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Value Above Cost: Driving Superior Financial Performance

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Donald E. Sexton lays out the central premise of his book and discusses tools that marketing and finance managers can use to answer questions about the impact of marketing efforts on an organization’s financial performance.
This chapter is from the book

Today’s competitive environment creates enormous pressures on all managers to be more effective (Exhibit 1.1). Managers at every level from Chief Executive Officer, Chief Marketing Officer, and Chief Financial Officer to the assistant to the Assistant Brand Manager feel these pressures.1

Exhibit 1.1

Exhibit 1.1 Pressures on marketing

Marketing managers feel not only the external pressures of the competitive environment but also internal pressures from fellow managers who ask reasonable questions within their organizations, such as:

  • What is the return on our marketing efforts?
  • What would our sales or profits be if we cut back on the marketing budget?
  • Why should we increase efforts in marketing?

In their surveys of marketing managers, the Association of National Advertisers (ANA) has found that relatively few managers are satisfied with their ability to estimate the return on their marketing efforts, and relatively few believe that they can forecast the impact of a 10 percent cut in the marketing budget (Exhibit 1.2).2

Exhibit 1.2 Marketing manager’s views on their ability to evaluate marketing

How would you evaluate your ability to determine marketing ROI?

Very Satisfied or Satisfied

2005 (ANA)

13%

2006 (ANA)

23%

2007 (ANA)

11%

2008 (ANA)

13%

“I can forecast the impact of a 10% cut in the marketing budget.”

2005 (ANA)

16%

2006 (ANA)

28%

2007 (ANA)

18%

2008 (ANA)

10%

It is, therefore, not at all surprising that about 60 percent of finance managers surveyed by Financial Executive Magazine have doubts about marketing forecasts (Exhibit 1.3).3 In fact, given the discouraging opinions of marketing managers regarding their own forecasts, it is surprising that about 35 percent of the finance executives were found to be willing to believe the marketing numbers!

Exhibit 1.3 Financial managers’ views on marketing’s ability to evaluate marketing return

No

Given that marketing forecasts are often input to financial guidance, do you believe these forecasts are audit-ready?

60%

Do you believe that marketing has adequate understanding of financial controls?

63.1%

Financial Executive Magazine and Marketing Management Analytics, 2008.

  • Few managers are satisfied with their ability to estimate the return on their marketing efforts.

These findings are remarkably consistent—not only over studies conducted by a wide range of organizations including the ANA, the Conference Board, the American Productivity and Quality Center, the CMO Council, and various consultancies—but also over time. In fact, in all these various studies, the percentage of managers very satisfied or satisfied with their ability to evaluate marketing ROI is generally between 10 percent and 20 percent, with no upward trend. At the same time, 80 percent of senior marketing managers surveyed in late 2008 believed that the demands of board members and C-level executives for proof of the effectiveness of marketing and branding initiatives were increasing.4

Today’s intensely competitive environment makes it increasingly difficult to determine marketing accountability. Marketing returns are affected by numerous, powerful marketplace forces such as knowledgeable customers, aggressive competitors, shifting macro trends, and technological changes—evolutionary changes that produce new industry leaders and revolutionary changes that produce new industries.

This book provides marketing managers and other managers, including finance managers, with tools to answer questions about the impact of marketing efforts on an organization’s financial performance. The heart of the book is the concept of Customer Value Added (CVA®). CVA® is the difference between the value an organization provides customers and the cost of providing that value—Value Above Cost (Exhibit 1.4).

Exhibit 1.4 Customer Value Added

CVA® = Perceived Value Per Unit – Variable Cost Per Unit

  • Total net value per unit created as perceived by customer
  • Associated with contribution, profit, and cash flow
  • Net value shared by the producer, resellers, and customer

CVA® is the net value to society created by an organization. The higher the CVA®, the more economically successful the organization. The lower the CVA®, the less successful the organization. It is that simple.

  • CVA® is the net value to society created by an organization.

This chapter explains how you can use CVA® to improve marketing decision-making.

Determining Marketing Accountability

Interest in how marketing affects financial performance has a long history. Nearly 40 years ago, the author’s first published journal articles concerned marketing accountability (Exhibit 1.5). Over the years, many qualified researchers have spent considerable time and effort attempting to estimate the return from marketing activities. Yet the answers have remained elusive, and today marketing accountability remains one of the most important issues facing marketers.5

Exhibit 1.5

Exhibit 1.5 Personal involvement in marketing accountability research

Marketing managers seem to believe that the evaluation of the return on the marketing investment is important. In 2006, members of the CMO Council placed issues involving marketing ROI as three of their top five concerns.6 A 2007 Conference Board survey found nearly 80 percent of the respondents considered marketing ROI and marketing metrics among their most important challenges.7

Given the amount of interest and efforts over many years, one would expect some success. Yet, a 2008 study by the Conference Board found that only 19 percent of the organizations surveyed felt that they had made good progress in measuring marketing ROI, and more than 50 percent had not started or had just started their efforts to measure marketing ROI.8 A 2007 Marketing NPV study found fewer than 10 percent of respondents felt their ability to measure marketing ROI to be “as good as it needs to be.”9 While a 2008 study by the Lenskold Group found that 26 percent of the firms surveyed calculated some profitability measure for at least some marketing investments, that is still far from a majority.10

This lack of progress is reflected in the budgeting process. Nearly two-thirds of marketing budgets are set based on history—last year’s budget, according to the ANA surveys and corroborated by other studies.11

In Chapter 11, “Organizing to Manage CVA®,” the reasons for this lack of progress are examined in detail.12 In brief, numerous studies suggest that the main factors slowing progress in determining marketing accountability are:

  1. Lack of clarity as to what marketing return is. Many managers report that there is no definition of marketing ROI within their organization.13
  2. Lack of time devoted to marketing return. Time spent on marketing return is one of the most useful predictors of progress, but many organizations have not even started to develop systems to examine marketing return.
  3. Lack of motivation for people to work on marketing return. Relatively few compensation or recognition systems seem to encourage work on marketing return.
  4. Lack of skills and resources. Many organizations feel they do not have the appropriate data or the appropriate analytical skills to evaluate marketing return.
  5. Lack of cooperation between marketing and finance. Marketing and finance silos still seem to be the reality in many organizations.
  6. Inertia. Many managers seem comfortable with what they are currently doing and neither feel the pressure to change nor have the time to change their approaches.

This book focuses on how to think about the return on marketing activities. It shows how a company’s marketing and branding efforts play a major role in determining the financial performance of any organization, including revenue, profits, cash flow, and shareholder value and how those efforts can be monitored and evaluated for maximum impact.

Will this book solve all the problems in determining marketing accountability? No, of course not. But it provides methodologies and approaches that are broadly rooted in many disciplines—marketing, economics, finance, and accounting—and which are supported by multiple studies. The book explains how to evaluate marketing efforts with a straightforward concept—CVA®—that has a direct relationship to contribution. Its use has been proven in practice by the author’s corporate clients.

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