By Chris Kenton, MotiveLab
Enterprise Marketing: A Framework For Boardroom Relevence
Marketing ROI is clearly one of the most important trends to ever impact the profession of marketing. As a growing number of marketing executives, managers and students gain the financial intelligence to measure marketing performance and interact meaningfully with financial executives, marketing stands to make significant gains in corporate influence and credibility. But there’s a lot of ground that remains to be covered before marketing is respected as a strategic corporate function with an important role in the boardroom.
Marketing ROI is mission critical. You can’t be an effective marketing manager without being able to gauge and continuously improve the profitability of marketing programs and practices. But to bring relevance to the boardroom, marketers also need practical ways to measure competitive effectiveness beyond the simple metric of market share. Specifically, marketers must learn to demonstrate the impact of marketing programs not only on the bottom line, but on shareholder value relative to other competitors in the market.
A new framework for Enterprise Marketing launches this discipline based on 40 years of research by Victor Cook, Jr., Professor Emeritus of Marketing at Tulane University. Cook released the book “Competing for Customers and Capital” and it’s a compelling look at measures of marketing effectiveness that link product markets directly with capital markets. The framework relies on financial accounting data—the same data CFOs rely on for capital budgeting—to measure the efficiency of enterprise marketing expenses in the pursuit of gaining a competitive share of value in a given market. In other words, beyond the question of how much revenue your marketing dollars are generating, how productively is the power of those revenue gains translating into shareholder value.
Look at the difference between Southwest Airlines and any of the majors to understand the concept of enterprise marketing and shareholder value. Southwest generates far less revenue than, say, United Airlines. But the value they generate as measured by stock price, compared to their revenue and the enterprise marketing expenses they’ve incurred generating that value is far higher. And that efficiency in generating value for shareholders is traceable back to expenses incurred by marketing in the effective pursuit of revenue—if you know how to do the numbers.
The enterprise marketing framework developed by Cook offers a number of practical and strategic metrics that will be new to most marketers. But the general structure of the framework is easy to understand—so easy in fact that it seems remarkable no one proposed it sooner. The framework generates a number of risk-adjusted metrics based on financial accounting data to compare the ability of one company to turn enterprise marketing expenses into revenue, market share and market value compared to other companies in the same competitive market.
In the simplest cut, these metrics demonstrate a company’s competitive efficiency in generating shareholder value. But deeper metrics point to a level of strategy that would make any CEO sit up and take notice. One of the most significant measures is Maximum Earnings—a metric that establishes a point of maximal efficiency in generating revenue from enterprise marketing expenses, or the point at which the cost of a single point of market share equals its earnings after those expenses. Before that point, you’re literally leaving money on the table by failing to maximize earnings. Beyond that point, you’re pouring money down the drain by pursuing revenue at a declining rate of return against marketing expenses. With the measurement of Maximum Earnings and a few other metrics, including your raw profit and cost per market share point, you can also calculate Relative Earnings Productivity. This is the difference between what you actually earned (EBIDTA) and what you would have earned if you had maximized earnings.
These metrics lift the concept of maximum marketing profitability to a new horizon—that of demonstrating the impact of marketing programs on shareholder value. The implications are significant. With a direct link between enterprise marketing expenses and shareholder value, marketers gain a strong position to offer new strategic insights into critical market decisions, such as acquisitions and mergers, product line extensions, and competitive positioning. But it’s not a walk in the park. Like Marketing ROI, the enterprise marketing framework is fundamentally a discipline, and it takes some discipline to understand and apply.
I’ve posed a few key questions to Vic Cook to help explain the role and value of the enterprise marketing framework. Immediately following this Q&A is a link to more resources to help you explore and understand this framework.
CK: Why do we need a new framework for measuring marketing performance?
