplete, confusing,                         and direct selling expenses, after taking account
                   or misleading. Because of the heavy focus on                            of cost savings that result from the marketing
                   creativity and innovation in IM, many marketers                         investment, such as reduced need for working
                   have tended to evaluate IM initiatives using process                    or fixed capital, and reduced risk-related costs
                   measures, such as the number of customers who                           through, for example, facilitating ongoing
                   could be convinced to open an email message or                          communication with stakeholders.
                   register for a company newsletter. Financial
                                                                                        IM Investment: the total value of investments
                   managers have also taken a short-term view of IM,
                                                                                        relating to the IM initiative.These include
                   treating costs as periodic expenses to be matched
                                                                                        investments that have already been made during
                   against concurrent revenues. In both cases, these
                                                                                        the current period and those that are anticipated
                   managers have failed to view IM spending as an
                                                                                        for future periods. IM Investments can be
                   investment which, like research and development,
                                                                                        categorized as one-time costs, ongoing costs,
                   can produce valuable organizational assets that
                                                                                        and allocations.
                   generate cash flows over several time periods.
                                                                                           One-time costs include the up-front costs
                   The ROI calculation model developed in this
                                                                                           of the IM initiative.This can include costs of
                   Guideline takes a comprehensive approach to
                                                                                           creative work, investments in hardware and
                   evaluating payoffs from IM. As shown in Exhibit 1,
                                                                                           software, and the current period portion of the
                   financial returns resulting from IM investments
                                                                                           ongoing costs described below.
                   take two forms: marketing assets and current
                   financial flows. In calculating ROI, the firm must                      Ongoing costs include the costs of operating
                   determine both the scope of the IM project and                          and managing the initiative. Ongoing costs can
                   the relevant time frame for determining financial                       include (a) hardware and software maintenance,
                   investment and resulting benefits.                                      (b) human resource expenses in IM, marketing,
                                                                                           and IT, (c) advertising and promotional
                   The general form of the ROI calculation for one                         expenses, and (d) other ongoing expenses.
                   IM investment, campaign, or initiative, is as follows:
                                                                                           Allocations are investments allocated to the
                   (Marketing Assets + Current Financial Flows) – IM Investment = ROI
                    ___________________________________________________________            current initiative from other past initiatives, or
                                         IM Investment                                     allocations from the current investment to
                                                                                           other future initiatives.The cost of an
                   Marketing assets: the incremental value added
                                                                                           investment, such as IT hardware or a large-
                   to customer value, brand equity, and the knowledge
                                                                                           scale branding campaign, can benefit many
                   base resulting from the IM investment.
                                                                                           corporate programs beyond the IM initiative
                       Customer value refers to net incremental                            under study. Costs can be distributed among
                       revenues anticipated from repeat sales, less                        initiatives that drive the costs and benefit from
                       expected cost of goods sold and direct sales                        them. Allocations should be carefully analyzed
                       expenses.                                                           to avoid double counting, and to include all
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   relevant costs. Due to the managerial challenges                  Calculation of the ROI from IM investments
   caused by cost allocations, measurement must                      (Exhibit 5) is the final step in the four-step method
   be carefully considered. Although increased                       for building a financial performance model for IM
   revenue will be included net of lost sales in                     investments. Section 4 discusses the components
   other units due to cannibalization, it may be                     of the IM payoff model in detail and provides
   necessary to recognize that these sales might                     examples of metrics for each component.
   have been lost anyway (to another company’s
   Internet sales).




Exhibit 5: Calculation of Internet Marketing ROI

          1       Calculate the Monetary Value
                     of IM Initiative Returns

                                                                                         Financial              Marketing
                    Item               Description                                       Flows                  Assets

 CUSTOMER           Increase in customer value associated with this investment           Flows realized in      Present value
 VALUE:                                                                                  current period         of expected flows

 Revenue:           Revenue            Sales revenue and other revenue from online       $+                     $+
                                       and other channels, net of revenue cannibalized
                                       from other channels (PV includes premium
                                       from accelerated cash flows and reduced
                                       revenue volatility)

 Costs:             Cost of goods      Product and service costs, returns and            $–                     $–
                    sold               uncollected revenue

                    Direct selling     Cost of special offers, order processing and      $–                     $–
                    expense            fulfillment, post-purchase service, incremental
                                       staff costs

                                                                       Net Revenue       $ +.................   $ +.................

 Other Inflows:     Savings from       Savings in costs associated with cash,            $ +.................   $ +.................
                    working capital    receivables, inventory carrying costs

                    Savings from       Savings in costs associated with fixed assets,    $ +.................   $ +.................
                    fixed capital      such as retail outlets, warehouse, and
                                       administrative buildings and equipment

                                                    TOTAL CUSTOMER VALUE                 $ +.................   $ +.................

 BRAND              Increase in brand value associated with this investment
 EQUITY:

 Revenues:                             Expected increase in future revenues and                                 $ +.................
                                       other inflows associated with the brand,
                                       such as higher response to advertising and
                                       public relations, price premiums, expansion
                                       of sales to current customers, increase in
                                       revenue from affiliate advertising and
                                       branding, and other brand-related inflows

 Costs:                                Expected reduction in future costs                                       $ +.................
                                       associated with stakeholder relationships,
                                       for example through turnover, attrition,
                                       lawsuits, monitoring costs, transaction
                                       costs, regulatory costs

                                                       TOTAL BRAND EQUITY                                       $ +.................




                                                                                                                                       15
MANAGEMENT

  S T R AT E G Y
                   Exhibit 5: Calculation of Internet Marketing ROI (continued)

MEASUREMENT                                                                                                     Financial               Marketing
                                      Item                Description                                           Flows                   Assets

                    KNOWLEDGE Increase in knowledge base associated with this investment
                    BASE:

                    Revenues:                             Expected increase in future revenues and other                                $ +.................
                                                          inflows associated with knowledge gained, such
                                                          as information useful for customization and
                                                          personalization strategies, product
                                                          enhancements, cross-selling and up-selling
                                                          opportunities, and innovations leading to new
                                                          products and services

                    Costs:                                Expected decrease in future costs associated                                  $ +.................
                                                          with knowledge gained, such as decreases in
                                                          production, marketing, selling, and service
                                                          costs and other processes improvements
                                                          and innovations

                                                                     TOTAL KNOWLEDGE BASE                                               $ +.................

                                                                                    TOTAL RETURNS               $ +.................    $ +.................




                             2     Calculate the Monetary Value
                                    of IM Initiative Investment

                    INTERNET           Cost of resources invested in Internet marketing initiative
                    MARKETING
                    INVESTMENT:

                    One-time                              Research, creative development, design and            $ – .................   $ – .................
                    Expenses                              implementation of information and databases,
                                                          channel preparation, training and production
                                                          planning

                    Ongoing                               Media and delivery expenses, information              $ – .................   $ – .................
                    Expenses                              systems operation and maintenance expenses,
                                                          payments to affiliates and trading partners,
                                                          performance measurement

                    Allocations                           Allocations from and to other cost centers            $ +/– ..............    $ +/–..............
                                                          such as campaigns, channels, customers,
                                                          business units

                                                                          TOTAL IM INVESTMENT                   $ – .................   $ – .................




                                     Calculate the IM Initiative
                             3
                                                ROI

                    (Marketing Assets + Current Financial Flows) – IM Investment
                                                                                                     = Return on Investment
                                             IM Investment




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                                    Summary of Metrics Exhibits

 INPUTS                  PROCESSES               INTERNAL                  FINAL                   OUTCOMES
                                                 OUTPUTS                   OUTPUTS

     EX 6                    EX 7                        EX 8                                         EX 10
                                                                           MARKETING                  EX 5
                                                                           ASSETS

                                                                               EX 9

                                                                           CURRENT
                                                                           FINANCIAL
                                                                           FLOWS

                                                                               EX 9
                                                                               EX 4




ROI is a versatile and robust measure. It can be            constrain the IM strategies. Key inputs or drivers
used to calculate the returns from all IM invest-           of IM performance include:
ments during a period, or to estimate returns
                                                            – organizational and business unit strategies,
from an individual IM initiative such as a campaign,
                                                               structures, systems, and resources
a customer relationship initiative, or a new strategy.
Increasingly, IM is an integral aspect of marketing,        – marketing strategies, structures, and systems
corporate strategy, and performance. Developing             – information technology strategies, structures,
a comprehensive ROI measurement enhances the                   and systems
company’s ability to allocate resources, and to             – features of the external environment.
plan, monitor, and evaluate the effectiveness of
                                                            Each element of the input component is described
its resource investments.
                                                            below, and sample metrics for the inputs are
4.THE INTERNET MARKETING                                    provided in Exhibit 6.
  FINANCIAL PERFORMANCE
                                                            An organization’s mission defines what products
  PAYOFF MODEL IN DEPTH:
                                                            or services the organization will produce and
  COMPONENTS AND METRICS
                                                            which customers it will serve.The corporate
Each component of the IM contribution model:                strategy outlines how the company will compete
inputs, processes, outputs, and outcomes, is made           – actions it will take to produce financial returns
up of several subsidiary elements. Components               and other outcomes stakeholders desire.The
of the IM payoff model are common across many               overall organizational strategy should drive the
organizations. Individual elements within the               strategies of all business units.
components and the metrics used to measure
                                                            Organization strategies today are often defined
them can be customized by the organization to
                                                            by the core competencies of the organization.
best represent the character and activities of its
                                                            In turn, these strategies drive marketing and IT
IM function.The components and their elements
                                                            strategies. For example, BMWs emphasis on
are described in detail below, and these descriptions
                                                            engineering quality requires a marketing strategy
are accompanied by examples of available metrics.
                                                            that targets high-end customers. FedEx, which has
These are summarized below, and the diagram
                                                            developed competency in logistics, requires an
identifies the exhibits that display metrics relating
                                                            IT strategy that supports and enhances logistical
to each element of the model.
                                                            excellence, for example through continual
                                                            improvements in standard routing software.
Inputs: Organizational, Marketing, and                      Organizational strategies are made concrete and
IT Functions, and the Organization’s                        implemented through organizational structures
External Environment                                        and systems. Strategy determines the way
The input component of the IM contribution                  business units are organized and how resources
model includes elements external to the IM                  are allocated. Organizational processes are
function.The inputs contextualize, support, and             designed to execute the strategy. The Internet
                                                                                                                  17
MANAGEMENT

