Accounting Article

Harmonising strategic marketing and finance

by Mike Wilman | Published on 4/18/2003

Mike Wilman is of the opinion that marketing as a strategic tool links the functions of Marketing and Finance. He
states a marketing plan should always support the corporate plan.

The role of strategic marketing

It has been stated that true marketing is strategic in nature and lies at the very heart of the organisation in providing a
range of planning tools to help the organisation meet its customers' needs and grow in competitive markets.

A marketing plan should always support the corporate plan. In particular, marketing should always support the
financial goals of the organisation. Whilst those goals may often be short-term financial measures such as sales, ROI
and market share, strategic marketing seeks to position the organisation for long-term growth.

These issues are of concern to marketers because short-term measures, undoubtedly important in specific contexts
and market situations, hinder the development of a longer-term strategic vision which will position the organisation for
sustained growth.

Chasing such objectives can lead organisations to pursue radical cost-cutting and investment-depleting strategies,
which improve short-term performance but damage long-term growth. But for organisations taking a more strategic
long-term view which sees cumulative rewards accrue over a long period of time, say five to ten years, it is important
for financial executives to be able to have the confidence in their marketing colleagues to help shape the future
direction and positioning of the organisation.

There are a number of ways in which finance and marketing people can work more closely together.

Measuring Marketing
One of the current debates in marketing circles is that of measurement. Marketers are acutely aware that whilst the
value of, say, sales initiatives or even an advertising campaign can be measured by revenue returns, it is much
harder to justify a long-term branding, positioning, product development or PR strategy. Changes are taking place.
Students on the final Diploma of the Chartered Institute of Marketing's professional qualification now have to study
some of the important financial measures which help shape a good strategic marketing plan.

Measuring marketing activity is not easy. For example, measuring the long-term contribution value of a brand can be
done by estimating the competitive advantage and marginal revenue streams it generates, but there are other
benefits such as the impact on an organisation's image and credibility which are harder to quantify. Taking a real-time
measurement of market share is useful but it must be related to the bottom-line.

Measuring the impact of a customer database linked to telesales or help desk activity can also be a valid way of
assessing marketing contribution. Having said this, many companies are struggling to put a value on database/IT-
driven projects such as customer relationship management both in terms of evaluating ROI and calculating the
lifetime customer value. For services industries in particular, the importance of investing in long-term after-sales
services, with the ensuing continuous and predictive revenue streams, cannot be over-emphasised. Unfortunately
such long-term business is often regarded as a cash cow and customers treated with disdain - a recipe for disaster.

Sometimes the measurement of potential loss can be a valuable activity. For example, it costs ten times as much to
recruit a new customer as keep an existing one, yet many marketing campaigns are cynical ploys to attract new
customers whilst leaving existing ones out in the cold. Financial services is a good example, where older savings
account interest rates are gradually reduced, or where credit cards offer a 0% balance transfer for six months - after
which the hard-won customer simply goes elsewhere.
In B2B environments, sales activity geared at long-term profitability cycles, which are relationship-driven, rather than
short-term profit-maximising can yield immense benefits. Many capital-intensive hi-technology sales teams are now
goaled on long-term cycles.

Financial executives should be wary about marketing campaigns which require a huge amount of investment but
have little long-term provenance. In the nineties, for example, Sainsbury's stopped its loyalty card scheme for a
couple of years, suddenly realised they had lost the ability to communicate with customers and introduced another
scheme at great cost. Last year another change was made to introduce the Nectar scheme. At least this programme
is a collaborative venture with other organisations.

Some marketing initiatives cannot be measured very easily - for example brand equity or lifetime customer value -
and FDs have to learn to quantify this is a way that is positive and helpful. Sometimes common sense and
professional sales or marketing opinion can become a measure of success. Sometimes it is tempting to measure
short-term factors - indeed this may be crucial to survival when times are tough - but what is the big picture?

The FD wants to be sure that any marketing spend being proposed is the most effective use of resource and should
explore, with marketers, the various options - rather like the debate about when to keep an old machine going and
when it is time to purchase a new one. Any marketing current or capital expenditure should have a time-line for
payback attached to it - three years may well be a long time for payback on a new product, but sometimes it is right to
take a risk and the FD must use or her best judgment about this based on experience and advice from marketing
colleagues. Think of the consequences if Boeing had never invested in the 747 (a totally untried concept at the time),
Ford in the Model T (for which no market existed prior to production) or the photocopier (an idea which IBM turned
down, enabling Xerox to capture the market; they also turned down an early offer from Bill Gates to buy the Windows
Operating System).

Creating Dialogue
The point of all this is that marketing people do tend to be creative and sometimes get carried away with exciting new
schemes. The FD should quite rightly ask what the anticipated ROI is, and whilst it may be difficult to measure, the
real question is 'what is this scheme contributing to long-term corporate strategy and brand-building?'. If the answers
are not too clear then the scheme should be questioned in more depth.

According to Richard Dodridge, FD for EMEA of software company Remedy, "FDs can instigate an agreed process
with marketers whereby marketing managers are asked for a list of planned activities which can be costed out to
obtain a view about total anticipated marketing spend over the next quarter or FY." Negotiation can be used to modify
the end budget and measures put into place to evaluate sales, branding, marketing communications and logistics
strategies. In particular, sales or PR campaigns can be costed out over a financial year and the investment
benchmarked against the results from the previous year's activities. For example, attendance at conferences or
exhibitions may be absolutely vital to the generation sales leads, press coverage and goodwill building and so FDs
must be flexible enough to find ways of putting a value of such activities.

