Lets be honest, Marketing gets no respect. It’s marketing’s own fault. Marketers have traditionally neglected to make their activities in any way understandable or valuable to the bean counters in the finance department. That is probably why marketing is a cyclical expenditure. Firms tend to plow money into marketing when they have money to burn, but when times get tough, marketing is among the first corporate expenditures to feel the budget cutter’s knife.
The job of top management is to generate and preserve wealth for the firm’s stakeholders. Unfortunately, accountants spend a great deal more time and effort measuring cash flow than measuring the sources of cash flow. For the past three decades, firms have spent enormous amounts of cash to acquire other firms. Growth by acquisition has eclipsed organic growth, the kind that comes from selling more stuff to customers.
Marketing is about generating wealth organically. Unfortunately, while it is relatively easy to measure the economic performance of an acquisition, it is notoriously difficult to measure the economic contribution of marketing. In a sense, marketing is like eating.
Just as people who don’t eat at all sooner or later die, so firms that don’t market at all sooner or later fail. Yet it’s relatively easy to calculate how much one needs to eat, but vexingly difficult to calculate how much one needs to market — and even more difficult to convince a sharp-eyed number cruncher that this amount of marketing is necessary to the firm’s health.
Are You Measuring Marketing’s Impact?
The following eight questions will help marketers diagnose the deficiencies in how their firms measure the fiscal impact of marketing. Keep a close eye on the questions that deal with the connection between marketing and making money.
- The purchasers’ purpose — Does your firm research customer motives and behavior?
- Alignment — Have you aligned your marketing metrics with your strategy?
- Definition — Have you quantified ‘success’ and the metrics that lead to it?
- Connection — Does your business model make an explicit connection among marketing, market performance and financial performance?
- Monitoring — Does top management pay close and regular attention to that connection and the metrics that monitor it?
- Internal comparison — Does management demand reports on those metrics and compare actual performance to forecast performance?
- External comparison — Does management compare its performance on those metrics to the performance of its competitors?
- Branding — How does brand equity enter into the evaluation of marketing activities?
Dangers of the Marketing Metric
It is tempting for senior managers to want to reduce complex issues of marketing to a single financial metric, one number they can focus upon to know immediately whether performance is on track or derailed. This approach has two problems. Even when it is possible to quantify an issue, the number may depend on so many assumptions that its relationship to reality is tenuous. Moreover, almost all financial metrics used in planning rely to some degree on predictions and forecasts. “Discounted cash flow,” for example, requires planners to make judgments not only about future cash flow, but also about future interest rates.
It’s hardly unfair to note that, in practice, these planning metrics involve projecting present trends into the future. But there is no rational basis for assuming that the future will, in fact, resemble the present. Think of typewriters, mainframe computers and Canadian beef, all products that met a future distinctly unlike the scenario their producers had anticipated.
But What About The Future of Marketing
To do marketing right, companies need to measure it right. But a word of caution is in order. The numbers don’t tell the whole story, and numbers are easy to abuse. Metrics designed to measure company-wide performance are inappropriate for calculating individual bonuses. Use marketing metrics as much as appropriate, but no more!