  S T R AT E G Y
                   marketing function, like all other organizational      and needs of customers and, increasingly, those of
MEASUREMENT        functions, will be heavily influenced by these         other stakeholders that interact with the company
                   strategies, structures, and processes.                 via websites and other Internet marketing channels.
                                                                          Due to the expanding role of Internet marketing
                   The company’s marketing strategy links the
                                                                          in information gathering, stakeholder interaction,
                   organization’s products or services and its
                                                                          and monitoring changes in the external environment,
                   customers. It defines how the organization will
                                                                          IM can play an important role in contributing
                   position its products or services and its value
                                                                          information and insights that inform corporate,
                   proposition. For example, the organization’s
                                                                          marketing, IT, and other organizational strategies.
                   marketing strategy defines the target market
                   and how the product or service will be branded
                   and positioned to appeal to that market; its           Processes: Internet Marketing Strategy,
                   structures and processes are then designed to          Structure, Systems, and Leadership
                   carry out this strategy.
                                                                          As the proportion of marketing activity conducted
                   Internet marketing activities must complement          via the Internet continues to increase, many
                   general marketing strategies, structures, and          organizations’ Internet marketing strategies are
                   systems. For example, during new product intro-        increasingly intertwined with general marketing
                   duction, website content may be focused on             strategies.The Internet marketing strategy, which
                   generating interest and providing information.         represents an intersection between marketing and
                   As the product reaches maturity, the website may       IT, is designed in concert with the organization’s
                   be re-designed to drive in-store or online sales.      offline marketing strategy.The two must be
                   The information technology strategy, structure,        complementary, and in many cases consistent,
                   and systems define how technology and related          since the organization’s customers may come into
                   resources can promote the organizational mission       contact with both online and offline marketing
                   and support the strategies of the business units       campaigns.
                   and functions. It defines the role IT will play in     Development of an online strategy follows an
                   generating shareholder value, and IT structures        approach that parallels that of the general
                   and processes will be aligned to enhance the           marketing strategy, but focuses on how the
                   ability of the organization to differentiate itself    Internet can support and enhance the general
                   and compete effectively.                               strategy. In formulating the general marketing
                   Internet marketing activities are heavily dependent    strategy, an organization commonly analyzes
                   on IT strategies, structures, and systems. For         customers, company, and competition (commonly
                   example, an IM initiative designed to drive traffic    referred to as the 3 Cs). Its online strategy
                   to the organization’s website must integrate its       focuses specifically on (a) needs that can be best
                   efforts with those of IT to ensure site capacity to    addressed through an online format, and
                   accommodate increased volume.                          (b) capabilities that can be expressed through this
                                                                          format. Online marketing strategies also consider
                   In addition to strategic influences, the Internet      STP – segmentation, targeting and positioning –
                   marketing function is affected by a broad range        and consider which among the organization’s
                   of other forces, both within and outside the           target segments can be best served or supported
                   organization. Resource availability and constraints    by an online format, and how online mechanisms
                   that affect the organization’s ability to support      can be used to help improve the products’
                   Internet marketing initiatives will certainly affect   positions over its competitors. Finally, the 4 Ps –
                   IM success. External forces include structural         product, price, place and promotion – are
                   characteristics of the industry, such as changes in    re-envisioned from an online perspective, allowing
                   the number and strength of trading partners and        for opportunities such as dynamic pricing and
                   organizations offering complementary products          geographically expanded promotion and distribution.
                   and services. Additional environmental forces
                   such as political, economic, social, and techno-       Structure is the way an organization organizes
                   logical changes also impact the organization’s         Internet marketing responsibilities and lines of
                   strategic options and direction.                       authority.The structure of the Internet marketing
                                                                          function can vary greatly across organizations,
                   Internet marketing managers should constantly          depending on outputs to be produced by IM.The
                   scan the environment for risks and potential           degree to which Internet sales are integrated with
                   opportunities. Internet marketing provides             other channels, for example by allowing online
                   mechanisms for monitoring changes in the interests     support for in-store purchases, or in-store returns
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Exhibit 6: Inputs

  Inputs                  Sample Performance Measures

  Organizational and      •   Organization’s competitive ranking within the industry
  Business Unit           •   Market share and strength relative to customers
  Strategy, Structure,    •   Planned and actual cash flow, profit
  Systems, Resources      •   Economic value, share price
                          •   Stock and bond ratings
                          •   Resources allocated to Internet activities

  Marketing Strategy,     • Sales revenue or units as a percentage of target market sales or relative to key competitor
  Structure, Systems      • Cost, development time, delivery time, quantity, price, and channels of products offered
                            relative to goals
                          • Cost, development time, delivery time, quantity, price, and channels of products offered
                            relative to the competitors

  Information Technology • IT budget and performance targets
  Strategy, Structure,   • IT expenses relative to competitors
  Systems                • Value of IT investments in architecture and software

  External                • Structural industry factors: number and strength of customers, suppliers, competitors,
  Environment               complementors
                          • Risk factors: number and strength of political, economic, socio-cultural, and technological risks
                          • Opportunities: number and strength of political, economic, socio-cultural, and technological risks
                          • Market growth




