Marketing Performance

Marketing Accountability is not just about ROI. It is about all the ways that marketers can demonstrate their contribution to overall business success, and earn the trust of their colleagues.

Marketing Performance Archives

What is Marketing (Revisited)?

On Monday this week, I presented to an MBA class at NYU’s Stern School of Business on the topic of “Brand Equity Measurement and Valuation” and the challenge of measurable marketing.

They were a very bright group but I was shocked to see how quickly they defaulted to a definition of marketing as “communications” which led to “advertising effectiveness” as the definition of marketing accountability.  It is an all-too-common mistake.

Marketers need to stake out their claim as a strategic discipline if they aspire to relevance in the boardroom.  The strategic significance of marketing rests on the twin observation that human beings have complex utility functions, and place importance on relationships.  Brands derive their value from their ability to communicate on multiple levels and to create perceived relationships between customers and companies (or their products).

Marketing is about the creation, communication and delivery of customer value.  Brands, advertising, social media are the mechanisms and channels through which this process of customer value creation occurs.  Value capture by the company occurs through the transactions that result from the customers’ recognition of the value being offered.  In the discussion on Monday night, we agreed that the success of marketing should therefore be measured in terms of two ways – transactions in the current time period; and building a relationship asset that would result in transactions in future time periods.

This led to a productive exploration of the metrics that should be used to characterize the success of marketing in the short-term – the kinetic energy created so to speak – versus the metrics needed to assess the quality of the relationship asset – the potential energy created so to speak.


Collaboration Between CEOs and CMOs

The HBR recently published an interesting blog post from several of McKinsey’s Marketing and Sales leaders with 6 recommendations about how to enhance the collaboration between CEOs and CMOs:

The recommendations are sensible but suffer from two problems: first, the assumption that CMOs have the skills to take on the wider responsibilities; and second, the onus that is placed on the CEO rather than the CMO to elevate the profile and influence of marketing within the organization (4 of the 6 recommendations are directed at the CEO).

In my experience, many CMOs still define their responsibilities in terms of delivering creative impact rather than business impact because communications and promotions are the only two activities over which they have direct control.  They are often reluctant to accept responsibility for business outcomes because they recognize that they have limited influence over many of the factors (such as the new product pipeline; pricing; distribution; customer service) that will play an important role in determining those outcomes.

In my opinion, recommendation #4 is the most important – having a plan for marketing that spells out explicitly how marketing is focusing on enhancing the value of the business.  That is the starting point for an improved collaboration between the CEO and CMO.

This involves overcoming the reluctance of CMOs to accept responsibility for outcomes over which they may not have direct control; and clarifying that the mandate for marketing is about more than advertising (within B2B companies at least, this myth is still surprisingly prevalent).

The definition of marketing is “creating, communicating and delivering customer value” (at least according to the American Marketing Association).  This is a helpful reminder to CMOs, CEOs and the wider company that generating customer value is the true goal of marketing – indeed, it is very lifeblood of the business since without a sustainable base of customers, there is no business.  This is what Peter Drucker meant when he said that “only innovation and marketing create value, all the [other business disciplines] are costs.”


Brands and Shareholder Value

As a former Finance person, I wince every time I see branding agencies publish simplistic charts with captions along the lines of “strongly branded companies outperform the market” such as those published by Corebrand, Havas, Interbrand and Millward Brown over recent years.  All these charts do is prove that these agencies do not know how to calculate excess returns.

Before you can claim that it is “brand” that is the cause of the outperformance, you need to adjust for the other factors that impact relative performance, such as risk and sector.  And if you want to meet the basic academic standards required for this form of analysis, you need to adjust for the FF4 factors (the three Fama-French factors – risk, market-to-book, cap size – plus Cahart’s momentum factor).

Until you do this kind of adjustment, your analysis is no more credible than saying “a portfolio of companies whose names begin with the letter F outperform the market” – this may be a statistical observation, but no CEO will change the name of their company in order to benefit from the “F effect”.  So marketers should not be surprised if simplistic charts such as those referred to above do not persuade a finance-literate audience to open the purse strings for brand investment.

Doing a proper analysis is hard work because it involves pulling in and crunching a lot of data in order to prove that brand is the true source of the outperformance.  Madden, Fehle and Fournier did such an analysis in their 2006 paper “Brands matter: an empirical investigation of brand-building activities and the creation of shareholder value” that won the Best Paper Award in the Journal of the Academy of Marketing Science that year.  That research did indeed suggest that a portfolio of strongly branded companies generated an excess return and at lower than market risk.  But this paper was criticized for using an independent variable (they used appearance on the Interbrand list as the definition of “strongly branded”) that was strongly related to the dependent variable (shareholder value).

Other researchers have tried to prove the “brand effect” by using measures of brand strength that are unrelated to a company’s market capitalization.  The most credible work in this area has been done by Natalie Mizik, Shuba Srinivasan and Marc Fischer (respectively from University of Washington, Boston University, and University of Cologne).  Their research has generally supported the hypothesis that brands enhance shareholder value, but suggests that the effects are more nuanced than most marketers want to be able to claim.

Even if most marketing agencies lack the skills and resources to perform a robust statistical analysis, their credibility would be vastly enhanced if they at least deflated the brand returns by the relevant sector returns so as to substantiate a claim that “strongly-branded companies outperform their industry peers”.  This is easy to do (you can use an ETF as the proxy for the industry return) and will communicate that the agency is serious about isolating the factors that help a company outperform its peers.

