Benchmarking establishes a reference point so you can gauge the success or failure of marketing and service strategies even when there isn’t an obvious cause and effect. We naturally want to know how our results compare to our competition and try to benchmark against them. It’s impossible to create realistic and accurate comparisons to other companies. Looking at the competition for insight into their strategy is a good thing. Investing resources in specific analytical comparison is wasteful and counter-productive. Use those resources to create solid internal benchmarks instead.

The first step in every plan should be to get all of the participants on the same page. This eliminates (or at least reduces) miscommunication and confusion. Sometimes we forget this in our haste to share information or get started. I tend to forget this step when writing about benchmarking and presume that everyone sees it the same way. When I wrote “Why Benchmarking against Competitors doesn’t Work,” I left the interpretation of benchmarking to the reader. I’m taking a step backwards and defining it so we start out on the same page.

Benchmarking began as a surveyors’ term. Permanent marks were placed as a reference for an exact elevation. All reference points after that were in relation to the original benchmark. It is a specific and exact science. Over time, the term was borrowed and used to denote a standard measurement that can be used for comparison. When I say “benchmark” or “benchmarking”, I am always referring to a metric that can be accurately and repeatedly measured. It is an exact science in my engineering mind.

Using benchmarks in marketing and service help measure the unknown. It is especially important now that we have the social channel where identifying cause and effect seems close to impossible. Establishing internal benchmarks is not for the weak of heart because capturing the information needed and converting it into usable information is hard work and requires a long-term commitment. The benefits far outweigh the challenges making it a worthwhile investment.

Direct marketers use benchmarks on a regular basis. They usually call them “controls” and measure new campaigns against the proven performer. Internal benchmarks have to go deeper than a promotional campaign control to maximize your return on investment. Service levels, operational costs, and profitability must be added to response rates, average orders, customer acquisition and other marketing metrics. This gives you a reference point that encompasses the whole organization instead of one area. When a company has comprehensive benchmarks in place, cause and effect is easier to see.

For example, if a social media campaign goes viral at the same time sales increase, does that mean that it is driving revenue? Maybe. Maybe not. If there was also an improvement in service levels at the same time, the additional sales could be generated by improved customer experiences. Without benchmarks, the increase would most likely (and possibly erroneously) be attributed solely to the social activity.

Benchmarking within an organization provides additional insight into contributing factors for sales and profitability. The more you know, the better you can plan and grow your business.

One statement in “The Numbers that Really Matter to Your Business” got a lot of attention because people didn’t agree with it. I wrote, “There is simply no way to compare metrics from different companies and deliver realistic results.” Responses varied from simply stating that the reader disagreed to explanations as to why I don’t understand how things work.

There are several reasons why benchmarking against competitors doesn’t work and won’t deliver realistic results. Before diving in, there is one qualification. My statement does not include manufacturing and bulk warehousing. Companies that produce the same products with the same equipment and automation can compare production metrics. Comparisons are helpful even when the equipment and automation varies because it allows the less automated company see the potential gains if they upgrade. Bulk warehousing is similar to manufacturing. Product moved by pallet load is similar no matter what items are being moved. Weight and distance differentials can be scaled.

Marketing and service metrics are different. There are too many variances to provide a realistic comparison. This includes:

Corporate Culture – Every business is different because companies are comprised of people. The responses to marketing and service vary by individual preferences.

Customers – All customers are not created equal. Ask anyone who has bought a business to find that half of the people in the customer database are hit & runners. Comparing response rates between companies is an exercise in futility.

Service – Quality of service is directly related to customer expectations. People expect different things from different companies. Expectations can be managed but they can’t be controlled.

Costs – Corporate expenses are dependent on so many factors it is impossible for an outsider to verify accuracy. Service levels, pay scales, bonuses, productivity, and perks are a few of the items that can vary. It’s hard enough defining the costs of doing business for your company. Why try to do it for another?

Productivity – The time required to serve customers and fulfill orders varies between companies. Order dynamics drive productivity. For example, apparel companies that have an average of three items per order can have very different productivity levels. If one typically has orders with three pieces of soft goods and the other has two pieces of soft goods along with a pair of shoes, the processing time will vary.

Social Activity – Comparing social activity is useless unless the companies are having the same conversations with the same people. We have clients that have very little community participation but are generating revenue every day from their social activity. We also have clients who have extremely active communities that also generate revenue. Which one is best? Both. Can they be compared? No.

ROI – Calculating the return on investment requires accurate information across the board. It is highly unlikely that you will receive everything you need in real numbers.

Transparency – Sharing proprietary information is foolhardy. If a competitor shares metrics for comparison, don’t expect them to be accurate. In some cases, there are errors in the collection and documentation. In others, the numbers are adjusted for appearance.

Wanting to know how your business compares to the competition is understandable. Asking questions so you have an idea of what they are doing and how it affects their metrics is a good way to get some insight. Trying to benchmark your business by another company’s standards is a waste of resources and will do more harm than good in the long run. Benchmarking against yourself and striving for continuous improvement is a much better way to succeed.