for online purchases, will affect where it is                    sales outpaces that of other channels, and
functionally placed within the organization.                     technologies and practices available for IM
                                                                 develop rapidly. In response to these changes, the
The structure of IM will be influenced by the
                                                                 roles and objectives of the IM function will not
organization’s general structure as well as the
                                                                 remain static, but will continue to evolve.The
structure of its marketing function. It will also be
                                                                 strategies, structures, systems, and leadership
influenced by how the information technology
                                                                 associated with Internet marketing should remain
function and the units responsible for e-commerce
                                                                 capable of reconfiguration as warranted by
activities are organized. For example, the IM
                                                                 ongoing organizational learning.
structure may be affected by the level of integration
among the corporate brands, and will be more
highly centralized when heavy brand integration                  Processes:Websites, Search Marketing,
is required.                                                     Ads and Public Relations, Relationship
Systems are the means through which strategies                   Marketing, Mobile and Ubiquitous
are executed, and include management control                     Marketing, and Marketing Research
practices such as incentives, measures, and rewards.             As Internet and wireless web technologies
Systems should ideally be designed to provide                    undergo continuous change, lines between
incentives, guidance, and feedback that encourage                categories of Internet marketing activities become
IM to design and pursue activities that optimize                 increasingly blurred. Currently, mainstream IM
its effectiveness. And, since senior management                  functions can be roughly divided into six
commitment is critical for the success of an                     categories:
Internet marketing program, leadership excellence
in corporate, business unit, marketing, and infor-               • websites
mation technology is necessary to support and                    • search marketing
direct Internet marketing activities.When strategy,              • ads and public relations
structure, systems, and leadership are aligned and               • relationship marketing
effective, IM activities will generate the intermediate
and final outputs, and result in enhanced financial              • mobile and ubiquitous marketing
performance.                                                     • marketing research
IM today operates in a dynamic environment: an                   Each element of the process component is
                                                                 described below, and sample metrics for IM
increasing proportion of organizational marketing
                                                                 processes are provided in Exhibit 8.
initiatives are pursued online, growth in online
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                   Websites                                                search helps ensure that potential customers and
MEASUREMENT                                                                other stakeholders will be directed toward the
                   Organizational websites are the most important
                                                                           organization’s site.
                   and resource-intensive component of the IM
                   offerings of many corporations.Websites serve           Organizations have two basic options for enhancing
                   many purposes, and can include a broad range of         their search engine ratings.The first is organic or
                   features. First, websites provide information for       natural search marketing. Under this approach,
                   customers and other stakeholders.Websites               websites are ranked based on a combination of
                   accessible by the general public (Internet sites)       items that include: where the search terms are
                   and websites accessible by employees and other          located on the site, how many other sites link to
                   authorized parties (intranet sites) provide infor-      the site, and how frequently the site is entered by
                   mation about the organization and its products/         users with similar search terms.
                   services that can be targeted to and used by
                                                                           The second approach involves purchasing rights to
                   employees, media representatives, investors,
                                                                           market research based on search terms.When a
                   analysts, value chain partners, and other interested
                                                                           user types in a search term, the results will appear
                   stakeholders. For customers, they can provide
                                                                           on the screen. In addition,“sponsored links” are
                   information to support a variety of pre- and post-
                                                                           available on other areas of the page. Companies
                   sales activity.They can provide information about
                                                                           can “purchase” these search terms, so that when
                   the products and services, how they can be used,
                                                                           these terms are entered, a link to the company’s
                   and where they can be obtained.They can provide
                                                                           page will appear on the sponsored section on the
                   information about pricing and features, comparing
                                                                           website. For example, Honda has purchased
                   these with competitors’ offerings. And they can
                                                                           variants of the terms “funny video” and “funny
                   provide customer support, maintenance and
                                                                           commercials” on various search engines for its
                   service information, as well as relevant contact
                                                                           Element sport-utility vehicle, since these terms
                   information for additional support.
                                                                           have demographic profiles that match likely
                   Online sales can be provided in many forms, and         Element buyers.These clicks, which are responsible
                   when products/services are digital such as .pdf         for about 40 percent of the Element’s website
                   files or programs to download, the website can          traffic, lead the user to a website that features
                   be used for instant purchase and delivery. For          commercials in which the vehicle “talks” to
                   other products/services, the site can be used           various sundry animals (Business Week 4-24-06).
                   to direct customers to purchase and delivery
                                                                           The use of new search advertising software that
                   locations or to select other options. Services can
                                                                           determines the order in which advertisements are
                   be scheduled, or in some cases provided, via the
                                                                           displayed has created new innovations at search
                   website as well. Links to affiliates can be provided,
                                                                           engines such as Yahoo and Google. It has also
                   to enable customers to easily access complemen-
                                                                           impacted the charges for advertising. Since much
                   tary products or services.
                                                                           of the banner advertising is sold on a pay-per-click
                                                                           basis, the search engines should place those ads
                   Search Marketing
                                                                           most likely to be clicked in the most prominent
                   Search marketing refers to activity designed to         spots. But, computerized auctions permitted less
                   direct stakeholders to find the organization or its     popular sites to buy premium ad locations by
                   products, services or brands using search engines.      awarding the location to those who paid the most
                   While Google is the most widely used search             per click. New systems are now determining the
                   engine, many others share the market, and each          advertisement display order that is most profitable
                   has a different approach to determining which           for the search engine based on the likelihood they
                   sites are listed and how they are ranked.When a         will be clicked.
                   user types in a search term, a set of words that
                                                                           Click fraud has been a recent concern and impacts
                   defines for the search engine what the user is
                                                                           the evaluation and cost of Internet marketing.
                   looking for, the search engine uses a complicated
                                                                           Sometimes organizations click on a competitor’s
                   algorithm to identify which websites containing
                                                                           website to increase the competitor’s costs. Some
                   those terms should appear on the screen, and
                                                                           have estimated that the average fraud rate for
                   in what order. In 2005, advertisers spent about
                                                                           search terms that cost advertisers more than two
                   4.7 billion U.S. dollars on this type of Internet
                                                                           dollars a click may be around 20 percent (Fortune
                   marketing (McKinsey Quarterly 6-27-06).
                                                                           9-18-06). Sometimes, there are automated systems
                   Because so much stakeholder interaction is              of “click fraud” with bogus websites getting a
                   conducted via the web, many organizations must          portion of the search engines’ revenue by artificially
                   improve search engine rankings. Ranking high in a       driving up the number of clicks. Some estimate
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that up to 30 percent of the clicks on the Internet      In the online environment, customers are often in
may be fraudulent (Fortune 9-4-06).                      charge of the interaction – they initiate interactions
                                                         with the organization and pull the information
Ads and Public Relations                                 they need.
Ads and public relations activities are used to          Relationship marketing offerings are often inter-
create awareness of a corporation and its products,      active in nature and can be designed to be used
and to establish or maintain an image. Among the         primarily as advertising channels, or as sources of
most widely used forms of Internet advertising           information and education for users. Because
are banner ads – the ads that often appear               customers agree to receive this information, they
across the top of a web page. It is estimated            represent a highly-targeted niche audience for
that advertisers spend about 2 billion dollars on        which marketing efforts are likely to be effective.
banner ads (McKinsey Quarterly 6-27-06).
                                                         Among the earlier forms of relationship marketing
Internet ads can take many forms. Banner ads can         were company bulletin boards and news groups.
be still or moving, and they can respond when a          Such mechanisms allow product users to
user rolls the cursor over or clicks on them. Kraft      communicate with each other (and sometimes
Foods has constructed entire IM campaigns using          with representatives of the organization) to
banner advertising.When a cursor is moved across         discuss the organization, the product or service,
a banner, the user is exposed to different recipes       and how to use the product or service effectively.
featuring Kraft products (Business Week 3-27-06).        Chat or instant messaging features, which allow
Related ads can take a variety of shapes and sizes       customers to communicate in real time with each
and can appear almost anywhere on the page.              other or with organization representatives,
                                                         provide a more interactive approach to customer
Video and audio advertising are of increasing
                                                         communication.These tools have been joined by
interest to Internet marketers as these formats
                                                         web logs or ‘blogs’. An organization blog is
are gaining prevalence on the Internet. Interstitial
                                                         maintained by the organization and posted at its
ads are small video ads that can precede a video
                                                         website. It is used to supply informal, current
viewed on the web. Online advertising formats are
                                                         information to readers, or to provide a site where
used for purposes similar to those of offline ads –
                                                         customers can provide their own comments.
to build awareness and interest in the organization,
                                                         Advertisers have also been known to pay
its brands, and its products/services, and to generate
                                                         independent ‘bloggers’ to mention their products
sales. In addition, in the online world, banner ads
                                                         in a positive light on their own websites to
and other formats seek to drive traffic to the
                                                         generate hype about the product or service.
organization’s websites, where the website then
takes over the advertising functions.                    Email has become an important medium for
                                                         relationship marketing. Customers provide email
Public relations documents, such as press releases
                                                         addresses and other information to the organization
posted or distributed online, serve a similar
                                                         and allow or invite the organization to send them
function to ads, in that they generate interest in
                                                         news, promotional offers, and other content
the organization and can make potential customers
                                                         through email messages.
aware of the organization’s plans and actions.
Press and media information can be provided at           Email and other forms of relationship marketing
the organization’s website, or can appear in online      are increasingly viewed as high-potential
newspapers, electronic magazines (e-magazines)           opportunities to direct campaigns to the specific
and other formats. And organizations can develop         segments most likely to respond to them.
their own newsletters or information portals, or         Information, promotions, and other offerings
become sponsors of online content sites or               provided through relationship marketing are
events. Because of the proliferation of online           often customized to address the specific interests
outlets, and the related increase in opportunities       of individual users. For example, customers might
to attract interest from these outlets, managing         receive discounts to frequently visited travel
online PR efforts can add breadth and complexity         destinations or notification that a favored author
to traditional PR roles.                                 has a new book in print.This approach is also
                                                         viewed as an important mechanism for establish-
Relationship Marketing                                   ing and nurturing the customer relationship (and
                                                         increasing sales).
Relationship (or permission) marketing refers
to actions that organizations pursue to develop          Email can also be used for broadcast-type ads,
relationships with current and potential customers.      for which permission is not obtained.These are
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                   gradually losing their effectiveness, and many are     system (GPS) feature. Users could, for example
MEASUREMENT        ignored by their recipients or filtered out by spam    receive ads or promotions from restaurants close
                   filters. And current and proposed legislation in the   to their current location.
                   US and elsewhere places restrictions on the
                                                                          Ubiquitous marketing is marketing that is attuned
                   nature and content of unsolicited ads.
                                                                          to environments where the user is surrounded by
                   RSS (really simple syndication) feeds provide          a variety of computing devices attached to the
                   information in a news-like format that can be          Internet. In movies, such environments are
                   linked to other sites and to users’ news readers.      represented by blackboards or billboards that
                   Users subscribe to these feeds, and information-       flash information of interest to a specific person
                   based services can also be provided to customers       walking by. As devices containing microprocessors
                   that establish a relationship with a company.          such as cars and microwave ovens are linked to
                   Webcasts can be used to distribute multimedia          the Internet, they can become marketing sites, for
                   over the Internet, and ‘webinars’ can be used for      example when locations of gas stations or recipes
                   seminar-like discussions. Podcasts often refer to      are downloaded to the devices. Communication
                   multimedia information that users can download         devices such as tiny radio frequency identification
                   on demand via portable computing devices or            (RFID) chips can be embedded in clothing, key
                   laptops.                                               chains, or labels applied to products. By tracking
                                                                          the movement of these chips, marketers can
                   Viral marketing refers to campaigns in which users
                                                                          receive information about the use of a product, or
                   are encouraged or expected to pass information
                                                                          target campaigns to specific users in real time.
                   along to other potentially interested Internet
                   users through a random process that resembles
                                                                          Marketing Research
                   the spread of a contagious disease.Viral marketing
                   has the potential to expand the set of customers       Online marketing research focuses on using the
                   that form online relationships with an                 Internet to gather information about customers
                   organization.                                          and other stakeholders. Organizations can use this
                                                                          information to develop a deeper understanding of
                   Mobile and Ubiquitous Marketing                        the needs and interests of their current customers.
                                                                          Many organizations today have customer relation-
                   Mobile and ubiquitous marketing, sometimes
                                                                          ship management or web analytics packages that
                   referred to as m-marketing and u-marketing, are
                                                                          allow them to track customer interactions in
                   marketing activities directed toward users of
                                                                          great detail. Understanding what customers are
                   mobile telephones, personal digital assistants, and
                                                                          doing when they interact with the organization
                   other devices that can send or receive information
                                                                          online is useful and important. It allows companies
                   when a user is away from a desktop computer
                                                                          to track customers through all steps in the
                   Internet connection.
                                                                          customer purchasing process, from pre-sales
                   Mobile marketing encompasses all of the online         search support to post-sales service.
                   marketing methods discussed above. Mobile
                                                                          The many mechanisms for gathering such
                   customers can be targeted via websites, search
                                                                          information include (a) monitoring what users
                   engines, ads, and relationship marketing. Some
                                                                          type into search engines, (b) asking users to
                   mobile marketing takes place over the wireless
                                                                          provide information through a registration
                   Web through websites that are similar in function
                                                                          process, and (c) monitoring patterns of access
                   to standard Internet websites, but designed to
                                                                          and time spent in different areas of the site.
                   accommodate small screen and graphics
                   constraints associated with mobile devices.            In addition to passively gathering information,
                                                                          organizations can conduct experiments to see
                   Users access websites or search engines in many
                                                                          how visitors respond to online stimulus.These
                   ways. For example, in the UK, when a mobile user
                                                                          experiments can often be conducted rapidly and
                   dials directory assistance, the requested phone
                                                                          their impacts used almost immediately by
                   number can be delivered in the form of a text
                                                                          marketers. Organizations can, for example, test
                   message with an ad attached; for example, a rental
                                                                          customer responses to various price points or
                   car ad could accompany the phone number for an
                                                                          examine the influence of promotions such as
                   airline. Mobile advertising has additional
                                                                          coupons, immediate-purchase discounts, or free
                   characteristics unavailable to traditional online
                                                                          gifts. Experiments can even be used to test the
                   marketing, such as targeting ads in real time to
                                                                          effectiveness of the online marketing activities
                   users based on their current location, which is
                                                                          themselves, such as testing the relative impact
                   available on phones with a global positioning
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of banner and other online ads by varying their          Intermediate Outputs:Awareness
color, size, placement, content, or tone. Almquist       and Perceptions, Attitudes and
and Wyner (2001) describe how Crayola, which             Intentions,Value Provision, Channel
provides substantial content at various levels for       Optimization, and Market Information
children, parents, and teachers, used experimenta-
tion to evaluate the effectiveness of email messages.    Intermediate outputs are the non-financial
The company varied attributes of their messages,         objectives pursued through IM initiatives and
such as the subject line, promotional offer, and call    activities. From a financial perspective, achieving
to action that were intended to drive customers          these outputs is not the end goal. Intermediate
to the Crayola.com site to complete a survey.The         outputs, such as a favorable attitude toward a
results were striking – the response rates varied        brand, are important because they are leading
from 10% to 34% for parents, and from 20% to             indicators or drivers of future financial
35% for educators.                                       performance. Intermediate outputs include:
                                                         • awareness and perceptions
Experimentation can have secondary benefits as
well – it can help build relationships with customers.   • attitudes and intentions
Customers who feel that they have made an                • value provision
investment in an organization, for example by            • channel optimization
taking the time to complete a survey, have an
                                                         • market information
increased interest in its success. And organizations
can enhance the relationship by thanking the             These intermediate outputs are described below,
customer or providing them with coupons or               and sample metrics for each output are provided
other benefits in appreciation for their engagement.     in Exhibit 8.

