Why Marketing Has Lost its Clout, and What it Can Do to Get it Back03.03.2010
In 1913, retail magnate John Wanamaker wryly observed that “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Nearly a century later, Wanamaker’s concerns regarding advertising still haunt chief executives and chief financial officers (CFOs) across corporate America. With marketing and advertising expenditures for 2005 projected to reach $250 billion in the United States alone, there is increasing pressure to bring those responsible for marketing expenditures to account.
Increasing global competition, corporate scandals and the recent economic recession have forced corporate boards and shareholders to join this call for greater marketing accountability. The era of trust me marketing is over. Marketers must show a clear return on marketing investment by measuring both the efficiency and effectiveness of marketing programs. Furthermore, marketers need to make a clear link between marketing dollars spent and shareholder value added. The pressure for accountability and performance, however, can be unbearable. Chief marketing officer (CMO) tenure is at an all-time low with most marketing executives lasting fewer than 24 months on the job.
Given that the primary function of marketing is to drive profitable sales, common sense would seem to dictate that marketing executives should hold seats at the highest levels of major corporations. However, the opposite is true. Less than 50% of Fortune 1000 corporations have CMOs, compared with approximately 80% that have chief information officers (CIOs) and almost 100% that have chief financial officers. Even for those companies that do have CMOs, their clout within the organization has diluted over the last decade. Some do not even report directly to the chief executive officer (CEO). Corporate leaders are increasingly electing to delegate the responsibility for planning and executing the marketing mix (i.e. product, price, placement, people and promotion) to a myriad of managers and functions rather than consolidating it under a single marketing executive.
There is, whether real or perceived, a wide gap between CEO and CFO expectations and marketing performance. According to a Forrester Research survey, 80% of companies express dissatisfaction with their own ability to establish benchmarks for the business impact and value of their marketing programs. A survey published in the Journal of Marketing Society found that chief executives tend to view marketers as creative and hardworking, yet inconsistent, unaccountable and not value-focused. Marketers tend to concentrate on short-term sales performance and daily operating problems rather than long-term strategic goals. They are increasingly viewed as the people responsible for brochures and promotions. Understanding why marketers have lost stature within their organizations will go a long way toward helping bring marketing back into the core of corporate strategy.
Marketing’s Fifth Wave
The history of marketing can be divided into five distinct eras or waves: production efficiency, salesmanship, market research, product differentiation and customer relationships.
In the late nineteenth century, most companies focused on efficiently producing quality products, building distribution channels and achieving economies of scale. Few companies produced branded products, and marketing was viewed as a cost rather than a valued-added part of production. The person in charge of marketing was likely a trained economist.
During marketing’s second wave, in the early twentieth century, branding became more common and companies focused on personalized selling as a way to reach consumers. The company’s sales manager led all marketing efforts.
Marketing’s third wave was marked by the advent and proliferation of consumer and market research in the 1940s and 1950s. During this era marketers such as David Ogilvy and Lester Wunderman pioneered the concepts of “advertising that works” and direct-response marketing. Research allowed marketers to test which ads received the highest response and direct marketing allowed for better tracking of marketing expenditures.
From the 1960s to the early 1990s, marketers focused on developing product differentiation—through branding and mass advertising—and traditional selling techniques to reach the largest number of consumers possible. This fourth wave may be referred to as advertising’s golden era. During this era, advertising became synonymous with marketing and marketers focused primarily on developing mass-media skills.
Marketing’s fifth wave coincides with the globalization of markets and the birth of the information age. Companies now face increasing competition from an array of global companies offering lower-priced and higher-quality products and services. Companies must also deal with more demanding customers and their increasing expectations. In the last decade, a significant shift in the focus of corporate and marketing strategies has occured. Corporate executives are demanding that marketing be less art and more science. As a result, marketing techniques are becoming more sophisticated. Technology now allows companies to collect a wealth of data that gives insights into customers’ preferences. Software engineers have developed computer simulation models that can mimic and predict consumer behavior. Neuroscientists give us understanding of how the brain makes purchasing decisions and how it responds to advertising. Statisticians use data mining techniques to segment markets with pinpoint accuracy. Marketers can now identify the company’s most valuable customers, understand those customers’ needs and tailor solutions to attract and retain them over the long term. Another technology-related trend is the increasing use of Customer Relationship Management (CRM) software, sophisticated financial systems and Activity Based Costing (ABC) accounting. ABC systems allow management to assign both direct costs and indirect costs (such as marketing) to an activity, product or service. Financial data can now be linked to market and customer data to provide marketers with actionable market intelligence. The tools exist for marketers to be able to track and measure the effectiveness of a corporation’s marketing strategy.
