In most large companies, the Chief Financial Officer is responsible for defining how the business invests its money. They review business cases, judge risk and reward and allocate budgets accordingly. Investments for which the return can be estimated with confidence are usually the first to be approved. Proposals for marketing expenditure, however, are likely to be scrutinised more cautiously.
Even though marketing spend has the potential to provide an unbeatable return, it’s often hard to estimate the financial gain precisely or even provide any guarantee of a good return. There is a higher degree of variability and risk from marketing investments compared to other areas because the quality of execution has a big influence on its commercial benefit. The situation is made worse if the business’s senior marketers aren’t good with numbers and shy away from producing credible estimates of likely returns. Despite the challenges, an enlightened CEO needs to understand the potential upsides of marketing and the longer-term risks of under-investment, especially in competitive markets.
Why is marketing even necessary?
In its broadest definition, marketing is practically synonymous with business strategy. Talk to any entrepreneur and they will find it hard to make a clear distinction. Marketing is how the company plans to make money by creating, delivering and promoting products/services that customers will buy at a profitable asking price. Marketing involves:
- Identifying what people need and want
- Developing products that satisfy people’s desires
- Promoting them in a way people find hard to resist
- … and doing all this quickly enough for the company to stay one step ahead of the competition
In other words, good marketing drives sales and creates competitive advantage.
Although everything people experience in relation to a brand can influence their likelihood of buying it, advertising is a particularly important aspect of marketing, especially in crowded, competitive markets. Advertising in all its forms, regardless of where it appears or whether it is has been placed digitally or the using wallpaper paste and a ladder, remains an effective way of building demand whenever a company has something new to showcase or needs to keep reminding people about their established products and services. Unless the organisation has a monopoly, advertising is an essential for enabling the brand to compete with competitors and without it, even the strongest product offers can fail, beaten by competitors with similar products but stronger marketing.
What is the commercial benefit of marketing?
Essentially, marketing increases the gap between customer value and cost of delivery. Widening the gap creates opportunities for the business. One option is to keep prices relatively low and give customers an exceptionally good deal. This will help attract more customers and generate positive reviews and recommendations, which, in turn, will bring in even more customers. Alternatively, the customer value created by marketing could be used to support higher prices in order to generate greater profit per sale. Whatever the commercial objectives of the business are, marketing can support them by maximizing customer value.
Evidence for the commercial value of marketing investment that leads to a stronger brand is overwhelming. The Financial Times, in association with Bloomberg, publishes the value of the world’s top 100 brands each year, based on Kantar’s BRANDZ methodology. The valuations show that strong brands (blue and turquoise in the graph below), grow in value much faster than stock-market benchmarks. This means that investing in companies with strong brands is highly lucrative. The author of this article has twice invested in a portfolio of companies with strong brands as defined by consumer perceptions and has achieved well above average returns on both occasions. The consumer data highlighted the potential of brands such as Amazon, Netflix, PayPal, Tesla and Alibaba before the share price of these companies started to reflect their long-term potential.
There is another commercial benefit to marketing that is harder to quantify. Marketing activity that showcases the relevance and appeal of what the business delivers through its products and services will enhance the company’s reputation. Being known as a company that produces strong products that people value or advertising that people admire makes it a more attractive business partner and potential employer. Many business deals are secured thanks to the positive halo created by marketing, and many great new employees are recruited, although just how many is hard to measure.
So why are marketing budgets the first to be cut?
Although there are situations in which marketing investment provides a good short-term return, the commercial benefits of marketing are often longer term. This means that when a business is struggling to make ends meet from one month to the next, cutting marketing spend may be the only solution. Whilst cutting marketing budget may help the situation in the short term, it could lead to major problems in the mid to long term. In any market where several players advertise regularly, continued spend on advertising may be required simply to maintain the status quo.
On-going advertising spend keeps sales buoyant, and above the level that would be achieved without continued support. A reduction in advertising investment could result in a decline in market share, especially if competitors are investing heavily. Coca-Cola is one of the most well-known and successful brands on the planet, yet it continues to spend approximately $4bn each year on advertising. It does this to protect its dominant position in the market and the sales that come from this. For big, established brands, marketing spend should be considered as ‘food’ rather than ‘medicine’. It is necessary for staying healthy even when the brand has no signs of illness.
In markets with several competitors all spending significantly on advertising, a brand’s performance depends heavily on how much is spends relative to its share of market and how spend levels compare to previous time periods. Brands spending above their share of market or more than previously have a better chance of growing whereas brands spending less are at risk of decline.
Marketing is necessity for almost any business. It provides direction for future success, based on understanding how customers’ habits, needs and preferences are evolving, it enables new products to get noticed amongst the clutter when they are launched and is an essential investment for established brands needing to defend their share against the competition.
Written by Dan White.