Of course, market research can also be used as           Awareness and Perceptions
a source of valuable information about an
organization’s other stakeholders. Increasingly,         Generating awareness is the first step in a process
the organization’s website is a primary site for         that leads to customer purchases and other
marketing an organization’s plans and results.This       desirable stakeholder behavior. Organizations and
information is regularly accessed by a variety of        industries engage in market conditioning activities
stakeholders, such as investors and financial            designed to make customers aware of an existing
analysts, current and prospective employees,             need, or to generate a need that didn’t previously
reporters and other members of the media, and            exist. Market conditioning results in demand, as
members of non-governmental organizations                it spurs customers to acknowledge a problem or
and advocacy groups. Many organizations include          need, and to initiate search behavior that helps
mini-sites or special regions within their websites      them clarify the need and identify options for
that are designed to meet specific needs of these        addressing it.
stakeholder groups.                                      Organizations can use IM to ensure that targeted
Marketing research can also be conducted in              customers become aware of the brand, and that
these areas, for example, to understand what             the brand becomes significant in comparison with
aspects of the organization are of greatest interest     existing brands as the customers start to seek
to various stakeholders, and to gather additional        solutions and develop preferences among the
information from them. For example, if an                available brands. Brand awareness is critical for
organization notices increased traffic to the            new brands, but as the brand matures it may be
environmental reporting pages of its                     less relevant as a driver of purchase behavior.
investor/member relations site, it can query             However, awareness relative to competing brands
visitors about who they are, what they are looking       continues to be a useful driver of purchasing
for and why, and whether they have found the             intentions and behaviors.
desired information. And the market information
so gained can ultimately be incorporated into the
organization’s market knowledge base, where it
can be combined with information in other
knowledge bases and used to support decision
making by interested business units.




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                   Exhibit 7: Processes
MEASUREMENT
                    Processes                Sample Performance Measures

                    IM Strategy,             • Number, cost, price and perception of products and services offered online relative
                    Structure, and             to competitors
                    Systems, and             • Offerings by customer lifestyle stage and segment
                    Leadership               • Ratio of value-creating program activities to total IM expense
                                             • Spending on initiatives and operation relating to website searches, ads and public relation
                                               searches, relationship searches and research
                                             • Quality of IM leadership

                    Websites                 •   Number of visitors, visits, repeat visits, and depth of repeat visits, purchase abandonment rate
                                             •   Site quality based on ratings and awards; customer satisfaction with the site
                                             •   Ease of navigation and speed; comprehensibility and physical attractiveness
                                             •   Pages of information provided, hit rates, page views, and stickiness
                                             •   Cost per click, cost per order, cost per customer acquired

                    Search Marketing         •   Paid and organic search engine rankings
                                             •   Visibility: search engine rankings and page locations relative to key competitors
                                             •   Click-through rates and number of site visits from paid and organic search marketing
                                             •   Number of conversions: qualified leads, initial purchases, etc.

                    Ads and Public Relations •   Number of impressions, frequency, net reach
                                             •   Click-through rates for ads and affiliate links
                                             •   Ad awareness; length of viewing time
                                             •   Quantity, quality, and frequency of media mentions
                                             •   Cost per thousand impressions (CPM)

                    Relationship Marketing   • Number of stakeholders and new stakeholders registered at site for emails, newsletters,
                                               RSS feeds, events
                                             • Number of stakeholders and new stakeholders participating in chats, user groups, blogs
                                             • Number of registrations, number of permissions granted

                    Mobile and               •   Number of ads sent to and received on mobile devices
                    Ubiquitous Marketing     •   Number of pages accessible from mobile devices
                                             •   Number and quality of site visits from mobile devices
                                             •   Number and quality of sites for ubiquitous marketing; number and quality of customers
                                                 accessible/accessed through ubiquitous methods

                    Marketing Research       • Number of stakeholders and number of stakeholder interactions stored in searchable format
                                             • Number of experiments conducted
                                             • Number of IP addresses affected, number and percentage of voluntary participants
                                               or respondents
                                             • Percentage or experiments with conclusive results




                   Attitudes and Intentions                                          design their own products, set their own price
                                                                                     points, solicit coupons or email ads, and create
                   Marketing increasingly focuses on managing the
                                                                                     their own user support groups.
                   lifetime value of the customer.Thus, development
                   of favorable attitudes toward the brands, services
                                                                                     Value Provision
                   and products, and generation of intentions to take
                   a desired action, are increasingly important. It is               Including value provision as an intermediate goal
                   well understood that attitudes don’t always                       of Internet marketing recognizes that information,
                   reliably translate into intentions to act, nor do                 support, and services make up an important part
                   intentions to act reliably translate into behavior.               of the organization’s value proposition.Whether
                   Nonetheless, these intermediate outcomes can                      the customer ultimately purchases a product or
                   help an organization predict outputs, and may be                  service online or through another channel, online
                   considered indicators of an asset (customer                       marketing can significantly contribute to the value
                   equity) that is developing within the organization.               the customer receives. Other stakeholders seek
                                                                                     value from the organization through its online
                   In addition, in the online environment customers
                                                                                     offerings. For example, current and potential
                   increasingly drive marketing action.The online
                                                                                     investors commonly visit corporate websites for
                   environment makes it possible for customers to
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financial data as well as current information about     locations rather than lose it to another website.
actions and plans.The Internet can be used as an        Thus, it is critical that organizational structures,
information channel as well as a sales channel.         systems, and rewards be established to encourage
The amount of rich information available to             this cannibalization and channel optimization.
stakeholders is almost unlimited.
                                                        In some cases, the business migrates from stores
The value it provides can take a variety of forms.      or catalogues to the Internet, and often in the
For example, it may be information that supports        reverse direction.The electronics retailer, Circuit
a sale, such as data that allows a customer to          City, found that over 60 percent of its online sales
compare products, or mission and values inform-         were being picked up in-store, prompting it to
ation that help potential employees form an image       remove the barriers between the Internet and its
of the company. Services can be offered online,         brick-and-mortar locations (Fortune 8-21-06).
such as the ability to complete a sales transaction,    Developing and coordinating systems to support
select a distribution method, or engage in a chat       these migrations is very important, as it impacts
with a customer service representative. Opening         the effectiveness of the channels and the channel
communication between the stakeholder and the           managers. Measurement is particularly difficult and
organization can provide an additional source of        impacts reward systems.
value, for example when customers are allowed
                                                        Benefits and costs will likely affect the various
to make suggestions, or community members are
                                                        channels differently. Further, as discussed in this
allowed to voice complaints.
                                                        guideline, Internet marketing programs are likely
Value-added IM content can also be valuable to          to have multiple objectives.Thus, often consumers
customers and other stakeholders. Offerings             may go to Internet sites for information and then
providing highly detailed information, with links       make their purchases in the stores. Since cross-
to related websites, current news updates, online       channel collaboration is typically encouraged, and
games, chat rooms, and user support groups,             cannibalization is often required, measuring the
increase the value online marketing can deliver.        impacts is both important and often challenging.

Channel Optimization                                    Market Information
Some organizations sell only through online             Market information is the product of both market
channels .Other organizations must balance online       research, as discussed above, and normal customer
sales and sales through other channels. Channel         and stakeholder activity. Information gathered
optimization encourages customers to purchase           actively through marketing research produces
products or to obtain service or support through        significant financial benefits to Internet marketing.
the most cost-effective channels. A website can
                                                        Information gathered passively, for example by
provide online sales but encourage customer
                                                        monitoring the behavior of website visitors, can be
traffic in stores. Or a retailer, such as a pharmacy,
                                                        scanned regularly to identify changes and trends.
might encourage in-store customers to make
                                                        For example, search information can be used to
future purchases through a more lucrative online
                                                        identify needs not currently being met but could
channel, and then use online information to
                                                        be, along with visitor demographics that can be
encourage mail orders of those drugs that require
                                                        tracked to identify new segments and targeting
written signatures.
                                                        strategies. It can also be used to identify potential
Ideally, rather than simply cannibalizing sales from    problems associated with the organization, its com-
other channels, the Internet can be used as a tool      petitors, technologies, and other external forces.
for dynamic channel optimization. For example,
                                                        Using the Internet, marketers can launch market-
online promotions can drive customers to
                                                        ing campaigns and monitor their responses
overstocked stores, or use in-store displays to
                                                        immediately.When designed to allow for
shift purchases of inventory with high carrying
                                                        responsiveness, web-based campaigns can be
costs toward online channels. Similarly, products
                                                        continually adjusted based on consumer responses
and services can be bundled, combining online
                                                        (Aufreiter et al. 2001). Staples.com conducts real-
and other channels. And organizations can use
                                                        time monitoring of its online activity and refines
channel optimization to dynamically correct
                                                        its marketing campaigns several times daily.This
production and distribution errors.
                                                        detailed information allows Staples.com to adjust
However, cannibalization is also valuable. Organi-      its marketing budgets weekly.
zations would certainly prefer their website steals
business from their brick and mortar store
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  S T R AT E G Y
                   Exhibit 8: Intermediate Outputs
MEASUREMENT
                     Intermediate
                     Outputs                Sample Performance Measures