CEOs and CFOs have taken notice and are asking marketers to use these tools to demonstrate short term and long-term return on marketing investments—and, more importantly, to demonstrate precisely how marketing contributes to shareholder value. So, why are not more marketing executives stepping up to the plate and delivering what is being asked of them?
The Knowledge Gap
One could say that CEOs and CFOs are in many ways joined at the hip. After all, CEOs are more likely to have a background in finance than in marketing. CEOs and marketing executives, on the other hand, are likely to come from entirely different perspectives. A major problem is that marketers do not speak the language of CEOs. A marketer will get excited about increasing sales, but will not get much reaction from a CFO without proof that the increase translates into profitable growth. Similarly, a marketer’s presentation about awareness and perceptions will draw yawns from a CEO who is preoccupied with shareholder value.
Most of today’s marketers are consumed with daily operational issues and short-term tactical goals. In most organizations they lack the stature and the skills to formulate and execute the functionally aligned marketing strategies that deliver shareholder value. Undergraduate marketing programs at U.S. universities are still training mass media marketers. They have fallen short of providing marketing students with the know-how to be the successful business executives of tomorrow. Essential advanced courses in supply chain management, strategic planning, manufacturing operations and financial marketing are elective. Unless marketers work at large corporations, they are not likely to receive the on the-job training or the advanced business courses necessary to obtain these skills. Forrester Research is forecasting an increase in demand for marketing MBAs with quantitative skills. However, marketing professionals who leave their positions to attend business school are not likely to go back into the marketing field. And while close to 60% of MBA students from top business schools go on to work in finance and management consulting, only 10% elect to work in marketing. As a result, the task of performing complex analyses and developing benchmarking and performance metrics falls mostly to finance.
Unable to gauge the value of marketing in meeting strategic corporate goals, companies rely on cost-cutting initiatives, increased productivity and acquisitions to deliver shareholder value.
The Value of Marketing
CEOs and CFOs are partly to blame for marketing’s failure to contribute significantly to shareholder value. Marketers may not fully understand the agenda of senior executives. But a more serious problem is that senior executives do not understand the true value of marketing. A survey commissioned by KPMG found that financial executives rank marketing at the bottom of investments necessary to generate long-term growth. Training, information technology, human resources and research and development were all ranked higher.
Chief executives, especially CFOs, must understand that a company’s brand is an asset—an intangible asset—but an asset nonetheless. However, brand investments are typically expensed and not capitalized, which makes no sense. Why capitalize over 10 years a machine that costs $100,000 but then take a marketing branding program that costs the same and expense it over just one year? Under Scenario 1, as shown in the accompanying table, the effect of the machine’s acquisition on the profit and loss statement for one year is only $10,000. Under Scenario 2, revenue has decreased by $50,000 and as a result investment in branding is cut by $40,000, while the machinery investment is left alone. However, as outlined in Scenario 3, the true implications of these investments can be seen only if looked at from a cash basis perspective. When both machinery and marketing are capitalized over only one year, the effect of both investments on cash is the same. But in reality, the useful life of the brand is likely to outlive that of the machine.
Capitalization accounting principles are the main reason why marketing budgets are the first to be slashed when corporations are looking to trim costs. Accrued earnings do not deliver shareholder value; cash does. It is myopic to make investment decisions based solely on short-term accrual accounting implications.
In most companies, marketing budgets are set as a percentage of projected sales or based on an arbitrary increase over the previous year’s budget. When sales decline, finance cuts the marketing budget. But marketing spending drives sales—not the other way around. It therefore makes no sense to indiscriminately cut marketing budgets when sales are declining.
Brand value equals customer value, which equals shareholder value. Brands and customers, not products and services, generate the cash flows that create long-term shareholder value. Consider IBM. Over the last 100 years, the company has transformed itself, selling tabulating machines from the 1910s through the 1930s, the world’s earliest computers in the 1940s and 1950s, mainframes in the 1960s and 1970s, personal computers from the 1970s through the 1990s and business consulting now. The only thing that has remained constant over the years has been its brand. Today, IBM is the ninth-largest corporation in America and generates annual sales of close to $100 billion. Companies like IBM prove that customers and brands, just like other corporate assets, have a lifetime value.
