Why Marketing Finance?
In most organisations, the primary criteria for measuring performance are financial. Immediately this creates difficulties for marketing since accounting data focuses on short, fixed periods whereas marketing activities often have an impact over a number of years. Therefore we begin with a consideration of why conventional accounting methods are inappropriate for measuring marketing before moving onto what Professor Peter Doyle referred to as “God’s gift to marketing”, and the foundation of marketing finance, discounted cashflow.
Discounted cashflow enables marketing’s true returns to be captured. It provides the best way to evaluate marketing activities – from brand building through to direct mail campaigns. It underpins the calculation of true Marketing ROI (eg Lenskold).
This session will examine, through a number of case studies, how to apply these value-based techniques.
The need for a marketing model
A value-based approach provides a solid foundation for measuring marketing effectiveness. However, there are still issues if we want to understand fully the impact of marketing. A campaign may be perfectly crafted and executed and yet fail to hit financial targets. Does that mean that marketing wasn’t effective? Perhaps there would have been a financial disaster without the campaign. In the circumstances the campaign should be judged a success. But how can one argue that case?
By developing a marketing model.
A marketing model is simply a description of marketing cause-and-effect. Of course, all marketers implicitly have a model in their head. By making the model explicit and shared – and crucially connecting it to financial performance – it is possible to not only measure marketing more realistically but also improve marketing performance. The link to financial performance is critical. As Ittner and Larcker stated in the Harvard Business Review:
“The companies in our study that adopted nonfinancial measures and then established a causal link between those measures and financial outcomes produced significantly higher returns on assets and equity over a 5-year period than those that did not.”
This session will consider the key drivers in the marketing model.
Having begun the process of building the marketing model, we move to the next challenge: attribution. How can marketers link the behaviour of customers and others to specific marketing activity? If a customer buys because they searched on Google, do we credit SEO activities or the investment in website design? And what if they had also received a direct mail leaflet and read an article in a newspaper?
In this session we try to establish how marketers can identify the real drivers of performance, with appropriate links back to the marketing model.
A customer perspective
“Without customers a company’s value isn’t even worth discussing.”
Peppers & Rogers – Managing Customer Relationships: a Strategic Framework
To gain a true understanding of the effectiveness of marketing, we need to place the customer at the centre. Discounted Customer Lifetime Value is consistent with the techniques discussed at the beginning of the programme but leads to new perspectives. It is the critical measure for many organisations and helps to focus the mind of the marketer on the critical financial elements: revenues, cost to serve, acquisition cost and retention cost. The approach is holistic and can integrate all marketing activities.
Amongst its many benefits, DCLV:
- connects with segmentation
- recognises that not all customers are equal – and helps in ensuring the most effective use of marketing resources
- moves marketing beyond simply being “the promotion department” and, by considering the entire customer relationship, places marketing at the centre of the organisation.
 Coming up Short on Nonfinancial Performance Measurement, Ittner & Larcker, Harvard Business Review