                     Awareness and          • Percentage of target customers with salient awareness of the brand (know why the brand
                     Perceptions              is of value)
                                            • Percentage of target customers with a favorable impression of the brand relative to
                                              competing brands
                                            • Customer’s perception of brand’s ability to deliver on customer needs (derived from points
                                              1 and 2 above) compared to competitors.To measure this, you could compare your brand’s
                                              perceived ability to deliver to those of your competitor – e.g. our brand 4.5, top competitor
                                              4.0. You could then calculate a ratio: 4.5/4.0 to get a feel for the magnitude of the difference
                                            • Rate of customer referrals

                     Attitudes and          • Brand penetration: purchasers as a percent of total population
                     Intentions             • Relative perceived price to value
                                            • Percentage of target customers willing to try the product; percentage intending to try product;
                                              churn rate
                                            • Likelihood of future purchases of related products and brand extensions
                                            • Number and frequency of visits

                     Value Provision        •   Return visits to informational sites and pages
                                            •   Number of query transactions and satisfaction with responses
                                            •   Number of push messages opened, number of pull messages requested
                                            •   Ratio of successful to unsuccessful site searches

                     Channel Optimization   • Percentage share of each channel’s total gross margin (total for all participants within a channel
                                              is 100%)
                                            • Relative channel performance, such as selling costs, unit margins, and inventory turnover rates
                                            • Channel stock positions across channels and across participants within channels (and number of
                                              out-of-stock situations)

                     Market Information     •   Number and percentage of experiments that initiated IM improvements
                                            •   Frequency and scope of IM updates
                                            •   Number and percentage of experiments that initiated changes to business processes or products
                                            •   Number of customers, stakeholders, and interactions identified and categorized


                   Market information can also be gathered from                     Final outputs are:
                   standard sales behavior.The benefits of that                     • customer value,
                   information are amplified for organizations that
                                                                                    • brand equity,
                   allow customers to choose product or service
                   components or delivery options online. Organi-                   • knowledge base, and
                   zations that gather information regularly can use                • financial flows (increased sales, reduced costs,
                   it for several purposes. In addition to initiating                  accelerated cash flows, lower working capital,
                   procurement and production, this information                        lower fixed capital, reduced revenue volatility,
                   can be used to customize customer offerings,                        and reduced risks).
                   and provide current information to interested
                   business units or functional units, such as R&D                  Customer Value
                   and Engineering.                                                 Gaining margins from customer sales is generally
                                                                                    assumed to be the ultimate long-term objective
                   Final Outputs: Customer Value,                                   for all marketing activity. Many analytics packages
                   Brand Equity, Knowledge Base, and                                use, as the final variable of interest, some measure
                   Financial Flows                                                  of sales or related profitability: which product,
                                                                                    customer, or campaign factors led a customer to
                   Final outputs are the detailed financial objectives              purchase or not purchase an item, or how strongly
                   the organization seeks through its IM processes.                 these factors relate to total customer sales or
                   As described above and shown in Exhibit 3,                       profits (profit often refers to gross margins,
                   these outputs can be divided into financial flows                calculated as sales revenue less product/service
                   (a) realized during the current period, and                      costs).
                   (b) expected to be realized in future periods as a
                   result of current period IM investments.The current              Traditionally, sales, market share, or growth in
                   value of future flows are reflected in the values of             share were seen as key dependent variables.Today,
                   the marketing assets from which they are derived.                marketing managers are also interested in the
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quality of a sale, its gross margin, and the net        Brand Equity
margin after deducting product/service, marketing,
                                                        The importance of product and organizational
and selling costs.They are also interested in
                                                        brands is well recognized by marketing managers.
sequencing issues – a one-time sale is qualitatively
                                                        Traditional thinking about marketing focuses
very different from sales within a stream of
                                                        primarily on gaining sales and market share.Today,
customer purchases.
                                                        marketers are well aware of the importance of
Customer value reflects both the revenues and           brand equity in their relationships with customers
the costs associated with individual customers or       and channel partners. Here, we differentiate brand
segments.The term ‘customer value’ is used here         equity from customer value. Customer value refers
instead of customer lifetime value (CLV), because       primarily to the stream of gross margins attributable
the latter term has been used to refer to many          to an IM investment. Brand equity captures the
different types and combinations of marketing           latent value that can be realized through customer
investments and returns, and often includes future      purchases in future periods. Brand equity also
investments.                                            captures a host of other sources of expected
                                                        future cash flows associated with the purchases
Customer value here refers to future incremental
                                                        customer make because of loyalty to the brand.
benefits flowing from current period IM invest-
ments. It is the net present value of the stream of     Brand equity refers to the asset value of brand –
revenues and expenses the company expects,              an intangible marketing asset. As with the other
without additional future IM investments. (Additional   marketing assets in the IM payoff model, brand
incremental benefits are realized only after future     equity incorporated in ROI calculations is the
investments are included in ‘brand equity’). It is      incremental increase in brand value attributable
the value that would accrue without any further         to an IM investment.The value of brand equity can
spending – the value already created through the        be conceptualized and measured in a variety of
IM initiative. Brand equity is the spillover effect –   different ways. Brand equity encompasses (a) value
the value that has been generated but can only be       related to sales, such as market share and price
realized through future IM or other investments.        premiums attributable to the brand, and (b) value
So, some stream of revenue occurs from a single         flowing from stakeholder relationships, trust,
IM investment where others only continue to             and loyalty.
produce a revenue stream with a continued
                                                        Brand equity results in returns to the corporation
expenditure.Thus in thinking about the payoff of
                                                        in a variety of ways. Most well recognized is the
these expenditures, a distinction of whether the
                                                        value brand equity has in reducing promotion and
returns are likely to continue to flow without
                                                        selling costs, and increasing price premiums.
additional expenditures or whether additional
                                                        Customers with a positive perception of the
expenditures will be required is important.
                                                        brand respond more favorably to marketing
These customer value benefit streams include the        initiatives and are willing to pay a premium for the
value of expected gross margins related to direct       product.Therefore, strong brand equity leads to
sales, along with (a) any cost reductions associated    higher returns on spending for advertising and
with these customers, and (b) gross margins from        other marketing costs. But brand equity not only
referrals these customers make. Pepsi has found         reduces marketing costs and increases related
that drinkers of its diet cola have very high           revenues, it can also impact profitability in many
customer value because of brand loyalty, impelling      other ways. For example, it can accelerate cash
the company to direct a sizeable sum of its IM          flows to the corporation, as customers more
funds towards Diet Pepsi.Walmart.com, the online        rapidly test and purchase new products when
division of Wal-mart, calculates customer value by      brand equity is high (Srivastava, et al 1998.).
using its consumer tracking tools to gauge the
                                                        Impacts of IM investments extend also to other
value of its advertising. Instead of simply focusing
                                                        stakeholders, whose decisions and actions may be
on one-time purchases,Walmart.com includes all
                                                        influenced by the organization’s reputation.These
purchases made by particular customers to
                                                        other stakeholders may include present and future
calculate the value of its advertising expenditures
                                                        employees, suppliers, and others. Organization
(Wharton 2006). Customer value can also include
                                                        factors that contribute to brand equity extend
any other benefits or costs derived from the
                                                        beyond perceptions about products and services
current investment, including impacts on brand
                                                        to include perceptions about the organization’s
equity and knowledge from the stream of future
                                                        vision and leadership, its workplace environment,
purchases incorporated in the customer value
                                                        and its financial, social, and environmental
concept described above.
                                                        performance.
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  S T R AT E G Y
                   Knowledge Base                                          development to post-sales service. And it can be
MEASUREMENT                                                                used as a source of information for improving
                   The value of the company’s knowledge base is akin
                                                                           interaction and engagement with stakeholders
                   to the value of the organization’s other intellectual
                                                                           outside the value chain. For example, data
                   property. Depending upon how this information
                                                                           gathered through IM processes could be used
                   was gathered, and the privacy rights granted to
                                                                           for (a) capacity planning and optimization,
                   customers and other stakeholders, the knowledge
                                                                           (b) evaluating risks associated with inventory
                   base could be sold for a cash value. Amazon.com
                                                                           management and pricing decisions, (c) tracing
                   has recently provided its sales information to
                                                                           product defects to suppliers and shippers, or
                   companies like Mpire.com, a website that allows
                                                                           (d) deciding what social concerns to report
                   customers to compare items on Ebay.com with
                                                                           to investors.
                   the most recent sales prices of other online
                   retailers such as Amazon (New York Times 8-14-          Knowledge generated through IM activities, like
                   06). If the information must remain private or only     other forms of business intelligence, is an asset
                   be used internally, the value of the knowledge base     of increasing importance in many corporations.
                   lies in the potential of the organization to use this   Turning data into actionable knowledge can
                   asset to generate profits for the organization or       generate significant financial payoffs for the
                   wealth for the stakeholders.                            corporation.
                   Organizations must keep up with the constantly
                                                                           Current Financial Flows
                   changing patterns of consumer needs, interests,
                   and capabilities, as well as with changes in the        Current financial flows are closely related to
                   organization’s industry and changes in marketing        marketing assets.They are the revenue and cost
                   processes and their effectiveness. Dynamic business     flows accruing during the current period (or
                   environments demand rapid responses to changes,         period of analysis) that flow from the IM invest-
                   and marketing knowledge can support those               ment. Revenues include online sales as well as
                   responses. For example, in responding to a change       the incremental value of sales through other
                   in consumer demographics, an organization can           channels driven by IM. IM can also accelerate cash
                   conduct research on customer reactions much             collections from revenues and other cash flows,
                   earlier in the product development life cycle.          and can enhance the value of current revenue
                                                                           through reducing revenue volatility and risk.
                   Many organizations still presume that the product
                   or service comes first, and marketing activities        Revenues can also accrue from other IM-related
                   follow as a necessary consequence. But in the           sources. Affiliate marketing programs can provide
                   wake of Internet-driven trends such as product          revenue to organizations for linking to other
                   customization and relationship personalization,         organizations’ websites, displaying their ads on
                   marketing increasingly becomes the driver of            corporate sites, through cross-branding
                   decisions on which markets to target and which          opportunities, and through customer referrals.
                   products and services to provide – decisions            Organizations that provide high quality use-related
                   that are both central to the mission and value          content can generate revenue through
                   proposition of the organization and influence           membership, subscription, and fee-per-usage
                   actions in all its functional areas.                    income. Organizations can sell information
                                                                           gathered via the Internet, such as entries to a
                   The knowledge base is an important driver and
                                                                           website’s search feature or customer profile
                   indicator of an organization’s ability to innovate.
                                                                           information. Organizations can also sell market
                   Most simply, it has potential to improve the
                                                                           information and research findings.
                   organization’s marketing and sales capabilities. For
                   example, knowledge gained from customers can            Relevant current costs include reductions in the
                   be used to develop new product concepts and             cost of sales and selling expenses. Numerous
                   determine the optimal mix of channels for moving        selling costs can be reduced through IM initiatives,
                   products to the consumer. Knowledge relating to         such as the costs of distribution when products
                   the expected future purchasing patterns of each         are shipped directly to the customer, or when the
                   customer can help align marketing resources such        customer bears the cost of executing a sales
                   as promotion and service within each channel            transaction or customer support services. Cost
                   with customer interests.                                savings can also accrue from reduced capital
                                                                           requirements.Working capital can be reduced as
                   Beyond this, the knowledge base allows the
                                                                           IM initiatives help organizations predict and
                   organization to learn about and improve every
                                                                           manage inventory stocks. Receivables can be
                   aspect of the value chain – from research and
                                                                           reduced through regularly scheduled online
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payments or reminders. Fixed asset requirements                   risks can also be reduced as relationships with
can also be reduced. For example, the need for                    stakeholders are strengthened. For example,
administrative office space can be reduced as                     stronger relationships with employees, suppliers
marketing responsibilities shift to customers, and                and other trading partners reduce transaction
warehouse space requirements can be reduced as                    costs and the cost of replacing partners that end
inventory flows become more manageable and                        relationships. IM can also reduce engagement
predictable. Organizations that execute sales                     costs associated with not-for-profit organizations,
transactions online can reduce the need for brick-                and costs associated with poor media coverage
and-mortar outlets. Costs relating to stakeholder                 and regulatory compliance.