PS: Thank you to those who shared their opinions with me and inspired this post.

Creating benchmarks that work to grow your business and improve profitability along the way requires an intimate knowledge of your company, customers, and team members. Your competitors’ metrics choice rarely matters except to provide fodder for bragging rights. If they have 10,000 Facebook followers and your company has 100,000, it may look good to your CEO but it doesn’t mean that you are ten times better. You may be much worse because their 10,000 may consist of loyal customers while your 100,000 are people who liked you when you said something funny or shared a viral video.

The same is true with customers. If your competitors have 200,000 people in their active customer file to your 100,000, you may still be light years ahead of them. Their file may have 150,000 hit & run customers to your 10,000. There is simply no way to compare metrics from different companies and deliver realistic results.

Competitors’ service levels don’t matter either. If your customers expect to receive their order in five days and receive it in four, you’ve exceeded their expectations even if your competitors are delivering orders in three.

Everything is relative and must be treated as such. Defining the numbers that really matter for your business is a project that starts with sales and profitability. It then drills down to the cause and effect items that ultimately make or break businesses. The process of identifying and analyzing the data for the benchmarks is as important as the final results because you discover things along the way.

When looking at data, invariably you’ll notice things that aren’t showing up on reports. Things like items being ordered together, oddities in shipping times, and abnormal service requests. The process is so beneficial at providing insight to unexpected events and effects reviewing the raw data on a regular basis is a best practice.

There are numbers that matter for every business. They are your starting point for defining benchmarks. They include:

• Sales Dollars
• Orders/Transactions
• Average order/transaction (This helps you compare channels and campaigns.)
• Customer Acquisition, Retention, and Attrition
• Service Levels
• Costs
• Profitability

When these numbers are established as benchmarks, start drilling down into your data for more information to help you grow your business. You may just find a gold mine.

Today’s economic conditions require businesses to squeeze every penny out of each transaction. Doing this requires an in-depth understanding of customer behavior so that the marketing and service strategy optimizes the return. In our video “How to Get the Most out of New Customers”, I talk about the importance of recognizing hit and run customers before they cost you money. Franck Silvestre responded by asking, “Could you explain why hit and run customers cost money?”

Franck, it’s tempting to think of all new customers as being equal. They are contributing to cash flow and look alike when they make their first purchases. We, as marketers, are used to people becoming long term customers after the first buy. This is why so many companies focus more on acquisition than retention. Historically, 95 percent or more of the people who bought once from a company would continue to buy if there wasn’t a major service issue. Marketing worked something like this: Find the best sources for customer acquisition, provide incentive to buy, and reap the rewards of lifetime value.

Things are different now. People are using the Internet to find the companies selling the products they need. With a few clicks, they can compare prices, service, and shipping charges. In other words, people have options and they are using them to get the best deal.

In our analysis, we see as much as 60 percent of new customers leaving after their first or second purchase.

Think about that for a minute. Before the Internet, five percent or less of the new customers acquired were hit and runners. It wasn’t enough to raise any flags. After the Internet, 60 percent are hit and runners. This is a huge difference that has a direct effect on the profitability and success of the business.

The scariest part is that traditional marketing metrics don’t identify hit and run customers. The newest members to the database continue to receive marketing materials until they cycle out of the active segment. This escalates costs without providing any return on investment.

Let’s say that your company invests $2 per month in marketing dollars for every active customer in your database. Activity is defined as having purchased within the last twelve months. The average acquisition is 1,000 customers per month.

The annual marketing costs for each customer is $24 which means that you are investing $288,000 annually in marketing to newly acquired customers. If 5 percent are hit and runners then $14,400 of your marketing budget is wasted. The costs of identifying those customers would exceed the initial price. When that number jumps to 40 or 60 percent, then $115,200 to $172,800 are lost. The sooner you are able to identify the hit and runners so you can stop marketing to them, the less it will cost.

A few business models thrive off of hit and run shoppers.

WOOT! is a good example. Their prices are so good they naturally attract customers. Once people find out about the site, they watch for the deals. Contrary to the social media marketing myths, most companies can not replicate this activity. Thousands of followers, fans, and updates don’t convert into cash without an effective marketing strategy that includes customer retention.

Growing your business requires customer acquisition. If you aren’t continuously bringing in new people to replace the ones who are completing their buying life cycle, your company is dying. Newly acquired customers fit one of three types. Adapting your marketing strategy to maximize your return is the best way to move your company forward. The three types are:

Active: Moves into the buying cycle and stays until the lifespan is complete.

Discount: Only purchases sale or discounted items.

Hit-&-Run: Purchases once or twice and never returns.

Watch the video for tips on how to market smarter.

For tools to help measure customer acquisition, retention and costs, check out our Customer Loyalty Toolkit.