I have analyzed the brand valuation league tables published by Brand Finance, Eurobrand, Interbrand and Millward Brown over the past 5 years.  Aggregating their results suggests that, for the 200 or so publicly-traded companies that are the parents of the brands that appear in these league tables, brand value represents around 16% of enterprise value.  That represents an aggregate value of over $2 trillion.  If brand is truly the asset that these agencies claim it is, then surely it merits a semi-credible analysis of the scale of the incremental business value that it has generated?

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Are You Value Relevant?

Marketers are drawn to the concept of brand valuation because they believe that it will provide definitive proof of the financial impact of marketing.  They are right about the goal and wrong about the method.

The goal of any business discipline should be to demonstrate value relevance – that is, to demonstrate that it has a material impact on the performance and valuation of the business.

There are three drivers of business value – profit, growth and risk.  Demonstrate how you are influencing any one of these for the better (higher profit or growth, or lower risk), and you have the attention of the finance folk and the whole management team.

This is not easy.  It is challenging to develop a comprehensive model of all the factors that influence the customer purchase decision and the importance of each (what academics like to call “attribution”).  That is why marketers fall prey to the apparent simplicity of brand valuation.  It is conceptually so much simpler to lay claim to a specific proportion of corporate cash flows in the name of the brand, and assert that the net present value of these cash flow is the value of the brand.

Simpler, but wrong.  The goal of marketing is to enhance the overall value of the business performance (the size of the pie), not to focus on what arbitrary proportion of that value it can lay claim to (the size of the slice).  That is why business executives get so frustrated with marketers who assert that brand value has gone up while business value has gone down – it demonstrates that marketers care more about their own credibility than about the success of the overall business.

To demonstrate value relevance, marketers are wise to focus on the messier task of developing a “causal model” for how the business makes money, with a specific goal of identifying where customer value can be increased at low incremental cost to the business.  It is this ability to bring together the revenue and cost perspectives on the business that is the foundation for effective business strategy.

An excellent first step is the use of marketing analytics to improve transactional efficiency.  This is the rightly the focus of much of current marketing investment.  But marketers also need to focus on the more strategic contribution of marketing – the development and management of profitable customer relationships based on the delivery of distinctive levels of customer value.  This is harder to measure, but this represents the larger component of the value relevance of marketing and branding.



Making the Business Case for Brands

I am excited to be invited to present at the October meeting of the Conference Board’s Council on Corporate Brand Management on the perennially important topic of the business case for brands.

As regular readers of this blog will know, I view things through the lens of business accountability.  My focus is on defining the strategic role of marketing and providing indicative “rules of thumb” for the value differential between a company that does marketing well and one that does it poorly.  It is a strictly business-based justification of marketing.

As things stand (and the presentation is two weeks away), I plan to make three basic points:

  • Business is ultimately all about cash flow
  • Your measurement systems should be based on tracking the things that measure current cash flow and serve as predictors of future cash flow
  • Focus on business accountability rather than marketing accountability

The first point is a simple one.  Money is the language of business.  It is literally the currency in which business performance is evaluated (the financial accounts) and rewarded (in the stock market).  That means that cash flow is the metric for success.  Marketing spending either generates cash flow in the current time period or in future time periods (in which case we call it brand equity). But generating cash flow is the requirement.

The second point is the implication that point #1 has for marketing measurement.  Marketing metrics are only of interest outside the marketing department to the extent that they explain the sources of the company’s current cash flow, or act as reliable indicators of the future cash that the company can expect to receive as the result of past actions (that is the brilliance behind Tim Ambler’s characterization of brand equity as a “reservoir of cash flow earned but not yet released to the income statement”).

The third point is about the end game of marketing.  Marketing is the means to a more successful business, not an end in itself.  Marketing’s singular contribution to business success is through audience identification, value proposition development, and communications.  The true asset of any business is the perception among its target audiences that it is a source of distinctive value to those audiences.  And the ability to deliver on the experience that they expect.  The business “asset” is the advocacy and loyalty of the customer – and marketing is only one part of the overall system for creating that advocacy and loyalty.   Key roles are also played by the new product development, pricing, lean manufacturing, distribution, supply chain management and a host of other supporting business functions.  That is why brand valuation as it is currently practiced is ultimately so unhelpful to marketers – rather than encouraging a collaborative effort across disciplines to optimize the process for delivering value to customers, brand valuation becomes a “land grab” by marketers to lay exclusive claim to revenue.

An essential step in the business case for marketing is an explicit “causal model” for explaining how customers (whether B2C or B2B) make and execute their purchase decisions.  Only then is there a business context in which the incremental contribution of any activity can be assessed.  In my experience, a large percentage of the marketing budget is then recognized to be an “operational cost of doing business” (another way of saying “money we need to spend in order to maintain our current position in the market”) and a sensible conversation can be had around the performance objectives for the truly discretionary part of marketing .


Brand Equity Measurement & Valuation

Last night I reprised my role from January and was again the guest lecturer on the topic of brand valuation at Professor Berndt Schmitt’s MBA elective course on “Managing brands, identity and experiences” at Columbia.

Given the work experience and intellectual caliber of the students, I took the opportunity to broaden the focus of the session away from the mechanics of how to value brands and towards a wider discussion of the business objectives that brand valuation serves.

As a result, I hope that I left them better able to argue for the strategic contribution of marketing, and the importance of the concept of brand equity as a “reservoir of future cash flow” (Tim Ambler’s elegant characterization) which substantiates the claim that brands are truly business assets.

