With advanced analytics, CMOs can demonstrate ROI with a degree of precision that’s never been possible before … and win over the CFO.
Marketing is in the midst of an ROI revolution. The arrival of advanced analytics and plentiful data have allowed marketers to demonstrate return on investment with a degree of precision that’s never been possible before. The opportunity is enormous. In our experience, companies that adopt this marketing analytics approach can unlock 10–20 percent of their marketing budget to either reinvest in marketing or return to the bottom line.
To date, however, the reality of marketing analytics has fallen short of the promise. Just 36 percent of CMOs, for example, have quantitatively proven the short-term impact of marketing spend, according to the 2013 CMO Survey (and for demonstrating long-term impact, that figure drops to 32 percent). That means that almost two out of three CMOs are using qualitative measures to show impact, or aren’t measuring impact at all. Moreover, the previous year’s survey showed that 63 percent of projects do not use analytics to inform marketing decisions.
This lack of an analytical approach has traditionally formed a barrier between marketing and finance. One financial services CMO told us how CFOs typically perceive his function: “We’re going to give a certain amount of dollars to those guys. They’re going to make ads and do whatever it is they do. And let’s hope it generates demand.”
To reverse this perception and to get greater bang for marketing’s buck, we believe that CMOs must become true collaborators with CFOs and adopt a marketing ROI approach that’s driven by analytics.
It doesn’t need to be complicated; in one company, a marketing department saved 20 percent after simply benchmarking the money they were spending on external agencies. And at another — a consumer packaged goods company — a series of strong brands had evolved in separate silos. Only when they began to really analyze their marketing costs did the company realize that it was spending three times the industry benchmark on coupons and 50 percent more on research. It was also using more than 50 different market research companies to conduct similar tasks.
Without a strong business case built on analytics, marketing too often is seen as a cost rather than an investment, despite marketing’s ability to drive above-market growth.
In our work with clients across dozens of sectors over more than five years, we have found that the strongest CMO/CFO partnerships develop when both parties undertake five actions:
1. Use consistent language across departments – and within them.
CMOs need to start building this relationship by having a clear understanding of what CFOs expect. CMOs do have plenty of data, of course, but it’s often not the data that the CFO is looking for. For instance, CMOs often focus on brand awareness, TV ad impressions, or share of voice in the market, which do not easily translate into financial impact. CFOs are more interested in capital investment estimates, net present values, and a clear outline of the trade-offs of any investment.
But it’s no good speaking the same language as the CFO if marketing itself is a Tower of Babel. CMOs have typically found it hard to say what the actual marketing spend is (by product, by market, by strategic intent), how much is spent on customer-facing (creative) initiatives and how much is spent on enabling (IT); how much is focused on different parts of the consumer decision journey; what is the spend on digital and social media (and what is it worth); and how much is spent on non-advertising activities (sponsorship, promotions, trade events).
Why is this so challenging? One reason is that different regions often allocate the same spend to different categories. For example, trade fair expenditure might fall into short-term spend in one market, but the long-term brand-building budget in another. The difference may seem trivial, but they will give the CMO a headache when answering basic questions about where and how marketing dollars are spent. Adding to the complexity is marketing’s increasing need to integrate with other functions in the organization to discover relevant insights from data, design products and offers, and then deliver them to the marketplace.
Creating transparency into its operations is the starting point for marketing to help CFOs understand where and how value is being gained or lost, which makes budgeting discussions much more productive. Bringing everyone into line is essential, but not necessarily easy or quick.
2. Focus on the metrics that matter.
Shareholders don’t care about fans or followers unless those numbers can be tied to profit. CMOs must demonstrate and track marketing’s impact by focusing on key performance indicators (KPIs) that are important for shareholder value such as strong cash flow, cost of capital, return on capital, and operating margin. Marketing KPIs that don’t directly address shareholder value and the company’s objectives don’t tell the CMO or the CFO where marketing efforts are having the most impact.
Together with the CFO, the CMO must develop a set of objectives that directly deliver on financial objectives and business goals. Marketing KPIs need to incorporate customer acquisition and retention targets and costs. It’s the CMO’s job to make sure that metrics reflecting the health and value of the customer base –net present value, lifetime value, return on loyalty, cost per acquisition – get on the balance sheet.