Exhibit 9: Final Outputs

 Final Outputs:
 Marketing Assets             Sample Performance Measures

 Customer Value               •   Customer lifetime value
                              •   Number of clients and potential clients at various stages in the sales cycle
                              •   Product usage volume
                              •   Frequency and quantity of online purchases; willingness of customers to pay premium
                                  or search

 Brand Equity                 • Incremental cash flow from brand, relative to estimated cash flow from unbranded products
                              • Difference in market and book value attributable to brand, based on estimated market value
                                without brand
                              • Estimated value and increase in value of intellectual property rights such as domain names,
                                logos, trade dress (online appearance, copyrights, web copy, advertising visuals etc.).

 Knowledge Base               • Estimated exchange value of knowledge base
                              • Estimated actionable value from scheduled queries to knowledge base
                              • Estimated value of knowledge base resulting from innovations in corporate and functional
                                strategies, structures, and processes
                              • Estimated value of knowledge base resulting from innovations in business processes
                                and products



 Final Outputs:
 Current Financial Flows      Sample Performance Measures

 Increased Revenue            • Sales revenues by channel
                              • Sales growth
                              • Affiliate advertising revenue
 Accelerated Cash Flows       • Current period cash flow
                              • Growth in cash flows

 Reduced Revenue Volatility   • Stability of revenue stream
                              • Percent revenue from repeat customers

 Lower Costs                  •   Product costs and margins
                              •   Inventory carrying and distribution costs
                              •   Customer service cost
                              •   Marketing and sales costs

 Lower Working Capital        •   Inventory stocks needed to support sales through Internet and other channels
                              •   Inventory turnover
                              •   Cash requirements
                              •   Receivables balance and quality

 Lower Fixed Capital          •   Market value of physical sales outlets and equipment
                              •   Market value of warehouses, distribution centers, and equipment
                              •   Market value of selling and administrative offices and equipment
                              •   Sales to fixed asset ratio

 Reduced Risk                 •   Stock and bond ratings
                              •   Cost of capital
                              •   Contingent liabilities
                              •   Quality of stakeholder relationships

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  S T R AT E G Y
                   Exhibit 10: Outcomes
MEASUREMENT
                     Outcomes                    Sample Performance Measures

                     Shareholder Value           • Long-term IM ROI: (increase in marketing assets + sales margins – IM investment) /
                                                   IM investment
                                                 • Change in market value attributable to IM initiatives
                                                 • Economic Value Added (EVA)

                     Organizational              • Short-term IM ROI: (sales margins – IM investment) / IM investment
                     Profitability               • Current period cash flow; growth in cash flow
                                                 • Current period earnings; growth in earnings




                   Outcomes: Shareholder Value and                                    5. IMPLEMENTING THE FINANCIAL
                   Organizational Profitability                                          PERFORMANCE PAYOFF MODEL:
                   For IM initiatives to be successful, their outputs                    A COMPREHENSIVE EXAMPLE
                   must eventually result in improved financial                       In this section, we provide a simple (yet compre-
                   performance.Viewed simply, the marketing assets                    hensive) example of how to implement the
                   generated through IM investments enhance the                       performance model. Implementation follows the
                   organization’s market value and are incorporated                   four-step approach described earlier. This process
                   into shareholder value. Likewise, the financial flows              is restated in Exhibit 11.
                   from IM investments enhance the organization’s
                   current profitability. Both the future value stored                We apply this process to a company that will be
                   in the marketing assets and the financial flows                    called,“U-Gas”.We then build a financial
                   already realized are incorporated into the ROI                     performance model for Internet marketing by
                   calculation, as shown in Exhibit 5.These financial                 implementing the four-step process presented in
                   returns are the ultimate outcome, and can be used                  this Guideline. A brief description of U-Gas is as
                   to (a) evaluate IM investments already made, and                   follows:
                   (b) predict outcomes from future IM investments                        U-gas operates a chain of gas stations throughout
                   that can be used to guide resource allocation                          Wyoming and Montana.The company operates
                   decisions.                                                             a simple website with a feature that allows site
                                                                                          visitors to search for gas station locations, and to
                   Exhibit 11: Internet Marketing                                         obtain basic information about the company.
                               Performance Model                                          Mobile phone coverage in this region has improved
                               Four-Step Process                                          greatly in recent months, and U-Gas has recently
                                                                                          launched a campaign to attract mobile phone
                                                                                          customers who drive in the area.The campaign
                      1. Develop the IM payoff model                                      includes a website for mobile customers along with
                                                                                          billboards and signage at gas stations, to drive users
                                                                                          to the site.The billboards and signs display the
                                                                                          message: “Press UGas # on your phone for nearby
                      2. Identify the linkages
                                                                                          U-Gas locations.” When a user makes the call and
                                                                                          enters the site, a list of stations near the mobile
                                                                                          phone base station or cell tower from which the
                      3. Define metrics                                                   call originated is displayed. The locations are
                                                                                          accompanied by text that reads: “Click on a station
                                                                                          for a map and free offer.” When a user clicks on
                      4. Calculate ROI                                                    station, a map appears along with a message that
                                                                                          reads: “Click here for a free text message with your
                                                                                          map and a coupon.” When the user clicks, a text
                                                                                          message is sent to the mobile phone; it reads
                                                                                          “Show this message to station attendant to receive
                                                                                          a free 24-oz soda with your fill-up.” The message
                                                                                          also says “Reply to this message to register with
                                                                                          U-Gas – receive coupons and station locations

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   when you’re driving away from home”.The message           External environment:
   contains a code, which the attendant records, that
                                                             Mobile phone coverage in Wyoming and Montana
   indicates whether the customer is a new, repeat,
                                                             is increasing, and mobile phone usage is increasing
   or registered user, and whether the user is away
                                                             in this sparsely-populated region.
   from home.
                                                             Processes: IM activities and investments
Step 1: Develop the IM Payoff Model
                                                             IM strategy, structure, and system
The payoff model for U-Gas is shown in Exhibit 12.
The model is a simplified version of the complete            The IM strategy for U-Gas is focused on
payoff model (Exhibit 1) – it shows only items               encouraging mobile users to become customers
relating to the above mobile phone campaign.                 by providing valuable information about gas
                                                             station locations. Distances between towns and
Inputs: external factors that influence IM                   gas stations in this region are often large, and
Corporate strategy:                                          drivers in the region carefully monitor their
                                                             remaining gas as they drive.
The company wants to target mobile phone users
– a demographic that frequents large international           Billboards:
oil companies and traditionally gives low patronage          Billboards are used to support the IM strategy and
of U-Gas stations.                                           drive users to the wireless website.
Marketing strategy:                                          Website:
The marketing strategy focuses on maintaining a              U-Gas has developed a site on the wireless web.
brand image of a local company that cares about              The site uses mobile phone base stations or cell
its customers.                                               tower locations to provide users with a listing of
                                                             the three nearest station locations. Upon request,
                                                             these locations are sent via text message to the
                                                             user’s mobile phone.


