“Let’s all focus on a single metric, a True North for the entire company!”

This is an understandable sentiment from Extremely Senior Leaders (ESLs).

There are so many data pukes (sorry, “dashboards”) running around the organization, employees face such difficulty in being able to be smarter. Or, worse, Teams/Agencies can cherry-pick and show “impact.”

Hence, the ESL idea is noble: If we all look at one metric, no one can game the system.

Sadly, there are unintended consequences.

[Bonus Reflection: An underappreciated problem: Methodology. Your teams in the US, Argentina, Indonesia might all be reporting the same metric, say, Lift In Purchase Intent, but doing so using entirely different methodologies! Digging in might help you find that only Indonesia is using an accurate causal methodology – both the US and Argentina are gaming the system. I OBSESS about the methodology more than the metric. If you subscribe to TMAI Premium, see editions #406, #406 You Are Doing ROI Wrong.]

In my strategic consulting work, I put in place a simple framework that delivers three difficult to deliver outcomes at the same time:

Unbelievably exciting, no?

Let's learn how.

Two Types of Metrics | A Financial Lens on Marketing.

Revenue is an Effectiveness metric.

So are: Market Share. Tickets Closed. Share of Search (don’t use this! TMAI #398). Site Visits.

They all represent the degree to which something is successful in producing a desired result.

Conversion Rate is an Efficiency metric.

So are: Add to Cart Rate. CPC. First Response Time. Attach Rate. CAC. ROI. Gross Margin!

They all represent the ability to achieve a successful result with the least amount of resources.

It is crucial to focus on both.

Especially for the Finance organization (because they set incentives for good behavior for the entire organization).

I can be massively effective (50% increase in Revenue). But, without a need to focus on efficiency, I will accomplish that by paying crazy amounts in Cost – delivering the company an overall loss, while being effective.

I can also be massively efficient (50% increase in Conversion Rate). But, without the need to focus on being effective, I will accomplish that by cutting company Revenue by 45% – delivering the company an overall loss, while being efficient.

Perhaps I've been uniquely cursed, but I constantly see the above two realities, and everywhere.

Here's a little cartoon to share the above in action… The company's set an efficiency metric, without a let's make sure we are efficient while being effective incentive for good behavior…

It might feel insane, but if you have spent any time in a Call Center, like I have, where taking as many calls as possible was the incentive… Customer happiness went down the drain. Pick up call. Hang up immediately. High efficiency! Hit targets. Bonuses for all!!

So… What incentives have you set for your Agency if all you measure is “ROAS”?

Will that help ensure they deliver a global maxima or just suck a little less?

[Note: I've become a massive advocate for POAS. Profit on Ad Spend. See TMAI Premium #419 for how you can leverage this transformative KPI. And, also use this free tool: ProfitMax!]

Effectiveness + Efficiency | Aim for a Balance.

It is a law of nature: There is no such thing as a free lunch.

If you agree, then it follows that, unless your current internal team/external agency royally sucks, more efficiency will come at the cost of effectiveness.

The reverse is also true. More effectiveness will often come from sacrificing efficiency.

[Again, unless your Old Agency sucked – in which case, for a little while your new Agency can bring more effectiveness by erasing the old Agency's bad practices. But subsequently, your new Agency will face the laws of nature: There is no such thing as a free lunch.]

A real-world use case, of Agency M and client A.

Client A welcomed new Agency M by saying their singular priority was to increase efficiency delivered by their Marketing.

The current Cost Per Incremental Sale was $10. The CMO wanted it reduced to $9.

Unless their internal team/Agency is doing something super-un-intelligent, the fastest way to deliver lower CPiS is to sacrifice effectiveness.

In this case, the effectiveness metric is Market Share.

I do deep analysis of the data, find all the channels/activities/tactics/creative delivering above $9 efficiency, I cut it to hit the CMO's True North. In doing that, I also accomplish being less effective: Reduce Market Share from 18% to 16%.

It is impossible to see this as a win. Right?