One of the useful roles that financial people can play is to act as a sanity check on marketing plans, asking marketers
to justify their ideas against corporate and financial objectives and the extent to which the plans fit in with previous
long-term strategies. This is particularly true of plans for channel partners or collaborative ventures with other
organisations. The three Cs - consistency, continuity and congruity are three key areas to validate with channel
marketing programmes. Recent research with a major B2B information technology vendor (Hill, 2003) suggests that
channel partners are often not consulted about marketing initiatives, that the needs of end-users are not known and
that joint goal-setting with partners would be a valuable contribution to marketing plans and activities. FDs also need
to measure the contribution that each business partner makes, whether a channel partner or a joint venture.

FDs could usefully take time-out to attend certain meetings with business partners, in conjunction with marketers, in
order to help assess the value of such initiatives. The same applies to conferences, exhibitions and user groups, for
example. That way, FDs can acquire qualitative information about the value of specific activities and find ways of
translating those into quantitative elements.
Involving marketers in the budgeting process is a way of helping marketers to become more realistic about their ideas
and open up discussion about ways of measuring, for example, the impact of PR campaigns. Evaluating the value of
exposure in traditional or on-line media, and the goodwill generated by PR activities leading to long-term business
building, are important areas to explore.

Involvement at such a level might appear to be a poor use of time, but the opposite is the case. By opening a
dialogue between marketers and FDs, investment decisions can become clearer, more effectively justified and stand
a higher chance of success. FDs can, for example, have an influence on marketing spend which is directed at
increasing customer retention and renewal rates. Such open dialogue is already happening in high technology
industries, for example, leading to an emphasis on marketing as being seen as an investment rather than a cost.
When times are tough, marketing always suffers from budget cuts - just at the very point when it is needed more than
ever. This is understandable where a high proportion of marketing spend is on tactical campaigns rather than
strategic business building.

According to Mal Wright, FD of logistics software company FWL Technologies, "it's the responsibility of the FD to
embrace the marketing side and make the financial function clearer. There may be a culture clash between marketing
and finance but there should not be a value clash".

Dialogue needs to be continuous and open. Marketers are often unable to put a dollar value on their planned
activities, so it is the responsibility of FDs to work closely with marketers to find ways of constructing value
measurements which are relevant to the organisation. This is very different from the easier option of regarding
marketing expenditure as a cost simply because certain aspects of it cannot easily be measured.

Another benefit of a closer dialogue between the two disciplines is that a greater understanding of the role the finance
and marketing are making to the overall business growth will help FDs gain insights into what works and the relative
importance of various marketing strategies. This in turn will enable FDs to develop the confidence to take quantified
risks.

Marketing Research
FDs should also take an interest in marketing research studies which justify investment decisions in new products,
new markets or a combination of both. It is good practice to ask marketers to justify the basis for their research and to
ensure that the research, or the results, has been constructed in such a way as to validate pre-set ideas.

An FD will be interested in the research that underpins a marketing plan and can usefully act as an objective reviewer
of research results. A check can be made to ensure that research is valid and correctly interpreted, not skewed to suit
pre-determined marketing requirements. The knowledge that flows from research into the marketing plan should be in
tune with corporate strategies and objectives on the one hand, and with customer needs on the other.

FDs will want to be able to measure the real value of revenue increases resulting from marketing campaigns,
isolating other variables such as the impact of tactical sales campaigns, increases due to a raised level of economic
activity or competitors losing ground.

New Product Development

New Product Development (NPD) is always gong to be difficult to justify and always will carry a certain level of risk.
This is again where an active and objective interest in marketing research studies will be of great value, helping to
identify changes in customer needs, in economic conditions, in forthcoming EU legislation, or competitor activity. The
FD will need to bring his or her experience and expertise to bear on NPD decision making and develop a framework
to manage and understand the risk factor. Where a new product is replacing an old one, the market positioning and
the length of the anticipated product life cycle should all be accounted for in the investment decision.

Understanding the characteristics and nature of customer behaviour can be helpful in NPD decision-making. For
example, if the proposal involves using the Internet as a channel to market, what are the buyer behaviour
characteristics involved? One of the main reasons for the spectacular dot.com failures during the past five years has
been that these operations were set up by people who loved technology or thought they had a great product to offer
but paid scant regard to the human factors. In other words they failed to appreciate why people carry out transactions
over the Internet.

Product Life Cycles

Product life cycles are also worthy of attention by FDs. Knowing the anticipated life of a product, the likely growth rate
relative to the market segment and the pricing model that can be adopted at the various cycle stages, can help
determine the investment model, the anticipated cash flow, and the points at which pricing and production decisions
can be optimised. For example, new consumer technology products usually start off with a premium pricing strategy
to target the exclusivity of the innovation adopter market segment. Later, it becomes important to target the mass
market and so the pricing/profitability/production model will change to reflect this. In part this will be a response to
competitive activity.

Conclusion
Although there are major differences between marketing and finance people, there is no reason why they should not
be able to learn to understand each other and to appreciate the benefits which the two disciplines can contribute to
business growth strategy. Financial people need to construct ways in which the contribution marketing makes
becomes an investment rather than a cost, and marketers need to help develop ways in which financial
measurements can be applied to both the qualitative and the quantitative elements of marketing strategy.

Mike Wilman is a Senior Lecturer in Marketing at Southampton Business School where he teaches on a range of
undergraduate, post-graduate and professional courses. His research interests include the relationship between
marketing and other corporate functions, CRM and e-business.