Exhibit 12: U-Gas: Internet Marketing Payoff Model


  INPUTS                         PROCESSES                                      OUTPUTS             OUTCOMES


Corporate                                                         Intermediate            Final
strategy: target                                                  Outputs                 Outputs
cell phone
users
                                                                                     Customer
                                                                 Enhance
                                                                 awareness of        value
                                        Billboards
                                        advertising              brand and           Brand equity
                                        website                  locations
Marketing
                      IM strategy:                                                   Knowledge
strategy:                               Wireless                 Increase
home-town             locate stations                            intention to        base
                      via cell phone    website
image                                   showing                  patronize
                                        station                  stations                           ROI
                                        locations                Provide
                                        Mailing list for         valuable
                                                                                     Increased
                                        automatic                location
External                                                                             revenue
                                        location                 information
environment:                            listings                 to drivers
increase in
cell phone use

     ▲
                                                 Feedback Loop

                                                                                                                ▼
                                                                                 ▼




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MANAGEMENT

  S T R AT E G Y
                   Mailing list:                                                       Value provided:
MEASUREMENT        U-Gas allows users to register for an automatic                     Locations of nearby stations are valuable to
                   mailing list, which sends nearby service station                    customers – locations help customers identify
                   locations to customer mobile phones when they                       stations as well as other services such as
                   are distant from their home mobile phone base                       restaurants, which are often co-located.
                   station or tower.
                                                                                       Market information:
                   Intermediate Outcomes: Intermediate
                                                                                       U-Gas monitors customer searches and records
                   indicators of investment effectiveness
                                                                                       information about the locations of customers who
                   Awareness:                                                          need a station.The information can be useful in
                                                                                       planning locations for future stations.
                   U-Gas seeks to make mobile phone users aware
                   of the company, its station locations, and its                      Final Outputs: Objectives pursued through IM
                   wireless website offerings.
                                                                                       Increased revenue:
                   Intention:
                                                                                       U-Gas seeks additional revenue from the mobile
                   U-Gas encourages customers to engage in                             customer segment.
                   pre-purchase research by finding nearby station
                   locations

                   Exhibit 13: U-Gas: Causal Linkages


                                                               ROI
                                    (Financial Flows + Increase in IM Assets) – IM Investment                          OUTCOMES
                                                             IM Investment
                                                                                                                 (Return on IM Investment)




                                    Sales to                   Customer         Brand        Knowledge               FINAL OUTPUTS
                                     target                      Value          Equity         Base                     (IM Returns)
                                   customers




                                    Awareness          Intention        Value            Market                      INTERMEDIATE
                                                       to purchase      provided         information                   OUTPUTS




                                                              Wireless              Text
                                       Billboards              web                 mailing
                                                               site                  list                              PROCESSES
                                                                                                                     (IM Investment)
                                                     IM strategy – provide locations
                                                          to mobile customers




                                    Increase in               Target cell              Maintain
                                    cell phone use            user segment             local image                       INPUTS




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Customer value:                                            Step 2: Explore Causal Linkages
Customers who have located and purchased gas               Once U-Gas has identified those elements in
from a station are expected to return to the               the IM payoff model that are relevant to this IM
station for future fill-ups.                               campaign, the company can begin to explore the
                                                           relationships between elements.To do this, U-Gas
Brand equity:
                                                           considers how each of the elements interacts with
U-Gas intends to strengthen its current image              other elements to drive success for the
as a friendly and helpful local citizen, which should      IM initiative.
result in sales when gas stations are opened in
                                                           Exhibit 13 visually presents how the elements
previously unserved locations.
                                                           interact. Sometimes called a strategy map or a
Knowledge base:                                            causal linkage map, this diagram traces the
                                                           pathways through which corporate and IM
U-Gas records information about (a) all
                                                           strategies ultimately result in financial outcomes
transactions through the site, (b) mailing list
                                                           for the company.The diagram shows how
registrants, and (c) which customers fill up and
                                                           strategies influence the processes pursued
become repeat customers.
                                                           through IM investments, how these processes
Outcomes: Final objectives sought through the              work to drive the intermediate and final outputs
IM initiative                                              desired by the IM function, and finally, how these
                                                           outputs result in financial performance and ROI
ROI:
                                                           for the corporation.
U-Gas seeks to generate positive returns on its
Internet marketing investments


Exhibit 14: U-Gas: Metrics Dashboard

                                           U-Gas IM Metrics Dashboard

                                                December     January      January
                                                Baseline     Target       Results     Variance     Evaluation

  Inputs:
  % mobile users who are U-Gas customers          10%           10%         11%          10%       Excellent
  % presence in small towns in region             38%           39%         39%            0%      Good
  # of mobile phone users in the region        400,000       440,000     470,000       30,000      Excellent


  Processes:
  % of stations served by billboards              50%           70%         63%         -10%       Poor
  % site accesses served w/3 locations            78%           95%         96%            1%      Good
  # of registered customers                      6,894        10,000      12,315        2,315      Excellent


  Intermediate Outputs
  # of drivers passing billboards              320,000       440,000     380,000      -60,000      Poor
  # of wireless website visitors                 6,297        20,000      24,322        4,322      Excellent
  # messages to registered customers            14,227        60,000      95,484       35,484      Excellent


  Final Outputs
  Customer value                               $90,000     $200,000     $235,000      $35,000      Excellent
  Brand equity                                       0      $25,000      $45,000      $20,000      Excellent
  Knowledge base                                     0      $10,000      $40,000      $30,000      Excellent
  Current financial flows                      $40,000      $95,000     $100,000       $5,000      Good
                                              $130,000     $330,000     $420,000      $90,000      Excellent


  Outcomes
  Return on Investment                            -35%          10%          40%        300%       Excellent


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MANAGEMENT

  S T R AT E G Y
                   Step 3: Develop Metrics                                             be confusing and cumbersome to use. Here, the
MEASUREMENT                                                                            metrics considered most important for managing
                   Using the causal linkage model, U-Gas determines
                                                                                       IM performance are inserted into a one-page
                   which metrics can best represent each element
                                                                                       metrics dashboard, shown in Exhibit 14.
                   contributing to financial performance.To keep the
                   example simple, we assume that U-Gas selects                        The metrics dashboard provides a simple way to
                   exactly one measure for each element in the                         present metrics that allow the company to
                   payoff model.                                                       monitor all aspects of its IM investment. By listing
                                                                                       the metrics in the order represented in the IM
                   Even in this simplified model, a large number of
                                                                                       payoff model (inputs, processes, outputs,
                   metrics can be used to monitor IM actions and
                                                                                       outcomes) the dashboard usefully tracks progress
                   results. Although metrics are very helpful in
                                                                                       and identifies potential problems in achieving the
                   planning and evaluating investments, they can also
                                                                                       company’s financial performance goals.



                   Exhibit 15: U-Gas: Return on Investment Calculations

                             1       Calculate the Monetary Value
                                        of IM Initiative Returns

                                                                                                          Financial                 Marketing
                                       Item               Description                                     Flows                     Assets

                    CUSTOMER           Increase in customer value associated with this investment         Flows realized in         Present value
                    VALUE:                                                                                current period            of expected flows

                    Revenue:           Revenue            Sales to mobile phone-using customers                      $500,000           $1,250,000

                    Costs:             Cost of            Cost of gas                                               $400,000            $1,005,000
                                       goods sold

                                       Direct selling     Cost of soda                                                  $4,000             $10,000
                                       expense

                                                                                          Net Revenue                 $96,000             $235,000

                    Other Inflows:     Other costs        Savings relating to station attendant hiring                  $4,000
                                                          and training costs

                                       Savings from                                                         $ + ........0........
                                       working capital

                                       Savings from                                                         $ + ........0........
                                       fixed capital

                                                                      TOTAL CUSTOMER VALUE                          $100,000              $235,000

                    BRAND              Increase in brand value associated with this investment
                    EQUITY:

                    Revenues:                             Expected increase in net revenue at future                                       $40,000
                                                          locations as a result of the campaign

                    Costs:                                Expected savings relating to future hiring;                                       $5,000
                                                          reduction in re-contracting costs with soda
                                                          and food distributors

                                                                          TOTAL BRAND EQUITY                                               $45,000

                    KNOWLEDGE Increase in knowledge base associated with this investment
                    BASE:

                    Revenues:                             Increased revenue from food sales associated                                     $15,000
                                                          with future soda promotions

                    Costs:                                Reduced cost of future market research                                           $25,000
                                                          for determining location of new stations

                                                                    TOTAL KNOWLEDGE BASE                                                   $40,000

                                                                                  TOTAL RETURNS                     $100,000              $320,000

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         2      Calculate the Monetary Value
                 of IM Initiative Investment

 INTERNET            Cost of resources invested in Internet marketing initiative
 MARKETING
 INVESTMENT:

 One-time                               Campaign development; IT architecture
 Expenses                               purchase and set-up, design and implementation
                                        of website, mailing list, customer database, and
                                        mobile tower location application, billboard
                                        design and set-up; development of station
                                        policies and procedures                                       $200,000       $ – ........0.........

 Ongoing                                Maintenance of software and hardware,
 Expenses                               Internet service provider costs, billboard rental,
                                        training for station personnel                                 $40,000                  $60,000

 Allocations                                                                                 $ +/– .......0.......   $ +/– .......0.......