Based on their reaction to the material I was presenting, I believe that three points were particularly well received:

  • First, that the role of marketing is to understand the key “currencies” in which customer value is denominated in order to develop value propositions that go beyond the purely functional
  • Second, that the perspectives of Marketing and Finance are easier to align once it is recognized that marketing’s role is to create incremental cash flow over the short term (through increased transactions) AND over the long term (through increased customer preference) – the challenge is that only the short term component is readily visible to Finance
  • Third, that even if the discipline of brand valuation is in its infancy (as evidenced by the woeful inconsistency between the brand values published by Brand Finance, Interbrand and Millward Brown), the data can be used to generate a useful “rule of thumb” for the economic significance of brands in different industry sectors

I provided a handout that includes a comparison of the Brand Finance, Interbrand and Millward Brown brand value league tables plus the calculation by Type 2 Consulting of what these brand values imply about the proportion of enterprise value represented by brands for each of the 24 GICS industry sectors.  Email me if you are interested in receiving a copy.


Managing & Measuring Brands in a Digital World

I attended the “Measuring & Managing Brands in a Digital World” conference put on by the Center for Measurable Marketing at NYU’s Stern School of Business today.

It felt like a “new world” agenda being discussed by a roster of largely “old world” practitioners, agencies and academics. There were very few true digital natives in the room, and fewer still at the podium. As a result, the quality of the presentations was highly variable. There were some moments of brilliance but there were also too many examples of “shiny metal syndrome” (infatuation with the possibilities of digital measurement, independent of the significance of digital to overall business value) which contrasted with the rearguard action being fought by providers of existing methodologies who were keen to prove their ongoing relevance. And then there were the tedious presenters who abused the podium to promote their own company/book/profile.

As a result, the list of what I learned about how to improve the measurement and management of brands in the new digital environment is disappointingly short. So, sadly (because I had high expectations for the conference), I am hard pressed to give the event more than a C+.

How might it have been better? Here are a few suggestions:

  • Include a “big picture” keynote that outlines a point of view about why and how the advent of digital is changing the possibilities and practices of brand management and measurement
  • Create a conference agenda with a strong narrative structure that explores different aspects of the conference theme – such as topics along the lines of “how digital is changing the way that consumers behave” or “how digital is changing the possibilities for brand measurement” or “how to structure a marketing organization that marries the best of traditional and digital”
  • Enforce the “do not abuse the podium for self promotion” rule



ROI – A New Low

In my list of the five things that marketers need to know about Finance, the final one is about the use of language.  Specifically, I counsel marketers against playing fast and loose with established financial concepts such as ROI or ROE.

Finance professionals do not find it cute to hear ROI redefined as “Return on Intimacy” (as Jeff Einstein, Beth Kanter, and a number of others have done) or “Return on Ignoring” (as Jeff Hayzlett has proposed in a recent segment on AMA TV).

Finance professionals are already disappointed that marketers are so poor at explaining how their activities contribute to the financial performance of the business.  For marketers to compound the situation by appearing to trivialize some of the core performance metrics of the business seems like the height of foolishness.  Surely it is not that hard for marketers to make the connection between the perceived financial illiteracy of marketers and the lack of respect for Marketing in the boardroom?

The delicious irony about the “Return on Ignoring” suggestion is that it was made during a segment on AMA TV that was making an entirely valid point about the importance of listening to your customers.  The irony is, of course, that the presenter appears to be overlooking the fact that Finance is every bit as important a customer of Marketing as are the external customers of the business – if marketers cannot convince Finance of the good sense of investing in marketing programs, then there will be no money to invest in marketing programs for external customers…

C’mon marketers, you need to hold yourselves to a higher standard and ignore these sort of frivolous and self-indulgent wordplays.




The Long Term

Finance theory tells us that a dollar tomorrow is less valuable than a dollar today.  I had always assumed that the argument rested primarily on the issue of opportunity cost – what could I have invested that dollar in today, and how much would it have been worth tomorrow?

But with interest rates as low as they are right now and markets as volatile as they are right now, the issue becomes less about opportunity cost and more about certainty. The reason why a dollar tomorrow is not worth as much as a dollar today is because it is less certain, rather than because I could have used the dollar to earn a higher return over the next 24 hours.

When you add into the occasion the observation that humans weight losses approximately three times as heavily as gains, you understand why certainty commands such a high premium.  Or, put another way, you understand why the long term is at a steep discount.

This is a big problem for marketers.  A significant proportion of marketing activity is aimed at short term returns but a large proportion is focused on laying the foundation for success in the future.  If the certainty of future returns are in doubt, then the value of marketing is decreased.

Unless, of course, we can show that brand-related profits are more certain than others forms of profit.  The argument for brands then becomes as much one of risk mitigation as it is of demand generation.

Some interesting research is already underway in academia about the impact of brands on firm-specific risk.  It sounds esoteric – but it is certainly relevant to the value we place on the long term.


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What Oft Was Said

I participated in a client workshop on “brand voice” today.  Despite being in the marketing business, I must admit to being something of a skeptic when it comes to the topic of voice.

