Are Financial Metrics Used In Marketing Measurement Overrated?

Shane Sutton 213555376 Suttonshane

Another way of putting this is, is marketing being overrated to say that it influences financial metrics. Marketing does influence financial performance but to what degree it does is probably definitively immeasurable.  In a businesses ROI, Return is measured by the change in profit. A businesses profit can change for many non-marketing reasons such as the changes in the economy, customer preferences, product quality. So how can you measure the change in profit directly attributable to marketing.

Marketing according to Iacobucci 2012 p3 is defined as “an exchange between a firm and its customers”. Thus a broad definition denoting marketing is a lot more than just advertising. Therefore we look at what financial metrics are available to measure the effect of marketing.

Lamest and Brady contend that marketing is losing its importance. They quote Webster JJ (2005) ”a major reason for this …is marketing’s inability to illustrate its contribution to business success”. One way of rectifying this is to use metrics to show marketing has the ability to point out that it does in fact create shareholder value.

By the way  according to Chambers Australia’s advertising spend is going to increase from $12.9Bn in 2014 to $16.4Bn in 2019. With that big of a spend marketing is very important and a big cost to businesses who partake (some would say it is an investment of the business). So there will be $16.4Bn worth of expenditure marketers will have to justify to the CFO & CEO. Thus marketing remains very important.

Marketo.com say to “Use metrics that matter to the CEO and CFO….in today’s economy CEOs and CFOs care about growing revenues and profits”.

Such financial metrics to use would be those discussed by Ambler and Roberts being ROI, Discounted Cash Flow, and Return On Customer. Ambler and Roberts find many objections to using these metrics and contend one better way is to measure the intangible marketing asset (brand equity).

Let’s take a look at ROI, Return On Investment which is measured by:-

Change in Profit/Investment. Change in profit attributable to the marketing spend. Investment equals the marketing spend. Given the broad definition of marketing, everything the company does is marketing related. This therefore implies any change in profit is attributable to marketing.

What does a company do when they sign a sports star or celebrity to wear their products? Would Nike have done an ROI when they signed Michael Jordan back in 1984?  I do not think so. Yes they would have done some homework to ensure they would get a good payback.

Today a business would be indebted to crunch some numbers in order to sign up a sports star or celebrity. Nike for instance can definitely say marketing has improved company performance, but the question still remains to what degree has marketing affected financial performance.

Does the average consumer buy products because they have been endorsed by a sports star, celebrity or do they just go into a store and buy what fits, is comfortable and looks good. This is something which seems to get lost in the metrics. One thing the average consumer does know is that every time they hear of a sports star, celebrity endorsing a product, is that they have to pay more for their goods to pay for the endorsement.

No doubt there are consumers who do buy goods because they are endorsed by a sports star, celebrity but to what degree this happens is once again immeasurable. As long as the revenues and thus profits increase everyone assumes it relates to the endorser.

Srinivasan and Hanssens in their paper Marketing and Firm Value do contend “If marketing’s contributions were readily visible in quarterly changes in sales and earnings, the task would be simple”. They also go on to say “much of good marketing is building intangible assets of the firm, in particular brand equity, customer loyalty and market-sensing capability”.

This backs up the difficulty in measuring marketing contributions to profit as against non-marketing contributions. Intangible assets, the main one being brand equity, gets mentioned in lots of literature. The only thing is that Intangible asset measurement is very subjective and difficult to measure. Intangible asset valuation is a difficult area for the accounting fraternity, so to measure the effect of marketing on brand equity increases this difficulty.

In the end the financial metrics will get used, but I still believe the true effect of a marketing event on financial performance is immeasurable.

References

Ambler Tim, Roberts John H., Assessing marketing performance: don’t settle for a silver metric. Journalof marketing management. 2008, Vol. 24 No. 7-8 pp 733-750

Chambers, Pippa, Adnews, 15 June 2015.   http://www.adnews.com.au/news/australia-set-for-16-4-billion-ad-market-worth-by-2019

Iacobucci Dawn, Marketing Management, 2012 South-Western, Cengage Learning

Marketo.com – The Definitive Guide to Marketing Metrics & Analytics

https://au.marketo.com/definitive-guides/marketing-metrics-and-marketing-analytics/

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