The Bottom-Line Impact of Marketing and Other Intangible Investments
Marketing assets such as customers and brand equity—as well as other intangibles such as intellectual property, human capital, and information technology infrastructure—are receiving increased attention from CEOs and investors. CEOs are looking more closely at these metrics as they seek to quantify the impact of investments and find new sources of growth. Financial markets are also giving more weight to intangibles in valuing firms.
In marketing, managers are under increasing pressure to demonstrate the returns from their programs in a cost-cutting environment. "People couldn't identify what their dollars were driving," said Wharton Professor David Reibstein, who is academic director of Wharton's Marketing Metrics: Linking Marketing to Financial Consequences executive program and co-author of Marketing Metrics: 50+ Metrics Every Executive Should Master (Wharton School Publishing, 2006). "Marketers would say: ‘Look at our brand's awareness.' But the CEO or CFO would say: ‘What does that do for me?' Other people in the organization were able to show the impact of their spending in other areas, such as investing in a new plant or equipment, or R&D."
Marketing Value Chains
Financial metrics can make a fairly direct relationship between revenue and expenses. Revenue that exceeds expenses leads to profit; revenue that falls short leads to a loss. Marketing metrics and other measures of intangibles, in contrast, follow a more indirect route. They play out through what Reibstein calls a "metrics value chain."
What do we know about how marketing metrics are related to performance? Some of the major insights from research are:
"We spend marketing dollars and have metrics about the direct consequences of this spending," Reibstein said. "That creates these interim metrics, such as awareness, preference and trial, and number of customers. This leads to intermediate financial metrics—such as sales, market share, or cash flow—which leads ultimately to financial performance."
Speaking the Language of the CEO
"Beyond marketing, leaders of other functional areas and business units need to be able to build 'value maps' to show how individual components contribute to growth," said David Wessels, Wharton adjunct professor of finance and co-author of the best-selling book, Valuation: Measuring and Managing the Value of Companies (4th ed., John Wiley & Sons, 2005). "Many CEOs struggle with how to allocate funds to functional groups whose financial benefits are difficult to measure," said Wessels. "For business units, profit and loss is relatively straightforward, but many internal services have no direct revenue streams. In marketing, for example, a strong brand allows companies to charge premium prices, but tying a specific return on investment to the brand is difficult."
In part, Reibstein said, it is even hard to assess what investments contribute to the brand. Brand equity is not just the result of advertising, but where a product is sold, what it has delivered, and how consistently it has done so.
Managers need to be able to demonstrate more clearly the need for investments in these areas. "Every functional group in the organization thinks it is special," Wessels said. "They may provide a service that is critical to the success of the organization, but since measuring the benefits is difficult, capital allocation can be challenging. The head of HR who wants to put in a new management system that requires an upfront investment needs to detail not just operational benefit but also financial benefits. At the same time, IT wants to invest in redesigning the technology infrastructure, and marketing wants to enhance the brand."
Managers need to put the returns into a language that the C-Suite understands. Important metrics for the CEO are operating margin, capital productivity, cash flow, organic revenue growth, and sustainability. "If a functional group comes to me with an investment idea, they need to convince me that the investment will lead to higher average prices, decreased costs, increased speed of business, or will drive long-term organic growth," Wessels said. "Too many functional leaders grow up in siloed organizations, so they don't think enough like the head of a business unit from a financial perspective. A CEO's dream would be to have every functional leader think like the CEO, understand how the business works, and identify the drivers that are consistent with the overall objectives of the firm."
Paying More Attention to Intangibles
Investors are clearly paying more attention to intangibles. This can be seen in changes to the market-to-book value (stock price relative to the tangible assets of the firm). About 50 years ago, the market-to-book value was around 1.2, meaning that tangible assets, such as factories and inventory, accounted for about 80 percent of stock value, Reibstein said. Today, however, the ratio varies from 2 to 4, meaning that tangible assets might represent only a third to half of the firm's value. The majority of the value for many companies is based on intangibles.
"That is an indication that the marketplace is recognizing the value of all these intangibles," Reibstein said. "Great plants and great equipment may have been more of a differentiating factor in the past. Now they are much less of a differentiating factor. As we are moving to a more service economy, equipment and inventory are much less of a driver. Who we are, what we do, and how we do it is much more important."
Even so, one of the inherent tensions for intangible metrics is the time lag to see results weighed against investor demand for quarterly returns. CEOs and investors need to have the vision and patience to wait for the payoff. "There is a time mismatch between when you spend the money and see the results," Wessels said. "Too often, a short-term perspective, coupled with an inability of managers to demonstrate the benefits of investments in their areas, can lead to decisions that undermine value in the long run."
Limits of Data
Even with the best marketing metrics, companies still have trouble answering the fundamental challenge addressed by John Wanamaker, when he said that half his advertising budget was wasted—but he didn't know which half. "To some degree, while we know what we are generating overall from our marketing spending, we may still be wasting half our advertising spending," Reibstein said. Metrics tend to offer a broader-brush picture of investments and results. Other tools, such as split-cable advertising tests, can provide more detail on the impact of specific campaigns.
A bigger question is: As companies and investors pay more attention to metrics, will all this attention to data interfere with marketing creativity? While marketing has become more of a science, art is still required for success. Some campaigns test poorly and end up doing well. Some off-the-wall ideas turn out to be brilliant.
Reibstein said marketing executives are concerned about the potential dampening effect of data-driven decision making. It does improve the effectiveness of decisions about marketing spending, but there are still times when managers have to step back from the data and trust their intuition. "You sometimes have to be willing to do things that you cannot justify with the numbers."
© 2007 The Wharton School, University of Pennsylvania
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