After today’s session, I realize that my skepticism is a direct reflection of the rather superficial way in which I have treated the topic – namely that it consists of no more than defining a list of the attributes that should characterize the tone of a company’s communications.  For some reason, whatever the brand, the lists I generated always included “optimistic” and “human”…

As a result of today’s workshop, I have a new appreciation for the science (and art) of defining the “how we communicate” in such a way that it magnifies the “what we communicate.”  It seems to me that there is enormous potential to create a self-reinforcing dynamic between the content, tonality and visual style of a brand.

Alexander Pope famously captured this idea in his phrase “what oft was said, but ne’er so well expressed.”  What I take this to mean is that because of the incredible sensitivity of the human ear, eye, and brain’s to subtle variations in tone, shade and message, differentiation may be achieved as much by how something is said as by what is said.

This is a profoundly exciting thought.  B2B marketers exist in a universe where most competitors can – and do – say pretty much the same thing.  This suggests that the secret to differentiation may lie as much in the creation of a distinctive voice and visual style as it does in a distinctive message.


Muscular Marketing

Marketers in B2B companies are often criticized for not understanding enough about the technical aspects of their businesses.  The implicit assumption is that, absent a deep technical understanding of how the business does what it does, marketing will be unable to help the business.

My goal is to help marketers expose this assumption as a fallacy.  My experience is that most B2B companies are full of people with deep technical understanding, and woefully short of people who can talk about the business in terms of the benefits that clients will receive.

This is the core mission of marketing – to understand the basis for, and to articulate, a compelling value proposition to clients.  The mission of marketing is NOT to become the technical writing department of the company, finding eloquent ways to talk about the company’s technology or services.

To do this, marketers obviously need to understand a lot about the technical side of how the company does what it does.  But marketers must never lose sight of the fact that their role is not “how to explain the company to the world” but rather “how to explain what kinds of customer needs are best resolved by our products/services/technology.”

What I am advocating is a more muscular stance by marketers.  They need to articulate where their value added lies, and be politely firm in resisting the suggestion that they need to become technical subject matter experts.  The true benefit to the company is not in swelling the ranks of the employees who can describe their technology but rather in creating a cadre of people who can articulate the benefits delivered by the technology.


Business Impact is the Goal of Marketing

I am passionate about the business importance of marketing.  But I often find that marketers are their own worst enemies when it comes to establishing credibility in the board room.

The bottom line is that marketers need to demonstrate that they are serious about enhancing the value of the business.  Period.

None of the other metrics of marketing are relevant to a business audience until that audience recognizes that marketing cares about business success more than it cares about awareness, loyalty, engagement, community or any other of the host of metrics against which marketing measures its impact.

Few marketers realize the extent of the skepticism about their interest and ability to impact business value.  It is generally believed that marketers care about dramatic impact more than business impact.



Should Brands be on the Balance Sheet

We had a lively debate over dinner at the “Marketing Meets Wall Street 2” conference last night about whether brands should be on the balance sheet.  The debate was led by members of the Marketing Accounting Standards Board – an initiative that aims to establish common financial reporting standards for marketing.

A number of speakers voiced the opinion that the credibility of marketing would be greatly increased if it was formally recognized that marketing resulted in the creation of an enduring economic asset (the brand).  The implication of this was that the brand building part of marketing expenditure should be capitalized, and appear on the balance sheet.

Fortunately Brandt Allen, a Professor of Accounting from Darden, was in the debate and nailed the fallacy in this argument.  He noted that the function of a balance sheet was NOT to represent the inventory of economic assets of a business – a balance sheet was simply the cumulative total of the transactions of that business since its inception.  Accountants do not focus on valuation except in rare cases (such as asset impairment and market to market accounting for widely traded financial assets).  Marketers would therefore need to argue for a change in the function of the balance sheet before internally-generated brands could be included on it.

He also counseled marketers to do some marketing and identify the “customer” that they were seeking to serve through the MASB initiative.  The initiative was unlikely to gain any significant traction if its motivation was simply to enhance the credibility of marketing as a profession.  FASB’s success was the direct result of its focus on the information requirements of the investor and financial analyst community.  MASB’s success would depend on identifying an audience (other than marketers themselves) whose needs would be served through the more consistent/comprehensive reporting of marketing activity, expenditure, and impact.

I contributed to the debate with the observation that there were two initiatives, not mutually exclusive, that were worth pursuing:

  • An initiative that aimed to create a classification of the major forms of market-based intangible assets of businesses to represent the stock of true economic assets of the business (this would need to include not only brands but knowledge assets, contract assets and other significant forms of intangible assets)
  • An initiative to standardize the reporting of marketing expenditures, and the development of a number of key marketing indicators (such as net new customers or a measure of brand equity) that companies could be encouraged to report

But, like Brandt, I could see no circumstances under which pursuing the goal of putting brands on the balance sheet was a worthwhile objective for MASB, or the marketing profession more broadly.


Marketing Metrics for Decision Making

I spoke this evening as a guest lecturer on an MBA marketing elective at NYU’s Stern School of Business.  The course title (also the title of this post) gives you a good sense of the subject material that the students were interested in discussing.  And, my, were they interested in discussing it!  Rarely have I been in front of a more engaged audience.  I think it took me over 10 minutes to get past the title slide of my presentation…

I left the class feeling really optimistic about the future of marketing, and the ability of marketing to contribute to business performance, and to create economic surplus more broadly.  This was an audience that obviously embraced measurement (or they would not have chosen this elective!) but they were hungry for the story behind the numbers, not the numbers per se.  They clearly had a view of marketing as the growth engine of business and recognized the need for appropriate methodologies to measure how marketing was adding to customer value.  The quality of the questions was exceptional and ranged from questioning the validity of comparing market value to book value, to the relative importance of brand across different industries, to the impact of network effects on brand strength…

I stayed for their class presentations about the prevalence of marketing metrics in the 10Ks of five major companies.  There was some excellent analysis of the Google, Microsoft, Disney, McDonalds and Coca-Cola financial statements – all of which highlighted the relative paucity of the marketing data included in the financial reports.  This provoked a great discusion around the notion of “if marketing is so important, why is there so little data on marketing in the financial reports?”  I will return to this topic in a future post.

