Well, there’s an often asked question. How do you answer it? We’ve seen and heard CMOs, VPs of Marketing, etc. scramble to create an answer to this question. Articles are written regularly on the importance of quantifying Marketing ROI and similar metrics. Since 2005, it’s been less “fun” to be a marketer because that’s about when all this accountability stuff started.
We have been kicking this idea around for a while. (Well since at least 2007 anyway.) And, of course, the first and most obvious question (at least to us) is what do you mean by Marketing? In too many companies what is really meant when the term “marketing” is used is the Marketing Communications/Branding/Social Media/Whatever functions that spend the most of the so-called “Marketing Budget.” Often time the question “what is all this doing for us?” is a proxy for the question “what is Marketing worth?”
While we accept that this budget and spend (though it should be an investment, but that’s another post) is potentially a large percentage of the total Marketing budget, it’s not where the leverage can be found. Apple spends a lot of money on the promotional side of their business, but as a percent of revenue, it’s trivial compared to others. Is that because their advertising/social media/whatever is so much better than everyone else? Not really, and certainly not anymore. Then what is it?
Simple, they get the true job of Marketing done right, so the backend (Marketing Communications) has less weight to carry. As we discuss in our book, Value Acceleration, Marketing’s responsibility is to “align the capabilities of your company with the desires of the marketplace.” So how much is doing that correctly worth to your company? We postulate the following answer:
Firms have a Market Value or Market Cap (MC). With publicly traded companies the Market Cap is easy to calculate since the stock price and number of shares outstanding is readily available. With privately held companies that are actively seeking investors (typically high tech companies, but not always) the Market Cap is simply the valuation at which they successfully raise money. With most privately held companies the Market Cap or Market Value is not readily known until it is time to sell the company. All that being said, the Market Value or Market Cap is composed of the current Net Asset Value (NAV) of the company and its potential future profits in net present terms, or the Present Value of Future Earnings (PVFE).
So MC=NAV+PVFE. If you accept that Marketing’s function is to “align the capabilities of your company with the desires of the marketplace,” then the PVFE is a direct result of doing that well. The costs associated with execution of that effort are ultimately subtracted from NAV. We then argue that the value of Marketing to your company is effectively the PVFE as defined by realizing that PVFE=MC-NAV.
You might argue that this is overly simple and ignores core capabilities a company may have developed over time in either R&D or Manufacturing for example. Fine, but if that R&D does not line up with the “future needs of the marketplace,” how valuable is it really? How is it being directed? On what basis are you making R&D investment decisions?
Or you might argue that your Manufacturing or Service delivery capability is world-class. Ok, that might be true. And again, how did you decide what aspects of Manufacturing or Service delivery at which to become great? How did you decide how to “align that capability with the desires of the market?”
One might suggest that we are describing strategy and its execution. Ok, but in strategy execution after you identify the goal, then the strategy must:
As we note in our book, Marketing, as we define it, is the source of competitive advantage.
How’s your Marketing function stacking up? Is you company worth a lot more than its NAV? It’s unlikely you can make a huge impact on the perception of future earnings from promotional activities alone. As Yoga Berra once said, “If people don’t want to come out to the ballpark, nobody’s going to stop them.” What is your Marketing function doing to make sure “people want to come out to YOUR ballpark” today and tomorrow?
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