Marketers can unlock budget by being finance friendly

Finance feels like a black box to most marketers. It is full of arcane terms like EBITDA (earnings before interest, taxes, depreciation and amortisation), ROCE (return on capital employed), and alpha generation. 

This is financial jargon that marketers may know are important measures of performance for their business, but which can be difficult to use as guides for making marketing decisions.

The good news is that the principles of finance are actually fairly simple. Financial value creation is a function of three – and only three – variables, namely: growth, profit , and risk.

The simplest formula for valuing a business is the Gordon Growth Model. This says that the value of a business with a stable growth rate can be approximated by dividing its profit by its cost of capital minus its growth rate.

This makes intuitive sense – you can increase the value of a business by increasing its earnings or increasing its rate of earnings growth or increasing the certainty of those earnings (that is, reducing the risk of them not materialising).

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What this means in practice for marketers becomes clear when each of the three financial value drivers is broken down into its component parts:

• Growth: The combination of the number of customers and their lifetime value
• Profit: The combination of price and cost
• Risk: The combination of earnings stability and “positive surprises”

In other words, there are six dimensions around which marketers can plan their activities, knowing that a positive outcome on this dimension will lead directly to an increase in financial value (so long as the performance on one dimension is not achieved at the expense of performance on the other five).

The relative importance of each dimension will depend on the context of the business – growth has the greatest value to companies with high margins (such as many tech and pharmaceutical companies) while improvement in profitability is the greatest driver of value for companies in mature and declining industries (which is why we see so many mergers between energy companies right now). The impact of risk is seen in the market’s response to “earnings misses” (such as those by Nike and Starbucks recently), where the value of the business is written down to reflect the greater uncertainty associated with the size of their future profits.

Let’s discuss the six marketing dimensions in the order of their relevance to the average marketer:

1. Marketing increases customer acquisition (growth driver)

There is a good reason why some CMOs prefer the title of Chief Growth Officer – they are in businesses where the number one responsibility of marketing is to drive customer acquisition. Their key responsibilities are for the promotion and place aspects of the 4Ps to ensure that the company and its products are top of mind and easy to locate in relevant purchase situations (or, as Ehrenberg Bass Institute would say, they enjoy high “mental and physical availability” among target audiences).

2. Marketing improves customer lifetime value (growth driver)

Marketers care about relationships, not just transactions.  A sustainable business is one that attracts the right customers (those to whom the company offers distinctive value) and have the potential for high customer lifetime value. This exposes the fallacy that the value of every dollar of revenue is equal.  It is not; “one off” transactions are worth considerably less that revenue from a customer with whom a recurring revenue relationship can be established.

3. Marketing improves pricing power (profit driver)

Customers buy based on value.  And value for the customer is based on the ratio between the benefits that a product or service is perceived to offer, and the price that the customer is being asked to pay.  The single most powerful measure of brand equity is whether the customer views the brand as “worth paying for”.

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4. Marketing delivers cost efficiencies (profit driver)

This is a tough financial argument for marketers to prove, because it involves modelling the increased efficiency that comes from alignment around a clear and compelling brand positioning.

The impact of this alignment is seen externally (the same media spend produces higher sales response; the business achieves higher overall awareness and social engagement) and internally (employee hiring and retention is improved; suppliers seem more eager to work with the business) – all indicators of being a recognisable and respected brand. This is the brand multiplier effect that was the subject of an earlier Marketing Week article.

5. Marketing improves earnings stability (risk management)

Warren Buffett is famous for his ability to identify companies with “moats”, meaning sources of sustainable competitive advantage that mean that their earnings stay stronger for longer. According to Buffet, brand is one category of “moat” and a major reason for many of his investments (such as the Coca-Cola Company, Apple, and American Express).

The more that a brand can rely on being consistently chosen by its target audience, the higher the predictability of its revenues and the stability of its earnings.  Achieving this relies on a specific type of creativity – the ability to keep a brand feeling fresh, relevant and attractive to its existing audiences and new customers.  It is why ideas like “priceless” (Mastercard) and “there is a glass and a half in everyone” (Cadbury) are so valuable, with fresh executions, the ideas never lose their appeal.

6. Marketing creates “positive surprises” (risk management)

There is a second form of marketing creativity that is more obviously associated with positive earnings surprises.  This is the “disruptive” form of creativity is “disruptive” that aims to change the way in which a category is perceived so that the brand in question is perceived to offer new and distinctive value (see pricing power above; also customer acquisition).

This is the strategy used by the likes of Red Bull, Salesforce and, more recently, Liquid Death to change how we think about specific categories.  When done well, both types of creativity deliver a customer response that exceeds market expectations – this is the very definition of alpha generation.

Together, these six dimensions represent the six levers of marketing value.  The relationship of these six levers to revenue and profit generation, and then to valuation, can be illustrated as follows:

As noted earlier, the relative importance of the six marketing levers will vary according to the specific circumstances of each business.

But these six levers provide a common framework for marketers to use in describing their marketing strategy in terms that their finance colleagues will both understand and respect. With marketing perpetually seeking ways to find a common language with finance, communicating through this framework can provide a simple way for the function to convey its ability to drive financial results.

Ultimately, it can provide a means to unlock bigger budgets, by giving marketers a framework to speak to finance on their terms.

Readers wanting to gain a deeper understanding of this framework can download the white paper recently published by LinkedIn’s B2B Institute.

Jonathan Knowles is the principal of Type 2 Consulting, a firm that specialises in working with marketing-skeptical B2B companies. He is the author of The Strategy of Change series for the MIT Sloan Management Review.

Lisha Perez is the partnership lead at The B2B Institute, a LinkedIn think tank that researches new approaches to B2B growth. Previously Lisha worked at Unilever where she led growth and profitability initiatives for several of the world’s largest, most iconic brands.