By Christopher Kenton
What is the value of marketing at your business? It's a sensible question, yet one that few marketers are able to nail down to the satisfaction of their CEOs. If you buy a piece of industrial equipment, you can account for it easily on your balance sheet, tracking the cost, depreciation, and ultimately the return on investment to shareholders. Unfortunately, marketing has never been so cut and dried.
When the marketing department says it has brought in a customer, sales can more easily take the credit. When marketing points to a market it has opened up, someone else will attribute this to uncontrolled market forces. When marketing claims the successful positioning of a new product, someone else will note that a simple price-performance ratio is driving demand.
HOW VALUE IS MEASURED.
Even in areas that are unquestionably marketing's domain, such as lead generation, measures that go beyond performance efficiency to measure real value creation are historically weak. Marketing's longstanding inability to account for its impact on the bottom line has severely undercut its credibility, and many businesses treat marketing as little more than a managerial function governing an expensive cost of doing business.
Over the past few years, sophisticated analytics and reporting tools like dashboards and scorecards have been developed that seek to quantify marketing ROI. This is good news for marketers -- sort of. After all, does anyone really think businesses are making big investments in dashboards just to help marketers prove their worth? In fact, the drivers shaping marketing metrics are well beyond the department's domain. Any marketer who doesn't understand them will be lucky to have a job when the dust settles.
To understand the value marketing brings to a business, you first have to understand how value is measured. What do investors look at when they assess a company's worth? Profitability, growth, and risk. A business needs positive cash flow, clear potential for increasing it, and some hedge against the uncertainty of achieving growth in the face of volatility. The question for marketers is how they contribute in a measurable way to improving profitability, promoting growth, and minimizing risk.
The answer is that marketing helps improve profitability when it identifies and consistently attracts the kind of customers that earn the enterprise the best margins. Marketing improves the prospects for growth when it identifies new needs and markets that can be profitably served with new products or services. And it minimizes risk when it builds a reputation that encourages loyal customers to continue buying from the outfit. Take that argument to the corner office, and you'll earn a nice pat on the back and a nudge back to your desk.
Like it or not, shareholders care about the kind of value that shows up on the balance sheet -- concrete worth that lends itself to crisp calculations that show money in the bank. It's a mentality that relies on relentless consistency, structure, and predictability, everything marketing has eschewed for decades.
In the finance-driven world of the boardroom, concepts are solid and slow to change. In marketing, even the most foundational concepts of the profession have a spectrum of meanings that change to fit new challenges. In finance, net present value is a formula that everyone writes the same way. In marketing, segmentation has one definition in the textbooks and a dozen on the street.
Such fluidity is a tremendous creative strength for marketing, and businesses have been content for years to put large portions of revenue in the hands of marketers to work all kinds of magic. As long as marketing performed, no one pressed too seriously on the details of how the magic worked, and the department had a long leash to explore new ideas in building brands and penetrating markets.
Then there was a boom, and the fortunes of marketing rose high. Afterward came the bust, and marketing dropped like a rock. For many people, that's the story, and they're eagerly watching the economic recovery for signs of marketing's return to the good times. But over in the financial office, the guys with green visors found something troubling in the post-bubble numbers, and marketing will never be the same.
Jonathan Knowles is managing director at the U.S. subsidiary of Brand Finance, the London-based consultancy that helps businesses determine the value of their brands. Brand valuation is important for a lot of reasons, from setting the price for mergers and acquisitions to helping businesses determine what assets they should invest in. Knowles is one of those rare financial guys who understands and appreciates marketing, which puts him in a perfect position to interpret the writing on the wall.
In his presentations to marketers on brand valuation, Knowles offers a chart that shows the market-to-book ratios for S&P 500 businesses dating back to 1982. Simply stated, the ratio measures the difference between what a business is worth on its balance sheet and what the market would be willing to pay for it. Everyone knows that during the dot-com bubble, business valuations soared ridiculously above book value. What many people don't know, and what troubled those like Knowles, is that the trend has been growing for two decades, and the bubble's bursting didn't stop it.
That means the mechanisms that help measure the value of business have changed, which makes financial people nervous. No one is certain why business valuations keep climbing above assets, but they have a good hypothesis -- one that's driving them into the bowels of business operations, particularly marketing. When they're done recalibrating their formulas, marketing will be fundamentally changed.
We'll talk to Knowles next time.
Edited by Rod Kurtz