VC: Peter Drucker famously said the purpose of business is to create customers. If he were speaking today he probably would add …and investors. Everyone in a business is responsible for creating customers and investors. This new framework is needed to extend marketing’s reach across the enterprise. How is this different than what’s done today? Three Ways:
You can’t sail a ship from the galley. The marketing function is just too narrowly defined. “Advertising and promotion” expenses are only a small piece of the enterprise marketing challenge. A bigger window is needed to address fundamental enterprise marketing questions.
That bigger window is found in SG&A expenses. This line item is the 800 pound guerrilla of the income statement. These expenses include the costs of the people and programs that drive intangible market value. All of these expenses should be managed from the perspective of how they effect customers and investors.
CMOs fail because they are charged with sailing a ship from the galley. And you can’t make the CFO adopt marketing metrics. You’ve got to equip the CMO with tools that translate financial concepts into enterprise marketing strategies.
- Being good at the wrong things isn’t good at all.Market share is the most widely used marketing metric in the world. But it’s used in the wrong ways … as hindsight instead of foresight, at the segment and not the enterprise level, as a goal rather than a variable.
Market share should be:
• Used to peer into the future, not just report on the past
• Measured at the enterprise level as well as the segment level
• Planned to rise or fall to the point that maximizes earnings
- If it doesn’t move the stock it doesn’t count.In public companies reality is defined by your closing stock price. The only marketing metric with a link to stock price is “customer lifetime value.” And this link can be tenuous. Relying as it does on the discounted cash flow from the average purchases of customers — which is not reported in audited financial statements — it also sidesteps the impact of competition on stock price.Competitive stock valuation provides a new perspective on how competitive advantages drive shareholder value. Here is the common ground this framework shares with financial valuation models:It is … productivity that the stock market reacts to when pricing a company’s shares. Embedded in all shares is an implied long-term forecast about a company’s productivity – that is, its ability to create value in excess of the cost of producing it. When the stock market prices a company’s shares according to a belief that the company will be able to create value over the long term, it is attributing [this belief] to the company’s long-term productivity or, equivalently, a sustainable competitive advantage. In this way, productivity is the hinge on which both competitive advantage and shareholder value hang (Rappaport 1998, 69).In Rappaport’s own words, this is how my competitive stock valuation model integrates the marketing theory of competitive advantage with the creation of shareholder value.
CK: How does your framework fit within the context of the current emphasis on Marketing ROI?
VC: I’d like to quote Jim Lenskold’s marketing ROI framework to answer this question. It consists of three primary components, 1) developing the tools and processes to calculate the financial and behavioral outcomes from specific marketing initiatives, 2) mapping out the measurement and analytic techniques to capture marketing’s incremental impact, and 3) applying the insight from the measurements and financial framework into strategic and tactical planning to improve profitability.
My framework fits easily into Jim’s. Just replace the phrase “specific marketing initiatives” with “enterprise marketing expenditures.” Then insert the word “enterprise” between “capture” and “marketing’s” incremental impact. Finally, add one other primary component: 4) linking the quality of earnings and competitive advantage to a company’s stock price.
CK: In practical terms, how would a marketing executive benefit from an understanding of this framework?
VC: The short-run benefit is that a senior marketing executive can use the language and data of finance to give strategic marketing direction to the enterprise:
- Estimate how much the company should spend on SG&A resources
- Measure the impact of people, sales, marketing and R&D on earnings
- Assess ways to increase enterprise marketing efficiency
- Calculate the impact of enterprise marketing risk on performance
- Identify unexpected merger and acquisition opportunities
- Maximize earnings quality, competitive advantage and stock price
The long-run benefit is this framework charts a new course to the CEO’s chair.
CK: How can a company outside the publicly traded domain benefit from understanding this framework?
VC: First, let’s assume the company has no interest in going public. By combining its own private financial data with the public data of its competitors, the company can realize the benefits of the first five strategic directions listed in the question above. Second, assume the company wants to evaluate the payoff of going public. Now it can run the competitive stock valuation model backwards to give insight into the number of shares and opening price.
Christopher Kenton is president of MotiveLab, a social marketing agency based in San Francisco, and editor of the MotiveWire network of marketing blogs.