Do you believe the hype?

While chief executives and accountants debate the return on company investment and productivity, the activities that generate business rarely appear to come under such scrutiny. Marketing, which sets out to generate profit by anticipating and satisfying customer demand, is at the heart of every business and requires considerable investment in money and resources.

The push for accountability in the marketing function is being driven by company executives, and FDs in particular, who are under pressure to measure return on investment across a range of business areas.

As cost-cutting persists, companies are tired of funnelling cash into marketing, especially advertising, which they say costs more and does less. But marketing is far more than the advertising budget.

In fact, most activities (except purely financial or production-related ones) tend to be marketing related, therefore measuring the return on marketing investment requires a deeper understanding of all the activities that contribute to satisfying customer demand profitably.

The reality is that finding, getting and retaining business costs money. Management boards increasingly see marketing as a necessary investment for the generation and maintenance of profit, rather than just a cost or expense.

Marketing was always the ‘unexplainable art’, but today there is hardly a marketer who is not demanding a more scientific approach to defend their marketing strategies in front of the FD. Indeed, many marketers are now under direct mandate to establish formal objectives, processes and metrics that can clearly measure the benefit of their programmes and activities.

Marketing may be the last corporate function to formally develop and adopt processes and standards that can be measured quantitatively, but it’s certainly making up for lost time. Today, improving the measurement of marketing performance is almost an obsession.

FMCG giants like Procter & Gamble, Kraft Foods and Gillette have long chased statistics to link different forms of marketing to sales and brand awareness. Today, the desire to construct a comprehensive set of performance measures, what you might call a marketing ‘dashboard’, is fast extending to marketers in other industries.

A survey last year of more than 320 of the US’s leading technology chief marketing officers found that less than 20% of those companies had developed meaningful measures for their marketing organisations.

More than 80% expressed dissatisfaction with their ability to benchmark their marketing programmes’ business impact and value. But those companies that had established a formal, comprehensive measurement system, achieved superior financial returns.

Establishing the return on marketing investment across the whole marketing function requires the understanding of the various activities that drive sales and generate revenue. The accepted standard formula to calculate return on marketing investment (ROMI) is based on ‘increase in sales attributable to the activity’ less ‘cost of the activity’ divided by ‘cost of the activity’.

The formula is generally limited to a specific marketing investment such as an exhibition, but it is difficult to identify which sales are attributable to which activity, and the formula does not readily apply to the marketing function as a whole. Increasingly marketers believe that measurement of all elements of the marketing mix is critical to their personal success and credibility, as well as that of the business.

Many marketers use data on sales, market share, customer satisfaction, customer retention and customer profitability as their performance indicators, but this information is of limited value when considering the return on marketing investment.

Metrics must be communicated on to the intended audience, in a format that is clearly understood. Frequent quantifiable data analysis allows better understanding of the marketing processes, which is essential for better informed management decisions.

It’s the CFOs job to ensure that assets and investment are used efficiently to maximise profits and minimise expenditure. To have equal importance with other management performance indicators, marketing needs to have a single indicator that encompasses the overall performance of the marketing function, highlights fluctuations in performance, and allows comparisons with other business indicators such as return on assets, stock turn and productivity.

Establishing the optimum marketing performance (OMP) – the indicator that encompasses overall marketing performance – requires a detailed understanding of the marketing budget, and the way that marketing generates revenues.

Although the principle of establishing the OMP is the same for every business engaged in profit generation, the detail and method may vary according to the type of business, whether it be consumer, industrial, business-to-business, long-term contracts, consultancies or financial.

For marketing to have true impact in the boardroom, its performance needs to be reported in a manner that is intelligible to the board, and particularly the CFO – that is by effectively demonstrating the correlation between marketing performance and profits.

Identifying the factors that drive the marketing function, with quantified indicators of marketing performance, provide a clear guide to management performance across the whole organisation. By continuously measuring marketing performance, you will not only keep your chief executives happy, but allow marketers to demonstrate the contribution of their function to the business.

Nicholas Watkins is chief executive of Contract Marketing Services

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