For now, NYU Stern partipants in tonight’s marketing elective (and Profesor Dawn Lesh – whose guest I was), thank you for a fabulous evening!


Marketing Analytics: The Triumph of Transactionalism

I attended the Canadian Marketing Association’s Marketing Analytics conference today.  As is usually the case with such conferences, a minority of the speakers deliver “blow your socks off” brilliant presentations, while the majority of speakers provide limited insight but a collection of helpful anecdotes, and then there is always one speaker who abuses his/her position at the podium to do an overt sales pitch for their product or services.

Those in the “blow your socks off” category included Gareth Herschel from Gartner who delivered a fabulous “state of the union” overview of the customer analytics industry, and Paul Tyndall from Royal Bank of Canada who gave a highly informative overview of the uses of text analytics.

A consistent theme of the day was how the true power of analytics lay in testing hypotheses about the optimal strategy for a company to pursue, rather than simply being used as a set of tools for optimizing whatever activities the company was already doing.  However, most of the presentations featured analytical approaches that fell into the latter category.  I came away impressed by the inventive use of technology to optimize existing media spend and to streamline the sales transaction process.  The remarks by Matt Ariker of Rogers Communications provided an eloquent explanation of why I always feel like my dealings with Rogers end up with them extracting the maximum value from me as a customer in exchange for them delivering the bare minimum value to me.

I came away from the conference admiring how analytics was being used to achieve much greater efficiency in marketing communications spending and sales funnel management.  But, at the same time, I was depressed by how marketing was being defined as “transactionalism” – the promotion of an efficient process for maximizing the transactions that could be stimulated from a particular customer set.  The focus is entirely on value extraction from customers, not value creation for customers.


The Value of Marketing

I think that it is healthy for marketers (and other business disciplines) to have periodic “crises of faith” about about the value of their work.  It is through these moments of deep introspection that we reconfirm why we are in our chosen profession and why we believe that it contributes to the sum total of human happiness.

Business has become a “magnificent machine” (to borrow Chris Kenton’s phrase) in which every activity is judged according to the sole criterion of how it contributes to facilitating a transaction.  The CRM system delivers a brutal transparency about how efficiently we are turning prospects into purchasers.  In this environment, much of marketing activity is no more than a cynical attempt to persuade people to buy more, and sooner.

Peter Drucker did not say that the purpose of business was to generate a sale – rather, he said that “the purpose of business is to create a customer.”  A sustainable relationship with a customer has to be based on the free and fair exchange of value.  If either party walks away from the transaction feeling like they have been jipped, then that is likely to be the end of the relationship.  So why do many companies treat each transaction as the opportunity to maximize their value capture?  Does it have something to do with the fact that those in leadership positions will no longer be around when it becomes evident that this “scorched earth” policy has boosted short term earnings. but only at the expense of long term earnings?

Marketing is the only business discipline with a constant focus on customer value – how to ensure that the customer perceives that the ratio of the benefits offered to price is an attractive one.  What makes marketing complicated is that human beings have rather a complex “utility function” (a fancy way of saying that we derive value from multiple sources).  A product or service certainly has to deliver the functional performance we want at a price that is appropriate, but we also want it to “feel right for me” – and that may have to do with design or status or a sense of belonging or a host of other things that turns the underlying product/service into a brand.  The goal of marketing is to create, communicate and deliver on this broader set of things that customers value.

Keep this goal as your priority and you will be confident about marketing’s contribution not only to the bottom line, but also to the sum total of human happiness.

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What Do Marketers Want?

Type 2 Consulting was created to serve an evident need for more business-literate marketers.  Our explicit ambition was – and remains – to support the emergence of a “next generation” of marketers who are able to integrate marketing and finance.  We consider this combination of skills to be essential for the creation of strategies that balance the needs of customer value and shareholder value.

Marketing and finance is only one dimension of the integrated thinking that we believe is necessary for this “next generation” of marketers to demonstrate.  We believe that business-literate marketing involves having a working understanding of strategy, technology and (in a services company) HR as well.  But the integration of marketing and finance is our primary focus.

We were aware that only some marketers would be interested in our services, although we believe passionately that all marketers should consider that basic fluency in finance to be essential.   But it took a remark by one of the other speakers at the Thunderbird Winterim two weeks ago to crystallize my thinking about the segmentation of Type 2’s audience.  Perceptively, he remarked “The participants wanted to hear about my topic – but they needed to hear about yours.”

I am totally OK with the fact that most marketers do not like finance.  But we all like respect.  If the answer to the title of this blog post is “the respect of my business colleagues”, then I see basic financial literacy as something that all marketers should want, not just need.


Brand Equity and Marketing Accountability

I am presenting to an EMBA class at Columbia this evening on the topic of brand equity and marketing accountability.  I am looking forward to it – EMBA students always ask great questions.

