by Jim Lenskold
CFOs are from Mars, CMOs are from Venus
Using Marketing ROI to Unite Marketing and Finance
Most people would agree that the finance and the marketing departments exist in two completely different worlds. In one world are your analytic, numbers-oriented finance people who are viewed as the responsible, serious group. In the other world are your creative, high-energy marketers who live in an artistic world of design, messages, and entertaining advertising and work to shape consumer perceptions and build brand images. Marketing views finance as the money source, and finance views marketing as a monthly expense. The time has come to take profitability management to new levels and establish marketing as more than just a discretionary expense. Uniting these two worlds offers the potential to bring mutually beneficial financial discipline to marketing.
We are on the verge of an industry shift where financial accountability will become much more prevalent in the marketing organization. Although there has been plenty of talk in recent years about marketing return on investment (ROI), this topic has now reached the top of the corporate agenda. Marketing ROI is a financial comparison that relates the return (the net present value of incremental profits less the initial investment) to the original marketing investment. Managing every incremental marketing investment using ROI measures and thresholds creates an opportunity to achieve the maximum profit potential.
Think about it. Marketing budgets are tight, the pressure is on for more sales, expectations for measurability have increased with technology implementations, and there is really no comparable solution for uncovering additional profits. Marketing ROI captures profit growth from both increases in top-line sales and share of profits and decreases in expenses as wasted marketing investments are cut.
Bill Korn, acting CFO for two tech-based companies, approaches marketing with both high confidence and high expectations. “CMOs and CFOs have the same objective: maximize the company’s profitability and value to shareholders, customers and employees,” reports Korn, “I’ve always found that senior marketing executives know how to best spend whatever amount of funding is available to get the best return on investment.”
Matt Bud, Chairman of the Financial Executives Consulting Group, believes marketing lacks financial discipline, which affects the budgeting process. Bud indicates that “decisions on budget cuts would be different if marketing could better educate finance on the profit impact for current and future years.”
The marketing organization has dodged the financial accountability bullet for a long time, hiding behind the veil of “creativity” and “shifting perceptions.” What marketing executives fail to recognize is how marketing ROI compliments customer, competitive, and market intelligence with financial intelligence to more effectively guide the strategic and creative development process. Traditional marketing measurements, such as cost per sale, awareness, attitudinal metrics, and even some forms of customer lifetime value measures, do not fully account for both the expense side (investment) and the profit side (driving the return). Marketers have much to gain by adopting a comprehensive marketing ROI process, developed in conjunction with the finance organization, to maximize profitability in strategic and tactical campaign decisions and to truly manage profitability of customer relationships.
Marketers receive significant benefits from implementing marketing ROI processes, such as the following:
- Greater financial intelligence into the profit drivers for target markets, offers, and channels guides decisions toward the most effective strategies.
- Tools and techniques that adapt financial analysis into relevant marketing terms and provide new insights, including a clear view of incremental ROI, make it easy to focus creativity and innovation around profitability.
- Access to and attention on customer value enables marketers to move past cost-per-lead or cost-per-order measures to recognize and reward strategies that attract more profitable customers and support higher retention rates.
- Measurement of marketing effectiveness from initial branding through the entire sales cycle aligns the goals of the sales and marketing teams and provides greater collaboration in a relationship that is often distant or at odds.
- Alignment of marketing measures with corporate goals and establishment of the strong connection between marketing initiatives and the profits generated shift marketing from a discretionary expense to a required investment. Executives have a different perspective of the budget-cutting process when they have a clear understanding of the lost short- and long-term profits that will accompany those cuts.
- Increased profitability means greater financial strength for the company to reinvest into the customer experience and competitive differentiators while also funding increased returns for shareholders and financial rewards for employees.
The most significant benefit that marketing receives from the use of marketing ROI is streamlined decisions and increased executive support. Marketing executives at companies benchmarked as having more advanced marketing ROI processes have indicated that they now speak the same language as the CFO and CEO. When these executives show ROI projections for a shift in strategy or to support a request for additional funding, decisions are made faster and are clearly understood by all.
Neulevel, the exclusive operator of the .BIZ Internet domain name registry based in Virginia, relies on marketing ROI to guide decision making. Tim Switzer, VP of Finance & Operations, notes that because of the marketing ROI process,
“we’re very much in tune with the marketing group. It gives both finance and marketing more credibility when bringing our plans and projections to the Board. Gaining support for our decisions and budget requests is much easier.”
Putting an effective marketing ROI process into place requires collaboration centered on marketing and finance. The goal is to guide each incremental marketing dollar toward the greatest profit potential while aligning with the corporate strategy. Marketing must ensure that the dynamics of the marketing strategy process are kept intact and the dynamics of customer behavior are considered. Finance must ensure that financial principles are followed as the ROI formula is customized and simplified to fit within a marketer’s area of expertise.
Improving the accuracy and predictive capabilities of marketing ROI requires a progression of incremental stages of success. Each level of improvement offers the potential for additional profit returns for the company. The need for profit improvements is urgent. Change in this area is evident but requires both a solid process and a culture that embraces the change. Marketing must become more analytical and more scientific in order to support more precise strategic thinking and creativity. The day will come when companies can effectively manage marketing investments toward maximum profit potential, and marketing, not finance, will be viewed as the money source.
Originally published on the American Marketing Association (AMA) website. Reprinted with permission.