For instance, at one automotive company, the CMO and CFO worked together with their teams to draw up a global set of financial and non-financial metrics for the short and long term. Financial metrics would typically include obvious numbers such as sales, return on investment, and cost per customer. Non-financial metrics included the numbers of people visiting dealers, or long-term indicators of the health of the brand such as number of customers considering the brand.
We’ve often found it helpful to create a chart that cascades out from business and financial goals at the top, to marketing KPIs that align to each of these goals, to tactics and strategies that can deliver on those KPIs, and finally to those metrics that measure the effectiveness of those strategies or tactics.
Although the metrics matter, what matters more is that the CMO and CFO agree on them. They should also agree and commit to regular meetings to assess progress on these KPIs. These meetings should review activities and results using simple charts and graphs that use the same vocabulary and methods used to measure financial goals.
3. Help CFOs focus on the long term.
CFOs often feel like they are under pressure to focus only on short term metrics when in fact value creation for shareholder is driven by generating superior growth and return on invested capital over the long term. As a long-term asset of significant value, the brand should be part of those calculations. Over the past decade, for example, the total return to shareholders of companies with strong brands has consistently been 31 percent higher than benchmarks such as the MSCI World index.
Too often, the brand is perceived as a “fuzzy” asset that’s hard to quantify. CMOs need to redress that misperception and help CFOs understand how critical the brand is to financial impact by providing estimates of brand worth and investment proposals that build the brand based on hard data. CMOs can use advanced analytics and judgment to manage the trade-off between short-term spending to boost sales and longer-term brand building to support the health of the company.
Long-term brand performance is affected by many factors, so determining the spend/impact relationship is challenging. However, calculations that separate short-term effects from long-term benefits can isolate those marketing activities that truly build brand equity.
To give an example, a consumer food brand developed an advertising program combining digital and social media initiatives that ended up delivering sales results similar to traditional marketing at a fraction of the cost. The brand therefore considered massive marketing budget cuts to TV and print advertising in favor of more spend on social media channels. However, when they included long-term effects in their calculations, they realized that digital marketing would deliver only half what they expected. Online displays and social media advertising couldn’t deliver the emotional connection needed to build brand equity that TV advertising could.
4. Get more for the money
CFOs don’t look just at the ROI of the creative process; they want to know the money is being spent wisely. Marketing could certainly take a long hard look at its procurement. In our experience, marketing can shave a significant 5 – 10 percent off of the budget.
Something as simple as benchmarking marketing’s spend on external agencies and developing a deeper understanding of an agency’s true cost to serve the client can reveal astonishing cost saving potential, up to 20 percent in one case.
At a consumer packaged goods company, a series of strong brands had evolved in separate silos, which meant total marketing spend was very inefficient. By analyzing its costs more closely, the company came to understand that it was spending three times the industry benchmark on coupons and spending 50 percent more than the industry average on research and over-testing TV commercials without improving them. It was also using more than 50 market research companies to conduct similar tasks.
5. Ask for the CFO’s help.
As obvious as it may seem, CMOs should invite finance to participate in marketing’s planning process to build bridges and to benefit from financial expertise.
The experience at one global insurance company is illustrative. The company’s CMO found himself under pressure from the board to demonstrate the value of marketing activities—while at the same time, the company’s competitors were massively outspending it. With his budget at risk, he recognized that he needed to quantify marketing’s financial impact.
To build support for his effort, the CMO invited the CFO among other leaders in the business to help him adopt a more investment-oriented approach to marketing. After frequent meetings, they agreed on three goals: to better clarify the role of marketing to the business; to provide coordinated input on requirements and assumptions to better inform the analytics; and to tie the resulting analysis to financial impact. The CFO appointed a representative from finance to join the effort—and the CMO agreed, up front, to discontinue any activities that proved uneconomic.
In the end, the CMO was able to demonstrate quantitatively the impact of marketing on business goals and save his budget. Moreover, in the process, he had developed an analytical approach to show where his next marketing dollar should go and what he could expect in return. This allowed for the CMO to follow an investment-oriented approach to marketing decisions and provided the Finance department with confidence that marketing was investing wisely.
An analytical approach to marketing doesn’t mean an end to the creativity required to touch people’s emotions. It only means using data to better define when and where marketers should target audiences with which messages—and to demonstrate the value in doing so.
This may not mean an end to difficult CMO-CFO conversations. But we believe it will mean the beginning of a powerful alliance based on trust and a shared understanding of marketing’s role in driving real business value.
This article originally appeared on the Harvard Business Review (HBR) Blog Network website