The gist of my presentation is that brand equity represents an important bridge between the worlds of marketing and finance.  Marketers intuitively think of brand equity as a measure of the strength of the brand’s franchise with customers; Finance folk intuitively think of it in terms of the incremental profit/cash flow that is generated by the brand.  The two definitions are compatible but they do not describe the same thing.  The marketers view of brand equity represents the potential for value; the finance view represents the realization of value.  In that sense, a marketing definition of brand equity will always be larger than the financial defintion because it does not allow for all of those potential brand sales that failed to occur due to lack of distribution or stock outs or a host of other factors that may prevent customers acting on their stated “intention to purchase” (one of the key measures of brand equity from a marketing perspective).

Should be a fun session.


Dodgy Brand Claims

I admire Millward Brown for its efforts to “talk the language of business” by trying to link brand equity and brand value to overall business value. But sometimes these efforts merely illustrate a lack of understanding for what constitutes a credible case.  For example, when the estimate for brand value exceeds the market value of a company (as was the case with Google, Starbucks and a couple of other brands in their 2009 survey), anyone half proficient in valuation is led to question how much of a “reality check” was done on the data.  For brand value to exceed market value, the aggregate value of all of the assets of the company other than the brand would have to be negative…

The latest example is the announcement that “Millward Brown Shows Stronger Brands Recover From Recession Faster” at the end of September.  The basis for this statement was a comparison of the performance of a portfolio of companies for which “brand contributes more than 30% of earnings” versus the overall market.

The problem is that the data does not prove the claim (any more than if the claim had been that “companies beginning with letters in the first half of the alphabet outperformed the market”).  The 30% criterion means that the Millward Brown portfolio is heavily skewed towards consumer industries  (such as food, retailing, consumer electronics) – and these industries have outperformed the overall market.  Therefore much of the outperformance of the Millward Brown portfolio is likely due to sector exposure, not branding.

To deliver a robust analysis about whether stronger brands recover faster, Millward Brown would have to show that its portfolio of strongly branded companies outperformed a portfolio of companies in the same industries, not the overall market.


ROI – Serenity in Action

In my previous post, I committed to a course of having “the serenity to accept the things than cannot be changed” – at least as regards the loose use of “ROI” as a catch-all for marketing accountability.

You might therefore be interested to learn how I responded to a client’s suggestion about incorporating “ROI” measurement into our messaging assignment.

The points I made were as follows:

  1. It is a great idea for us to discuss how we can explicitly articulate the commercial benefits that we expect to accrue to your company as a direct result of this assignment
  2. There are a number of ways of doing so, including an actual ROI calculation or a formal brand valuation
  3. In my experience, what the senior leadership actually values is a simple model showing how our work is aimed at changing external and internal perceptions and behaviors that in ways that result in changes to the growth and cash flow of the business
  4. Such a model has three benefits – it communicates that we care about the business, not just marketing; it clarifies our hypothesis about how marketing works (this can be debated and tested); and it demonstrates that marketing is about more than just the short-term response to changes in communication
  5. The best starting point for developing this causal model is to ask the senior leadership about the changes they would like to see in terms of perceptions and behaviors (internally and externally) and how they believe that the achievement of these changes would translate into improvements in revenue, growth, margin and volatility
  6. This model would deliver two benefits:  consensus at the senior level of the company about “how marketing adds value to the business”; and as a roadmap for defining the quantitative and qualitative research necessary to measure progress on the key dimensions identified
  7. This, in turn, would lead naturally to the creation of a marketing scorecard
  8. The process might culminate in a formal financial calculation – either in the form of ROI or brand valuation – though such point measurements typically only justify their costs if you are using the results to inform your actions in a merger, securitization, trademark infringement or licensing transaction

I will report back on the response from the client.  I certainly felt more “serene” in crafting this response rather than one that directly addressed the misuse of “ROI”…


ROI – a rose by any other name?

My admonition to marketers to be specific in their use of the “ROI” term makes me feel like King Canute, commanding the incoming tide to retreat.  If anything, the use of “ROI” as a general catch-phrase for “marketing accountability” is becoming more embedded.

I am conflicted about this – part of me delights in seeing marketers embrace the need for demonstrating accountability for their use of company resources (my new client last week even beat me to the punch in suggesting that we should articulate the commercial benefits we expected to result from our messaging assignment – amazing!); but part of me despairs that the ROI moniker will encourage financial types to see marketing as an essentially tactical discipline whose impact can be fully captured within the 12 to 18 month horizon typical for ROI measurement.

As any of you reading my posts on a regular basis will know, I have three main issues with the financial measurement of marketing and/or brands whether in the form of ROI or brand valuation:

  1. First, it involves treating marketing/branding as an activity that is separate from the other operations of the business (which seems crazy for a discipline that claims to focus on the overall customer experience, rather than just its communications)
  2. Second, it is hard to do.  It is genuinely difficult to construct a model that demonstrates the delta between “company with no marketing” and “company with marketing” – most people end up with a model that merely demonstrates the impact of marketing communication (in which case, my first point applies)
  3. Thirdly, a financial model is rarely what the senior leadership of the company wants to see.  In my experience they are much more interested in an answer to the question “how is this investment in marketing going to impact the overall performance of the business?”

I have mentally committed to “having the serenity to recognize the things that cannot be changed” and to use each reference to “ROI” as the opportunity to discuss the nature of accountability rather than the trigger for launching into a lecture about the correct use of financial terminology.