                                                        TOTAL IM INVESTMENT                           $240,000                  $60,000



         3         Calculate the IM Initiative
                              ROI


 (Marketing Assets + Current Financial Flows)       –       IM Investment
           ($320,000 + $100,000)                    –    ($240,000 + $60,000)
                                                                                   = 40% Return on Investment
                        ($240,000 + $60,000)
                           IM Investment




Step 4: Calculate ROI                                                  contracts when they expire, and the costs of
                                                                       expanding contracts to cover new stations.The
The final step in evaluating the financial payoffs
                                                                       total value of incremental increases in brand
from IM is calculating ROI, as shown in Exhibit 15.
                                                                       equity resulting from the U-Gas campaign is
The calculation shows that the IM investment has
                                                                       estimated to be $45,000.
contributed to financial performance in a variety
of expected and unanticipated ways.                                    The final benefit accruing from the campaign
                                                                       results from an increase in the value of the
The customer value section shows how the
                                                                       company’s knowledge base.The web management
mobile web campaign has resulted in sales margins
                                                                       software records each time a customer (a) enters
or net revenue of $96,000 realized in the current
                                                                       and searches the site, (b) receives store location
period, and $235,000 expected through repeat
                                                                       information via text message, (c) registers for
purchases and referrals directly attributable to the
                                                                       automatic emails when driving away from home,
U-Gas mobile web campaign. By attracting new
                                                                       and (d) purchases gas and food.The information
customers, and adding to net sales, the campaign
                                                                       captured thus far will allow the company to
has drawn the attention of qualified potential
                                                                       analyze the food purchases of customers receiving
employees who have sought employment at U-Gas
                                                                       free soda, which will be useful in planning effective
stations, and has reduced the company’s hiring and
                                                                       food-related campaigns in the future.This
training expenses by a total of $4,000.
                                                                       information is valued at $15,000. In addition,
The campaign has also been effective in building                       the knowledge gained by tracking which station
brand equity, which is expected to result in sales                     locations customers most frequently request
margins (without further marketing expense) at                         can be used to place new stations in the future.
planned station locations after new stations are                       This information can reduce the cost of market
opened. As has been realized in the current                            research by an estimated $25,000.
period, this brand equity is expected to result in
                                                                       The costs associated with the U-Gas campaign
cost savings related to future hiring. In addition,
                                                                       investment include a variety of one-time and
brand equity built with soda and food distributors
                                                                       operating expenses that include: creative costs of
as a result of this effective campaign is expected to
                                                                       developing the campaign, information technology
reduce the costs associated with re-establishing
                                                                                                                                              35
MANAGEMENT

  S T R AT E G Y
                   expenses associated with hardware and software,        standardized analysis for evaluating Internet
MEASUREMENT        and the costs of developing and implementing           marketing expenditures, for both planning and
                   policies and procedures to execute the campaign.       control purposes. It provides a model to integrate
                   The investment already made in the campaign            Internet marketing payoffs (both costs and benefits)
                   totals $240,000; future planned investments            into an ROI calculation.
                   expenses are valued at $60,000.
                                                                          It responds to the increased interest in evaluating
                   The ROI is then calculated by dividing the excesses    the payoffs of investments in advertising and
                   of benefits over costs by the IM investment. In this   marketing generally, and Internet marketing
                   case, the investment is expected to become very        specifically.The recent improvements in tools and
                   profitable, generating an expected return of 40%.      techniques for performance evaluation and the
                                                                          ability of information technology to process larger
                   6. CONCLUSION                                          amounts of data for analysis, and the development
                                                                          of more reliable non-financial measures of
                   As long as investments continue without the rigor      performance, has enabled marketing professionals
                   of measurement that is normally a part of business     to focus more effort on measuring the ROI of
                   decisions, they will continue to be made based on      investments in marketing. It is no longer acceptable
                   the actions of competitors and the persuasiveness      to make these expenditures without the rigorous
                   of the marketing or information technology             analysis necessary to prove success, and to ignore
                   managers’ arguments.This frustrates senior general     this analysis in formal ROI calculations. It is also
                   managers, information technology managers, and         unacceptable to continue to approve resource
                   financial managers. Marketing managers are also        allocations without formally evaluating past
                   frustrated because they often believe that their       successes and failures.This guideline provides the
                   marketing programs do create significant value,        tools and techniques for improved planning,
                   but often cannot prove that value in monetary          control, and evaluation of Internet marketing
                   terms.This Guideline provides the tools and            expenditures.
                   techniques to provide a more rigorous and




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                                          I N T E R N E T M A R K E T I N G I N I T I AT I V E S


7. BIBLIOGRAPHY
Almquist, E. and G.Wyner. 2001.“Boost your            Epstein, M. J. and A. Buhovac Rejc. 2005. Evaluating
Marketing ROI with Experimental Design”,              Performance in Information Technology.
Harvard Business Review. Oct.Vol. 79, Issue 9,        Management Accounting Guideline, Society of
pp. 135-141.                                          Management Accountants of Canada and American
                                                      Institute of Certified Public Accountants.
Ambler,T. 2003. Marketing and the Bottom Line:
The Marketing Metrics to Pump up Cash Flow.           Farris, P., N. Bendle, P. Pfeifer, and D. Reibstein.
Second edition. FT Prentice Hall.                     2006. Marketing Metrics: 50+ Metrics Every
                                                      Executive Should Master.Wharton School
Aufreiter, N., P. Quillet, and M. Scott. 2001.
                                                      Publishing, Upper Saddle River, NJ.
“Marketing Rules”, Harvard Business Review.
Feb.Vol. 79, Issue 2, pp. 30-31.                      Gupta, S. and D. Lehmann. 2005. Managing
                                                      Customers as Investments The Strategic Value of
Brynjolfsson, E.,Y. Hu, and M. D. Smith. 2006.
                                                      Customers in the Long Run. Wharton School
“From Niches to Riches: Anatomy of the Long
                                                      Publishing, Upper Saddle River, NJ.
Tail”, MIT Sloan Management Review. Summer,
pp. 67-71.                                            LaPointe, P. 2005. Marketing by the Dashboard
                                                      Light: How to Get More Insight, Foresight, and
Clark, B. 1999.“Marketing Performance Measures:
                                                      Accountability from Your Marketing Investments.
History and Interrelationships”, Journal of
                                                      http://www.marketingnpv.com.
Marketing Management.Vol. 15, pp. 711-732.
                                                      Lenskold, J. D. 2003. Marketing ROI:The Path to
Clark, B. 2001.“A Summary of Thinking on
                                                      Campaign, Customer, and Corporate Profitability.
Measuring the Value of Marketing”, Journal of
                                                      McGraw-Hill, NY, NY.
Targeting, Measurement, and Analysis for Marketing.
Vol. 9, No. 4, pp. 357-369.                           Rust, R.T.,T. Ambler, G. S. Carpenter,V. Kumar,
                                                      and R. Srivastava. October 2004.“Measuring
Epstein, M. J. 2004. Implementing E-Commerce
                                                      Marketing Productivity: Current Knowledge and
Strategies: A Guide to Corporate Success After the
                                                      Future Directions”, Journal of Marketing. Vol. 68,
Dot.Com Bust. Praeger Publishers.
                                                      Jan., pp. 76-89.
Epstein, M. J. 2005.“Implementing Successful
                                                      Srivastava, R. K.,T.A. Shervani, and L. Fahey. 1998.
E-Commerce Initiatives”, Strategic Finance.
                                                      “Market-Based Assets and Shareholder Value:
March, pp. 23-29.
                                                      A Framework for Analysis”, Journal of Marketing.
Epstein, M. J. and A. Buhovac Rejc. 2006.“What’s      Vol. 62, Jan., pp. 2-18.
in IT for You (and Your Company)?, Journal of
                                                      Wharton, Marketing for the Bottom Line,
Accountancy. April, pp. 69-75.
                                                      Knowledge @ Wharton, March 1, 2006.




                                                                                                             37
MANAGEMENT

  S T R AT E G Y
                   This Management Accounting Guideline was prepared with the advice and counsel of:
MEASUREMENT
                   Barry Baptie, MBA, CMA, FCMA                        Mano Mahadeva, MBA, CPA,ABV, CFE, CIA
                   Board Director and Business Consultant              Regional Finance Director
                                                                       US Oncology
                   Richard Benn, CMA, FCMA
                   Vice President, Knowledge and Program               Melanie Woodard McGee, MS, CPA, CFE
                   Development                                         Director of MBA Programs
                   CMA Canada                                          The University of Texas at Arlington

                   Ken Biggs, CMA, FCMA, FCA                           Mahesh Shetty, MBA, FCA, CPA, CITP
                   Board Director and Business Consultant              Chief Financial Officer
                                                                       North American Technologies Group, Inc.
                   Dennis C. Daly, CMA
                   Professor of Accounting                             Robert Torok, MBA, CA
                   Metropolitan State University                       Executive Consultant
                                                                       IBM Global Business Services
                   Michael R. Friedl, CPA
                   Chief Financial Officer                             Kenneth W.Witt, CPA
                   SBI Group                                           Technical Manager, Business, Industry
                                                                       and Government
                   Jasmin Harvey, B. Comm, B. Econ, ACMA               American Institute of Certified Public Accountants
                   Product Development Specialist
                   Technical and Research Services
                                                                       The views expressed in this Management
                   The Chartered Institute of Management
                                                                       Accounting Guideline do not necessarily reflect
                   Accountants
                                                                       those of the individuals listed above or the
                                                                       organizations with which they are affiliated.
                   William Langdon, MBA, CMA, FCMA
                   Knowledge Management Consultant

                   Donna Mackenzie, CPA
                   Senior Vice President, Chief Financial Officer
                   Channel Intelligence, Inc




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                                     E VA L U AT I N G T H E E F F E C T I V E N E S S O F
                                       I N T E R N E T M A R K E T I N G I N I T I AT I V E S




ABOUT THE AUTHORS
Marc J. Epstein is Distinguished Research Professor of Management at Jones Graduate School of
Management at Rice University in Houston Texas and was recently Visiting Professor and Wyss Visiting
Scholar at Harvard Business School. Formerly a professor at Harvard Business School, Stanford Business
School, and INSEAD (European Institute of Business Administration), Dr. Epstein has written previous
Management Accounting Guidelines. He has also written other articles on strategic management
systems and performance measurement, and over 100 articles and 15 books. In 1999, he wrote the
award winning “Counting What Counts:Turning Corporate Accountability to Competitive Advantage”.
He has recently co-edited a four volume series “The Accountable Corporation.”
Kristi Yuthas is Swigert Endowed Information Systems Management Chair at Portland State University.
Dr.Yuthas has a background in IT consulting, focusing primarily on business process improvement and
knowledge management. Her research explores the strategic, organizational and social consequences
of management, accounting, and marketing information systems. Dr.Yuthas currently sits on the editorial
boards of accounting information systems journals and has over 100 publications and presentations
covering a broad range of topics in accounting and information systems topics.




                                                                                                          39
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