“Imagine the scenario. Your Finance Director needs to cut back on spending” / Jon Webb, Ohal

Taking Marketing Beyond The Bottom Line – Bringing Share Price Into The Marketing Mix

Jon Webb, Deputy MD of global marketing effectiveness consultancy Ohal writes  ..   The concept of ‘Marketing Return on Investment’ (MROI) is in need of a dramatic overhaul. Simply improving sales and showing you’ve done so is no longer enough, Marketing Managers must also be able to demonstrate greater value and prove the true impact of every element of their activity.

With marketing departments facing increasing internal pressure to cut costs, it’s become vitally important to identify new mechanics that can meaningfully justify their spend to the Board, particularly as marketing is now being seen more as a cost that can be cut than an on-going investment.

So why not treat this spend as you would any other cost to the business, by relating it back to your bottom line and, more importantly, the share price? We all think about the bottom line, but share price isn’t normally factored in directly.

Measuring the short term effect of (for example) an advertising campaign is of course important, but it doesn’t help when it comes to understanding the bigger picture. Even when long-term effects are measured under-reporting of the true financial impact is likely. Why? Because standard approaches fail to take into account the potential impact on a company’s share price.

Imagine the scenario. Your Finance Director needs to cut back on spending. They identify the areas where they might be able to reduce costs and then stop and ask themselves – should I get the Marketing Manager to cut their budget? Do it and your bottom line will instantly look a lot healthier. But is that really giving you an accurate picture? A basic mathematical calculation indicates otherwise.

If you consider that your marketing activity usually creates (for example) a 2.5 return in terms of margin, cost cutting of this type starts to look less appealing.  If your annual marketing budget is £10m and you decide to halve it, that £5m cut may increase your cash flow in the short-term and win you favour with the Board. But the long-term impact could be a £12.5m drop in profit and a net loss of £7.5m.

So what seemed like a clever cost cutting mission to begin with actually costs the business money. You might end up losing more money than you save. This could turn into a serious mistake in the long run, having a huge impact on the profitability of the company and ultimately the share price. For this reason alone it will always be worth making the case against such measures being taken.

All other significant investments are evaluated in terms of their impact on profit, with calculated internal rates of return and the opportunity cost of the capital invested.  Why don’t we look at marketing in the same way?

Jon Webb – Deputy Managing Director