Brand Bonus – a.k.a Robustness

Vic Cook has posted his research into whether the stock prices of companies with stronger brands fared better in the downturn than those of companies with lesser brands (  Whereas I used a classical finance approach (branded companies vs the general market) for my analysis of the brand “bonus”, Vic looks at relative performance within the set of branded companies.

He divides the set of 62 companies (the publicly-traded parent companies of the brands on the 2008 Interbrand list) into four quadrants based, first, on whether brand value represented a greater/lesser than average proportion of market value and, second, on whether the company suffered a higher/lower than average decline in its market value.

I encourage you to read his post in full, but would still like to share the conclusions here:

  • The more valuable brands accounted for 33% of the total pre-crash value. The companies that owned those brands incurred losses in their market cap amounting to only 10% of the losses suffered by all firms in the study
  • The less valuable brands accounted for 25% of the total pre-crash value. Their owners incurred losses amounting to 50% of the total sustained during the storm.
  • The brands with inconsistent performance (defined as being greater/higher or lesser/lower) accounted for 42% of the pre-crash value and 40% of the losses in market cap incurred by all firms in the sample.

Vic ends his piece by saying “One can conclude with high confidence that, as a rule, companies with better brands suffer less than those with lesser brands.”

I find this a compelling piece of analysis that supports the (somewhat counter intuitive) conclusion that brands are a class of asset that has lower volatility than that of other forms of corporate assets.


Brand Bonus – Revisited

There is something very appealing about the simplicity of the argument that brands provide protection in a downturn.  I have been privileged to share ideas on this topic over the past few weeks with Raj Srivastava (Provost and Professor of Marketing at Singapore Management University), Dave Reibstein (Professor of Marketing at Wharton) and Vic Cook (Professor of Marketing at Tulane).  Both Raj and Vic have forthcoming articles on this topic that are well worth reading (based on the drafts that I have seen).

The articles take rather different tacks – Raj’s focuses on the mechanisms whereby brands deliver a financial bonus, and the need to maintain brand investment in a recession; Vic’s focuses on the magnitude of the bonus delivered, and whether it is a function of the relative importance of brand as a proportion of overall market value.

I will post links to both pieces once they are available.


Is There a Brand “Bonus”?

People like to assert that brands provide some cushion for a company when markets are falling, and help them bounce back faster when the market begins to recover.

The last twelve months provide a wonderful testing ground for this theory in that we have had a period of rapid market decline (Sept/Oct last year) and a period of rapid recovery (March/April this year).   Interestingly, the percentage changes were almost identical – in the first period the S&P 500 fell by 35% vs. a rise of 37% in the second.

My question is “How did a portfolio of strong brands perform relative to the market?”

The answer (based on a portfolio of 102 companies measured relative to the S&P 500) is that strongly branded companies enjoyed a brand “bonus” of around 4% during the market crash.   In the rising market, they outperformed by less than 1%.

I actually constructed a number of different portfolios to see if a portfolio based on any of the major lists of “the world’s best brands” outperformed the market.  I created 9 portfolios in all using the Fortune, Interbrand, Millward Brown and Brand Finance lists, and combinations thereof.

The portfolio that registered the best performance in the down market was one based on the Fortune list of most admired companies (it beat the S&P 500 by 7%).  The portfolio that did best in the up market was a blended portfolio comprising companies that appeared on at least 3 of the 4 lists (it beat the S&P 500 by 15%).   Across the up and down markets, the blended portfolios performed the best.

Maybe this is another case of “the wisdom of crowds”?  Across market cycles, a portfolio based on a synthesis of the Fortune, Interbrand, Millward Brown and Brand Finance lists outperforms portfolios based on any one of them…


Book Value or Tobin’s Q

Apologies for another somewhat technical post – but it concerns the appropriate metric by which to measure the contribution of marketing.

A company’s value is typically expressed in two ways – market capitalization (the market value of its equity – the amount you would need to pay to buy all of the shares) or enterprise value (the total of its equity and debt – the amount you would need to pay in order to have outright ownership of all of its assets).

The success of a company in “adding value” is typically measured in terms of its intangible value, which represents the excess of its market value over its book value.  Book value is defined as the difference between the total assets on its balance sheet and its total liabilities.  Given that the value of the assets on the balance sheet are recorded at the lower of “historic cost or net realizable value” rather than their replacement cost, there is an argument that a more accurate measure of the amount of “value added” is the difference between market value of a company’s equity and the replacement cost of its assets – this is known as Tobin’s Q.  Unless you do this adjustment, you do not know whether intangible value is just a reflection of the undervaluation of the assets on your balance sheet (the difference between their book value and their “true” market value, or replacement cost) or the proof of the existence of assets other than those that appear on the balance sheet.

So far so good?  The picture was relatively clear so long as the only assets on the balance sheet were tangible (either financial or physical).  The situation has become more complicated now that certain forms of intangible asset are allowed to be shown on the balance sheet.  These intangible assets represent specific forms of intellectual property such as patents, contracts, copyright and trademark.  Because these represent legally enforceable ownership rights, the accountants are content to see them recognized on the balance sheet – but only when they are acquired from another company (it is still not possible to show assets that were created in house on the balance sheet).

Given this context, my interest is in determining the most appropriate terms in which the value added of marketing should be expressed.  First of all, should we look at market value or enterprise value?  Second, should we measure the “value added” of a business relative to its book value , or its tangible book value (book value minus the intangible assets on the balance sheet), or Tobin’s Q – or a modified version of Tobin’s Q that restates only the book value of the tangible assets on the balance sheet?