Using logic or citing case studies to argue the need for marketing investment might not be enough to persuade a CEO or CFO. It is important for marketers to work with finance to develop financial models that link marketing investment to future cash flow generation. Assuming the right data are available, estimating both brand and customer lifetime value in terms of cash should not be a difficult exercise. A simple approach would be to use traditional discounted cash flow formulas adjusted to brand-specific risks and variables. Of course, these estimates would only be subjective approximations—but that is true for most investment analyses.
The value and differentiation of a brand in a customer’s mind is stronger and more sustainable than that of a product. Strong differentiated brands will consistently generate, maximize and grow cash flows. They achieve this by commanding a price premium, allowing for brand extensions and licensing, creating barriers of entry, attracting and retaining more valuable customers and reducing the costs of customer acquisition. Only through alignment; a value-focused, measurable marketing strategy; and consistent investment can companies build the assets needed to identify, attract and retain these valuable customers.
How to Bring Marketing Back into the Core of Corporate Strategy
Understand the CEO’s agenda
Ultimately, a CEO’s job is to create and grow shareholder value. Marketers must understand how the corporate strategy will deliver this value and align their marketing strategy to it. They must learn to convey to CEOs how marketing investment results in increased shareholder value. Measurement and cross-functional alignment will be crucial to this, as marketing does not operate in a vacuum. It is important for marketing to develop strong partnerships with other internal functions, especially finance and IT, as well as with external channel partners.
Broaden your skill set
The age of the mass media marketer is over. A marketer who does not know how ABC accounting works, or who cannot estimate the profitability or net present value of a customer, will not be able to have a meaningful relationship with senior executives. Marketers will not be able to protect or grow their marketing budgets if they cannot articulate to the CFO the effect that marketing investment will have on the bottom line. If business school is not an option, there are several excellent financial marketing, valuebased marketing and marketing metrics books and articles that would be very useful to the self-starter (see Further Reading). There are also a number of firms that offer on-site metrics and financial marketing workshops.
Embrace a measured approach
A marketing metrics plan that is based on both financial and non financial measures is vital to the success of a corporation’s marketing strategy. Marketers should identify and develop their organization’s MetricsDNATM—that is, a map of benchmarks and key performance indicators that allow corporations to control and optimize the marketing mix in order to identify, attract and retain customers (see Figure 1). Strategically, marketers should concentrate on aligning measurement across the organization around a few key strategic metrics that focus on customer profitability, customer lifetime value and brand equity. Marketers must use financial metrics to make a direct connection between their marketing measurements and shareholder value. It is also important to make marketing agencies and other partners accountable for delivering shareholder value. Corporations should select agencies that take a measured approach to marketing planning and execution.
Beware of meaningless metrics
Not everything that marketers measure is worth measuring. Measuring can sometimes be prohibitively expensive, with the cost of measurement surpassing its value. Not much is to be gained from measuring the value of Procter & Gamble’s 250 brands on a monthly basis, for example. The cost would be astronomical and the process too time-consuming.
Another problem is that sources of data are often unreliable or nonexistent. Most companies do not possess sufficient historical customer data to make accurate correlation and regression analyses. And data obtained from third-party sources may be dated or not relevant.
Measures of efficiency may be misleading or of little value. A metric indicating a low marketing cost per sale is of no importance if the total cost per sale shows a loss. Similarly, a sudden increase in awareness might be undesirable if the brand’s reputation has just plummeted.
Metrics must be tailored to each corporation’s business model and corporate strategy. Furthermore, over-reliance on metrics may be counterproductive. Marketing will never be 100% science. A marketer’s experience, intuition and strategic thinking will determine the success of a corporation’s marketing strategy.
Embrace value-based marketing
A marketer’s goal should not be to research, advertise and promote a brand. These are just marketing tactics. Rather, a marketer’s goal should be to deliver value to shareholders. Marketers should view customers and brands as the corporation’s most important assets, and they would do well to pursue an investment portfolio approach to managing these assets. That is, marketers should develop and execute strategies that build and grow the equity and value of these assets over the long term (see Figure 1).
Back to the Core
The relegation of marketing from a position of corporate influence to one of dubious importance has been neither sudden nor simple. The decline took place over a century’s time and may be attributed to a number of factors. The situation is not, however, irreversible. Marketing can move back into the core of corporate strategy by taking a proactive approach to understanding, participating in and promoting the corporate agenda of delivering shareholder value, as outlined in this paper.