Budget cuts? Best you measure the shareholder value created by your corporate marketing!

The first victims of expense reduction are often people, training, marketing, travel and general expenses. While some of these are understandable, others, in this case such as marketing, may require at least a second thought before it becomes a target of budget cuts.

Before I start, it's probably useful to define marketing first, as it's unfortunate that so many see marketing as consisting merely of advertising and perhaps a logo. In this instance, I am talking about the full value chain, from branding to shareholder value measurement, whether it be market research, market strategy, marketing strategy, logo, corporate dress, advertising (TV, radio, print, billboard etc.), culture and language, PR, internet, social media, data mining and direct (mail, call-centre, SMS, MMS etc.) and many more.

The thing is, as marketers, we're notoriously bad at measuring the real success rate of our initiatives. We get interest, some of which are converted to sales, may tens of thousands of sales. We design and implement a new logo or colour scheme, and are content to say we added an extra stripe, or converted our colour-scheme from blue to red.  We cross sell and up sell, and are pleased that there was good take-up. All in a world where a success rate as low as 2% (e.g. direct) can be accepted as good.

However, when it comes to the board and shareholders, saying we spent $x million and generated y sales with a revenue increase of $z million or a book increase of $p million with a customer growth of q% and a churn reduction of r% may no longer be good enough. It's not even good enough to estimate our Return on Marketing (ROM), Return on Investment (ROI), or heaven forbid, our ROE (Return on Equity). Indeed, shareholders are becoming increasingly crusty, wanting to know to what extent the efforts created shareholder value, and whether the shareholder value created is justified by the level of expenditure. And even this is not good enough. They want to know how we improved the lives of our communities, and reduced our carbon footprint. It's almost as if you require marketing to be mixed with mathematicians, which in turn need to be mixed with corporate financiers, in order to properly justify the level of expenditure. More on the latter two aspects in a later blog though.

As a corporate marketer, if you're happy with your ability to measure your full balance sheet, cash flow and income statement impact, then there's no need to read further. However, with some big global banks planning to shed 10,000 jobs each over the next few years, the message is clear - each functional unit, including marketing, need to become much more explicit at demonstrating their value.

Consider these questions:

• Can you quantify your brand equity with qualifying assumptions, and determine the shape of the distribution curve (error) associated with that estimation. This is a 'balance sheet' impact, an assessment of the future value you are likely to capture, but who are not yet your customers. 
• Have you considered the value and extent of customer-oriented training required to be sure that your own staff reflect your brand as accurately as your advertising is doing it?
• Can you quantify your customer equity (future looking) with qualifying assumptions, and determine the shape of the distribution curve (error) associated with that estimation. This is a 'balance sheet' impact, a real balance sheet impact (in the case of debtors or embedded value as well as the required funding arrangements), a cash flow impact and an income statement impact
• Can you qualify the customer lifetime value per customer, and what are your qualifying assumptions? Again, this could have a full financial impact
• Can you show which customers, at an individual level, are not optimised from a risk/return perspective, and what you will be doing about it?
• Can you convert all of these measures into coherent messages in terms of EBITDA (earnings before interest, tax, depreciation and amortisation), EPS (earnings per share), HEPS( headline earnings per share), and contribution to EBITDA/EPS/HEPS?

If few of the above can be done, then there's no wonder that marketing budgets are being cut. It's because they cannot demonstrate the value, or because it is difficult to assess the amount of value created by the prevailing level of spend. Furthermore, if you're not measuring the value, then the unknown element of wastage is probably larger than you would like to admit!

The challenge is clear - it's no longer enough to say:

• Customers (value) acquired
• Customers (value) lost
• Customers (value) retained
• ROM / ROI

Instead, you've got to be able to say:

• Change in brand equity (value to be realised ...)
• Change in customer equity (new products, new channels, cross sell, up sell ...) 
• Balance sheet impact
• Income statement impact
• Cash flow impact
• Change in EBITDA
• Change in Earnings
• Change in EPS/HEPS

Do this (it's not rocket science), and you will have your shareholders eating out of your hands. Don't do it, well, then be prepared for those cost cuts! 

This insight was the subject of a paper I wrote in 2008 which I now consult on. Given that the subject survived the critique of some of the best marketing minds, and given the state of the global economy particularly in terms of cost cutting, the time is right to up global marketing's measurement game.