The CFO may know that it's important to the bottom line to have happy customers. The CMO (chief marketing officer) knows how to increase customer satisfaction. But do you — or anyone else at your company — know by how much a 5% increase in customer satisfaction will increase your company's profitability?

These are the kinds of questions that managers need to be able to answer to truly understand the impact of marketing initiatives, said Wharton Marketing Professor David Reibstein, academic director of Wharton's Marketing Metrics: Linking Marketing to Financial Consequences program, during a recent Wharton presentation.

"Marketing today is still treated as expense depreciations, with a schedule of one year," Reibstein said. "But when you consider that we are investing in a customer who has a lifetime, clearly we need to study the long-term value of customers," said Reibstein.

Watching the Right Metrics

Reibstein's research on the connection between marketing and finance has found that different parts of the organization were looking at different sets of numbers. "When we looked at what metrics companies were gathering, we found that there were very few that both financial and marketing people — as well as their boards — took under consideration," he said. Information gathered and studied by the marketing departments was rarely discussed by the board or the financial officers, and vice versa, he said.

By adding data that are not normally part of the balance sheet or P&L statement — such as new customer growth, customer retention rates, and share of requirements — the impact of marketing efforts can be seen more clearly. Many companies might know a lot about their customers but still may not be collecting relevant data, he said. Banks, for instance, usually know which customers are their best ones, but many often do not know how much of those customers' total business — their share of wallet — the banks are getting, he said. "It makes a big difference if you are getting 10% or 90% of a customer's business," he said.

Comparing two hypothetical companies that have generated the same level of profits and maintained the same margins, Reibstein demonstrates how adding underlying information — marketing measures such as new customer growth, sales per customer, and acquisition costs — can turn around their profitability forecasts.

Making Intangible Assets Tangible

"Customers are assets you acquire," Reibstein said. "If you can determine the lifetime value of your customers, you can set a ceiling of what you will pay to acquire and/or retain them," he said. "For instance, Coca-Cola knows that a Diet Coke customer is more valuable to them than a regular Coke customer, which enables them to initiate efficient spending programs."

Understanding these marketing metrics and other assessments of intangible assets is more important than ever. "Intangible assets now can make up more than 80 percent of a firm's value," Reibstein said. "If you go back 40 years ago, over 80 percent of the value of the firm was explained by physical assets such as land and equipment. Today, we can't explain the value of the firm without thinking of intangibles. Many of these are related to marketing. We need to articulate the value of the customer base and its long-term value. "

• Marketing Metrics: Linking Marketing to Financial Consequences

• Wharton Executive Education
  
  
• The Wharton School

This month's articles:

• Thought Leaders
  Coca-Cola CMO Javier Benito discusses strategies from the recent launch of C2.
  
  
• In the Classroom
  Wharton Professor David Reibstein looks at ways to link marketing to financial metrics.
  
  
• Career Reflections
  L'Oreal USA President and CEO Jean-Paul Agon remembers the "bet" management took on him early in his career.
  
  
• Wharton Leadership Conferences
  Top executives and other experts explore how to lead with "creativity and conviction."
  
  
• Education à la Carte
  Improve your skills in marketing and other areas through upcoming programs.