It’s time for marketers to speak the language of finance, not the other way round

Marketing can be a profession of contradictions. One characterised by an air of entitlement and exceptionalism on one hand, offset by something of a crisis of insecurity and inferiority on the other. Nowhere is this more visible than around the vexed relationship with the financial community.

The story goes that CFOs and investors just don’t ‘get’ marketing.  Accountants record marketing as an expense, not the investment it ought to be. An expense that’s first in line to be sacrificed when margins are under pressure. Those working in finance are ‘bean counters,’ who don’t understand the value of brands. Ditto financial investors, who are obsessed with quarterly earnings, at the expense of the longer term.

According to a recent IPA report on ‘Marketing as an Investment’, “leadership support for building the company’s brands via effective marketing spend has shallow organisational roots” and “marketing can be seen to be an easy budget to cut”. The recurring theme is that the financial community – CFOs, investors and analysts – are inherently hostile to marketing.

I don’t think the issue is that the finance community don’t speak the language of marketing, it’s that marketers don’t speak the language of finance nearly well enough.

Nothing could be further from the truth, in my view. Having started my career in ad agencies in the 1980s, I have recently retired from a 17-year stint as an analyst in the City of London, weighing the share prices and financial performance of big, marketing-led names including Unilever, Nestlé and Reckitt so have seen things from both sides.

I don’t think the issue is that the finance community doesn’t speak the language of marketing, it’s that marketers don’t speak the language of finance nearly well enough. Compounding the problem is that some of the solutions being offered to bridge the gap incline to the obscure when a simpler and more universal language is there to be adopted.

Reflecting the value of brands on the balance sheet is one such example of something marketers cling to that is unlikely to create greater harmony with the finance function. It’s something that many in the marketing industry have advocated for. The debate has raged for decades and yet, seems no closer to resolution, beset as it is by legitimate concerns around the separability and transparency of brands. But the bigger problem is the utilitarian one; namely that investors just don’t lean that much on the balance sheet as a signal of value.

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Much more salient to investors is the profile of a firm’s profits and cashflows, and the capitalisation of those via earnings multiples and discounted cashflow analysis. If strong brands are driving faster growth and/or rising margins, then that is how investors are going to notice their value. So, my advice would be, if marketers want to influence the debate, start with the profit and loss (P&L) statement rather than the balance sheet. It’s a lot simpler to understand anyway.

At the top of the P&L sits the sales line. For the consumer-facing business, the rate at which sales are growing is, overwhelmingly, the most important influence on the share price. Because if you haven’t got sales that are growing reliably, then neither will profits.

The sales growth metric that matters the most to investors is ‘organic’ (or ‘like-for-like’) growth: the growth that can be squeezed from existing brands and assets (rather than from acquisitions less divestments, or random movements in currencies). With organic growth comes the magic of ‘operating leverage’: the fact that sweating existing assets harder is good for margins, as well as the top line.

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It’s hard to understate how obsessed investors and analysts are with organic growth. Price-earnings multiples (the most widely used valuation metric among investors) correlate closely with organic growth expectations. Organic growth ‘beats’ and ‘misses’  to consensus result in material on-the-day moves in share prices.

Take Unilever for instance. Following a spurned hostile bid from Kraft Heinz in 2017, Unilever embarked on a strategy of growing earnings by expanding margins, underpinned by zero-based budgeting initiatives, including in marketing. Between 2016 and 2022, its marketing to sales ratio fell, from 14.7% to 13.0%. At about the same time, a new CEO at Nestlé (Unilever’s principal peer in the eyes of investors) chose to set less aggressive margin targets and went about boosting organic sales by pruning low-growth brands in categories like confectionery, waters and meats.

Unilever’s strategy was well-intentioned. But it soon proved damaging to both the top line and share price. The company fell short of its sales growth targets at the end of 2019, 2020 and the first half of 2021. Between the aftermath of the Kraft bid and the end of 2021, Unilever’s share price underperformed Nestlé’s by 40%.

Framing marketing always as an “investment” is a noble aspiration. But marketers can be reluctant to walk the hard yards of accountability, analysis and transparency that come with that territory.

Under new leadership, Unilever has abandoned a margin target and has instead focused afresh on organic sales growth, where it has been beating expectations. In the first half of 2024, marketing to sales increased to 15.1%. As gross margins expanded by over 4 percentage points of sales, on the back of falling commodities, over 40% of the benefit has been reinvested back into marketing. Since the start of 2022, Unilever’s share price has outperformed Nestlé’s by over 70%. Nestlé has recently decided to change its CEO, following two successive quarters where organic growth fell short of investor expectations.

Unilever might be just one example. But long experience would lead me to question whether any self-respecting consumer-facing CEO or CFO would dissent from the view that the path to long-term value is via repeatable organic growth, backed by competitive levels of marketing investment.

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This opens a window of opportunity for marketers to raise their profile. Because if marketing isn’t in charge of organic growth, then who is? This means, first and foremost, using the right terminology. The components of organic growth are, simply and exclusively: price (charging more, if you can get away with it), volume (selling more units) and mix (selling more higher-priced units.) These are different from, but complementary to, traditional marketing metrics such as penetration and loyalty.

Second, marketers need to develop familiarity and empathy with the financial promises the wider business is making to its investors and demonstrate willingness to engage in the resource trade-offs that are part and parcel of delivering on those promises. Framing marketing always as an investment is a noble aspiration. But marketers can be reluctant to walk the hard yards of accountability, analysis and transparency that come with that territory.

Try testing yourself with the following questions. Firstly, are you au fait with the financial guidance your company is sharing with its investors, particularly around organic growth, and is your brand plan accretive or dilutive to that? Secondly, do you have a working understanding (doesn’t have to be perfect) of the marginal economics of your brand in terms of its sales and profit response to changes in pricing, marketing intensity and mix? And lastly, if you were asked to make a 10% change in your brand’s budget (increase or cut) would you know where to start, consistent with maximising or limiting the profit impact?

The best marketers are those who can combine right-brained creativity with left-brained rigour and accountability. Learning the language of finance is critical to the latter. Nor does it have to be that hard, particularly if you keep it simple. Sticking to the P&L and the centrality of organic growth is a crucial first step on the path to enlightenment.

Martin Deboo began his career working at agencies including Publicis Groupe in the 1980s before becoming an analyst in the City of London. He was voted the City’s Analyst of the Year for his coverage of Unilever and is recently retired.