Global competition, commoditization, market fragmentation, and the Sarbanes Oxley Act have all converged to create an environment requiring companies to create better processes, address controls, and assess risk. In addition, zero-based budgeting has become the norm. This convergence marks a new age for marketing in the 21st century; The Age of Accountability.
This new age forces marketers to change focus from awareness and image to business outcomes such as increasing revenue, customer acquisition and value, cash flow and shareholder value. Marketers are sitting squarely inside the trigger hairs of the finance organization. In order to dodge the bullet, they need new skills, tools and perspective and finance’s help.
While marketing and finance have tended to have an adversarial relationship, with some work it’s possible to transform finance into an ally, and turn marketing into a performance-driven unit at the same time.
Talk the Language of Business: Cash Flow
To change the relationship, marketing needs to understand the finance mindset. Basically, finance people are risk averse. They need marketing to show them why what it wants to do is the right thing to do — not by saying it’s strategic, but by being able to communicate how much money will come back, and when.
Finance is focused on revenue, expenses, profit and shareholder value. For most companies, the old adage “cash is king,” still reigns. It’s not that financial people aren’t interested in the brand, it’s that they want the ability to link brand image and loyalty to cash flow. It isn’t a coincidence that there is a strong correlation between cash flow and marketing’s responsibilities.
Marketing is responsible for helping the organization acquire and keep profitable customers and therefore relate its functions directly to cash flow. The more marketing’s initiatives address customer lifetime value, improve the rate of product adoption, reduce customer churn and lower acquisition costs, the better the company’s cash flow.
When marketing talks in these terms, it is talking in the language of business and the language of the CFO. If marketing understands the CFOs expectations and learns to speak their language, it will be well on its way to creating an ally. If marketers don’t understand the CFOs language, it’s time to learn.
There are four key concepts important to most CFOs. We’ve already talked about cash. The other three are: EPS (earnings per share), Net Contribution, and Payback (the time frame for when the investment pays off).
When the leadership team asks about marketing ROI, it is really asking about payback. Leaders want to understand how and when the investment marketing is making on behalf of the company will pay off. It’s not that they don’t want to give marketing the money; it’s that they want to be able to analyze the tradeoffs between one investment and another. The company has only so many resources and therefore can only make only so many investments.
Treat Marketing Like A Small Business Unit
Hopefully the CMO and the marketing team understand that finance executives expect marketers to manage risk, improve efficiencies and be financially accountable. What they’re really asking is for marketing to act like a strategic business unit (SBU) owner. They want marketers to know their numbers, to show they have a plan, and to demonstrate they care about the company’s success, not just marketing’s own piece.
If marketers accept this role, then just like any SBU owner they need to demonstrate due diligence and accountability by focusing on incremental sales and gross margin contribution. SBU owners know their business and the key operational indicators. The CFO wants to know that marketing knows its business, too.
What kind of operational indicators communicate to this to the CFO? For marketing, the key operational indicators are the average purchase per customer, the upgrade/cross-sell conversion ratio, the customer lifetime value, the average customer acquisition cost, the average customer retention rate and cost, the share the brand has in each segment and geography, and the rate of new product acceptance.
Jeremy Adamson, Global Controller for Consumer Products and Services at Symantec, once said that he expects marketing executives to keep the following numbers in their head, “headcount, the revenue target for the quarter, the cost per revenue dollar, the cost per booking dollar, and your program-to-people ratio.” If you don’t know what numbers your CFO expects you to know at the drop of a hat, ask him or her.
If you are part of the marketing leadership team and you aren’t acting like an SBU owner, it’s time to change. In most companies, the SBU owner collaborates with finance to develop performance metrics for their business. For marketing this means they need to engage finance in the marketing planning and measurement process just like any other SBU owner.
Show Me the Business Case and I’ll Show You the Money
When an SBU owner wants company monies for an investment they present a business case to the leadership team. Marketing needs to be able to articulate it business case in the same way as any other SBU owner. This is often where it fails. Marketers don’t appear to have done their homework. Any time they go to ask for money, even for the annual budget, they need to be able to address the following nine questions.
- What is the opportunity?
- Who is the target market?
- What is the strategic value of the opportunity to the company?
- What is the potential return and profit?
- What is the time to revenue?
- What is the impact on revenue and sales capacity?
- What other opportunities will this impact?
- What are the risks?
- What are the implications of passing on the opportunity?
Where Do Marketers Need to Shore Up?
Once marketers learn the language and begin to act like an SBU, they may realize there are a few areas they need to shore up. Marketing organizations typically face five challenges.
First is the need to improve the team’s analytical and quantitative skills. The department must embrace the science-side of marketing rather than rely on creative talents. This may mean training and personnel changes. Right behind number one is learning to understand and use statistics and data to drive decisions rather than relying solely on experience, intuition, and opinion. Third, marketing leaders may need to revisit and reengineer marketing processes to achieve appropriate levels of granularity. Fourth, they need to ensure they have a culture that is results-oriented and performance-driven. And lastly, they need a set of marketing measures and performance targets aligned with those of the company.
Finance executives can actually help with these challenges and transformation. They can help with defining realistic and appropriate marketing metrics. Once finance becomes engaged and starts thinking about marketing in a different way, marketing is on its way to having an ally.
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Laura Patterson is the author of ‘Measure What Matters’: Reconnecting Marketing to Business Goals, ‘Gone Fishin’: A Guide to Finding, Keeping, and Growing Profitable customers, and numerous articles on marketing subjects. She is president and co-founder of VisionEdge Marketing, Inc, a leading metrics-based strategic and product marketing firm located in Austin, Texas. The company specializes in consulting and learning services associated with measuring marketing performance, customer acquisition and retention initiatives, market, customer and competitive intelligence, market and product validation, market and customer segmentation, positioning, pricing, and channel strategies. For more information, go to www.visionedgemarketing.com.