Market Share is extremely challenging to gain, and so easy to lose.

This is the problem with focusing on only one metric, in this instance efficiency, without having the foresight to realize the role of effectiveness.

Sometimes, maybe your company is in trouble, you simply HAVE TO focus on efficiency.

When that happens, be smart and put a limit on how much effectiveness can be sacrificed. Essentially, set guardrails.

Tell your Agency:

Now, you've incentivized good behavior by all involved.

As a measure of effectiveness, Market Share can be a difficult one for many companies if you don't have sophisticated causal computation in place. No worries. Use Revenue as your effectiveness metric, or use Profit, or any additional metrics that will provide a positive incentive to the ruthless (often thoughtless) focus on just efficiency.

Oh. And, you can take this to a whole new magical altitude.

When I’ve been responsible for the Marketing budget, I’ve chosen to be strategic about the incentives I’m creating for my Agency.

I’ve set ranges to guide optimal behavior.

I’ll set the Current vs. Target for efficiency as $10 to $9, with a counterbalancing stop loss of effectiveness between 18% and 17.5.

But.

I also imagine what incredible success for the business would look like, and then create incentives for that.

If you can move our Market Share from 18% to 22%… Efficiency can move from $10 to $12.

Going from 18% to 22% is insanely hard.

It will have a game-changing impact on the company’s present and future.

For many companies, but not all, that type of strategic change can only be accomplished by being a bit more inefficient.

Sometimes going from $10 efficiency to $12 efficiency is simply making a little less Profit.

Occasionally, it might be ok to lose $0.5 to gain four points of Market Share.

These are discussions the CMO can have with the CFO, they can make informed decisions.

My nudge is simple:

Then… Give this strategic guidance to your internal Marketing team, your external Agency…

What the Agency receives is a beautiful framework within which the incentives are aligned for both parties.

If your Agency is not very good, they can focus on keeping the $10, or making the $10 into $9 without losing you too much Market Share.

If your Agency is exceptional, they have the breathing room to bring innovation, bring brilliance, bring tools, bring experimentation and incrementality, bring their superstar employees to move your Market Share from 18% to 19% (incredible!!) and do so by making the $10 to $10.75.

So on, and so forth.

Balancing effectiveness and efficiency, with ranges that incentivize good behavior on all sides.

You are not saying: Bring me revenue at ANY COST!

You are not saying: Extract water from a stone, I don’t care what it takes!

So on, and so forth.

Obviously, this magical mindset works well for your Agency, but it also works well for your internal Marketing teams, and, if you think about it for a moment, it also works well for how you create OKRs for your employees.

Effectiveness + Efficiency | For Everyone, Everywhere!

To inspire you to think differently, allow me to share ten examples that would apply to different companies, different types of teams, illustrating a balance for how this mindset applies to the strategic (as above) and the tactical.

My sincere hope is that the above list sparks your imagination as you pick the best missing effectiveness or missing efficiency metric for your initiative/team/division/company/parent.

Bottom line.

Anthropologist Marilyn Strathern stated that individuals try to anticipate the effect of a policy, and then take actions that alter its outcome. Alternatively stated as:

You can never entirely eliminate this possibility. Human ingenuity is a thing to behold when it comes to gaming the system.

But. You can create incentives to reduce the chances of Ms. Strathern’s postulation coming true. One crucial way of doing that is to create positive incentives via the lovely counterbalancing forces of efficiency and effectiveness.

Carpe diem.

PS: A Note for Overachievers:

To build a sustainable competitive advantage, you want your effectiveness and efficiency metrics to be measured using incrementality methodologies.

Ex: Incremental Revenue & Cost Per Incremental Sale. Or Number of Individuals Lifted (Consideration). Cost Per Individual Lifted.

TMAI Premium Members pour through numerous Premium editions on Incrementality and on sophisticated Brand Measurement. Start with TMAI #411: Proving Marketing’s Incrementality. (Email me if you can’t find it.)