My next post will suggest a couple of different measures that may make sense.


ANA Marketing Accountability Webinar

I delivered a webinar earlier today on the topic of “Frameworks for Brand Valuation” as part of the ANA’s marketing accountability series.  The series culminates in next week’s marketing accountability conference in New York.

It was a well attended session, reflecting the ongoing hope in the marketing community that there is a “silver bullet” out there that can definitively prove the value of marketing.

These were my conclusions for how marketers should think about the topic of brand valuation:

  • It is very important for marketers to be able to explain how marketing is adding to the overall value of a business
  • Brand valuation appears to offer the promise of providing definitive proof of the value of marketing – but this is, sadly, an illusion
  • Brand valuation is a valuable tool when it is necessary to calculate a financial value for the brand as an independent asset
  • However, it rarely makes sense to treat the brand as an independent asset for marketing evaluation purposes as this inevitably leads to conflict about the definition of brand and the extent of impact that brand has on the customer purchase decision
  • It is more productive to think of brands as having a magnifying effect on the underlying performance of the business (the value of the brand is therefore contingent on the quality of the business it supports)
  • The extent of magnification should be measured in terms of the three key drivers of business value – profit, growth and risk
  • The differential impact of branding on any one of these three variables is definitive proof of how branding is enhancing the value of the business

Based on feedback so far, the material was well received.  But I am left with the sense that I have “rained on the parade” by revealing some of the practical problems with brand valuation.


Tangible Book Value or Net Tangible Assets?

This is an esoteric point – but one on which I would welcome input.  It seems to me that there are two ways of looking at the relationship between what a company reports on its balance sheet and the value attributed to it by the market.

The first approach is to take book value (defined as total assets minus total liabilities) and subtract any reported intangible assets.  This gives you the tangible book value as reported on the balance sheet.  You can then compare this number to the market value of the company’s equity to arrive at the percentage of market value accounted for by the tangible assets reported on its balance sheet.  As I mentioned in an earlier post, this number is around 15% for US companies.

The alternate approach is to begin with the financial and physical assets that you know that a company is using in the course of its business – its working capital plus its property, plant and equipment – and define these as the productive base of the company.  You can then compare this net tangible asset number to the total enterprise value of the company (the sum of its market value and long term debt) to arrive at the ratio between the physical assets of the company and its market value.

For reasons too numerous to list here, the results of these two approaches are comparable but the net tangible asset gives higher numbers for the proportion of market value explained by physical assets.

I calculate using both approaches but would welcome any comments or suggestions as to which you find the more compelling approach.

To my mind, the first approach has the virtue of simplicity and comprehensiveness.  The second has the virtue of transparency but cannot be performed meaningfully for financial services companies (due to their massive amounts of short-term debt, and issues to do with the calculation of total enterprise value).

Your views?


What Finance wants from Marketing (Hint: it is not ROI)

Marketers have a poor record of responding effectively to requests from their business colleagues (especially those in Finance) for evidence of the effectiveness of marketing.

Too often our response is to look for a “silver bullet” – a single financial metric that provides definitive proof of the value that marketing is adding to the organization. Our obsession with ROI and with brand valuation are classic symptoms of this “silver bullet syndrome.”

The problem is that we have misunderstood the nature of the request being made by Finance. We are NOT being asked to provide a single financial number. We ARE being asked to provide a compelling argument for how marketing is adding value to the business and why we are effective investors of the company’s money.

There is a tragic irony about marketers’ embrace of ROI. Finance types view ROI as a short-term efficiency metric, not a gauge of strategic effectiveness. Marketers’ embrace of ROI is, tragically, serving to reinforce Finance’s view of Marketing as a tactical, short-term discipline.

I have found that the demonstration of marketing accountability involves three elements:

  • Evidence of the extent to which the customer purchase decision is driven by factors other than simply functionality and price (this establishes the strategic role of marketing in generating customer value);
  • Development of a comprehensive “go to market” strategy for delivering customer value across the full range of possible sources (including product functionality, purchase convenience, service quality, perceived value – not just communications);
  • Identification of the business metrics on which the impact of this “go to market” strategy will be most powerfully observed.

When Marketers recognize the true nature of the accountability request (the business case for marketing, not just a defense of the efficiency of certain forms of communications spending), a much more productive collaboration with Finance can be achieved.

[BTW this post is an adaptation of a somewhat longer piece I wrote for the ANA’s Marketing Accountability blog last month]


Measurement is not the same as Accountability

Marketers have a tendency to confuse measurement with accountability. We assume that every request for marketing accountability needs to be answered in terms of ROI.

In my experience, the issue of marketing accountability revolves around three issues:

  • Relevance: explaining where and how marketing adds value to the business
  • Alignment: proving that marketers are focused on the success of the business, not just the size of their budget or health of the brand
  • Rigor: developing a fact-based, disciplined approach to marketing strategy and execution (to include relevant forms of measurement)

Until marketers demonstrate these qualities, their colleagues in Finance will continue to ask the ROI question (which is their way of asking “can I trust you to spend the company’s money wisely?”). When marketers begin to behave in ways that explicitly demonstrate these three qualities, the requests for ROI miraculously disappear.

As a former Finance person, I can assure you that Finance people do not want more ROI models to review – they just want Marketing colleagues they can trust.

[BTW a version of this post now appears on the ANA’s Marketing Accountability blog]