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How to show the value of marketing

24th May 2005
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While chief executives and accountants debate the return on company investment and productivity, the activities which generate business rarely appear to come under such scrutiny. Marketing, which generates profit by anticipating and satisfying customer demand, requires considerable investment in money and resources, and is at the heart of every business. If all marketing is investment, why would companies not want to assess the returns on their money? Increasingly Chief Executives and Financial Officers are looking to ensure that measurements of the return on investment are used across the whole business area, including marketing.

The push for accountability in the marketing function is coming from the Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs). Companies that have relentlessly cut costs in every corner except marketing are tired of funnelling cash into marketing, especially advertising, which they say cost more and does less. However, marketing is much more than the advertising budget, and to measure the return on marketing investment requires a deeper understanding of all the activities which go to satisfying customer demand profitably.

Management boards are increasingly seeing Marketing as a necessary investment for the generation and maintenance of profit, rather than just a cost or expense. Finding, getting and retaining business costs money. Marketing was always the “unexplainable art”, but now the Marketer, is frequently asked to justify and account for the Marketing performance by the CEOs and CFOs. There is hardly a marketer today who is not demanding a more scientific approach to help defend marketing strategies in front of the chief financial officer, and many marketers are now under direct mandate to establish formal objectives, processes and metrics that can clearly measure the benefit of their programmes and activities.

Marketing has been the last corporate function to formally develop and adopt processes and standards that can measured quantitatively. Companies throughout American business have become obsessed with improving the measurement of marketing performance. Procter & Gamble, Kraft Foods, and Gillette have long chased statistics to link different forms of marketing to sales and brand awareness. But the desire to construct a comprehensive set of performance measures, what many call a marketing "dashboard", is fast extending to marketers in other industries

A survey in the spring of 2004 of over 320 of America’s leading technology Chief Marketing Officers reveals that less than 20% of the companies surveyed, had developed meaningful measures for their marketing organizations. Over 80% of the companies surveyed expressed dissatisfaction with their ability to benchmark their marketing programs’ business impact and value. Yet those companies which had established a formal, comprehensive measurement system, achieved superior financial returns and had higher CEO confidence in their marketing function.

Establishing the Return on Marketing Investment across the whole marketing function requires the understanding of the various marketing activities that drive sales and generate revenue. The accepted standard formula to calculate Return On Marketing Investment (ROMI) is based on - 'Increase in sales attributable to the activity' less 'Cost of the activity' (i.e. the investment) divided by 'Cost of the activity'. The formula is generally limited to a specific marketing investment such as an exhibition, but as it is difficult to identify which sales are attributable to which activity, it does not readily apply to the marketing function as a whole. Increasingly Marketers believe that measurement of all elements of the marketing mix is critical to their personal success and credibility, as well as that of the business. The favoured result would be so-called “dashboard reporting”, the use of key indicators which collectively provide performance information. Many Marketers use data on sales, market share, customer satisfaction, customer retention and customer profitability as their performance indicators, but this information is of limited value when considering the return on Marketing investment.

For marketing to command an equal seat at Board level, quantitative measurement must prove marketing investment creates a positive return for the business. Metrics must be communicated to the intended audience, in a format clearly understood. Frequent quantifiable data analysis allows better understanding of the marketing processes, which is essential for better informed management and decision making, by the chief marketing officer.

The prime interest of the CEO and CFO is to ensure that assets and investment are used efficiently to maximize profits and minimize expenditure. To have equal importance with other management performance indicators, marketing needs to have a single indicator which encompasses the overall performance of the marketing function. Such a single indicator would enable fluctuations in performance to be easily seen, and would allow comparison with other business indicators; Return on Assets, Stock turn, productivity etc. The Optimum Marketing Performance (OMP), is the particular indicator which encompasses the overall marketing performance by directly relating revenue with Marketing investment.

Establishing the OMP for any business requires detailed understanding of the marketing budget, and the way that marketing generates business and money. For many businesses, the marketing budget covers little more than advertising and sales expenditure. However, since Marketing, includes all those functions which anticipate and satisfy customer demand profitably, most activities which are neither purely financial nor production, tend to be marketing related. Calculating the OMP requires careful analysis of quantified performance data from all of the activities involved in the wider perception of Marketing. While the principle of establishing the OMP is the same for every business engaged in profit generation, the detail and method may vary in different types of business, e.g., consumer, industrial, business to business, long term contracts, consultancies, and financial.

For Marketing to have the impact in the boardroom that its importance merits, marketing performance needs to be reported, in a manner which is intelligible to CEOs and CFOs, effectively demonstrating the relation of marketing performance with profits. Chief executives, Accountants and Managers responsible for marketing, must know continuously how all their business activities are performing, including Marketing. They also need to identify the factors that drive the marketing function, with quantified indicators of marketing performance, providing a clear guide to management performance across the whole organization. Continuously measuring marketing performance will help to satisfy the management need of Chief Executives and Accountants, while enabling Marketers to demonstrate the contribution of the Marketing to the business.

By Nicholas C. Watkis AE DipM CMC MCIM MIMC

Contract Marketing Service
(Specialists in measuring marketing performance and Return on Investment)
Tele/Fax:01452 616465
[email protected]

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