CMOs, Start Thinking Like Investment Managers

Talk Like Them, Too: Marketers Must Explain How Their Strategy Decisions Drive Shareholder Value

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They say the first stage of starting a revolution is to begin with the language. OK, here's an attempt: What if marketers started to change the marketing lexicon? For example, instead of referring to the marketing budget, what if they were to call it a loan? One that needs to be paid back, with interest? And that ROI should be recast as a profit or loss? And advertising and marketing channels should be viewed as alternative investment funds designed to maximize marketing profits?

Identified: Fiji water leveraged the purity of its country of origin to drive its purity perception vs. that of its competitors.

Sounds a bit heretical, perhaps -- as if Goldman Sachs had taken over WPP -- but it's really a way of suggesting to marketers that they adopt an investment-management approach to their marketing. Such a transformation will give them a foundation to demonstrate how marketers can drive shareholder value, as opposed to just being purveyors of brand building or driving short-term sales lifts.

Corporate profitability is softening, this year more than ever, and going forward, marketers will be challenged in the boardroom to justify their expenditures. They're going to have to propel new skills and go beyond justifying marketing plans to providing a case for why marketing will be profitable. The first step in this process: adopting something akin to what I call the ICE checklist. ICE stands for identify, clarify and establish, and it's a tool that helps marketers clearly consider a proposed strategy as well as their investment motivations.

First, CMOs need to identify points of leverage. Pursue opportunities to entice and strengthen your relationships with your existing customer base, or build a strategy around a particular product benefit that is a competitive edge or difference.

An article published in the McKinsey Quarterly in 2005 titled "Boosting Returns on Marketing Investment" defines economic leverage for CEOs as "allocating capital to the businesses generating the highest returns." In marketing, this means making a serious investment in promoting a product's most buyable characteristics over the competition's.

For example, British Airways innovated when it introduced flat beds in business-class cabins and was the first airline to promote this feature. It continues to promote this as a British Airways property and "owns" it, despite competitive airlines' offering similar comfort levels. Fiji Water leveraged the purity of its country of origin to drive its purity perception vs. that of competitors in the crowded bottled-water sector.

To better identify your own leverage points, marketers must clearly understand their brand drivers. The more compelling the brand drivers -- either real or perceived -- the better the risk/return equation.

Next, clarify the investment's objectives. This is vital. Marketers must ask: What is the investment trying to achieve? Who are we targeting, existing customers or new ones? Is the investment to drive sales or build loyalty? How does it fit in with the organization's wider corporate goals?

The McKinsey article continues: "Good financial advisers start [investment conversations] by asking clients about their investment horizons, growth expectations and appetite for risk. Marketing investments should start with similar questions." Asking these questions aligns marketers' goals with those of the overall company.
Consider the ICE checklist
Helps marketers understand investment motivations:

IDENTIFY: CMOs need to identify points of leverage. Pursue opportunities to strengthen customer relationships.

CLARIFY: Marketers must ask: What is the investment trying to achieve?

ESTABLISH: What will marketers risk if they don't invest?

Clarifying the investment objectives means determining what outcome you're seeking and being clear about what choices are being made. In our research, we found that having too many goals for the budget available is one of the biggest reasons for marketing failure.

Setting the investment horizon is almost as important as the growth expectation. The payback period will dictate what marketing communication choices are made. For example, Toyota plays a long-term game when setting out its goals. This explains the high degree of consistency in its messaging. Other companies have more short-term payback goals, and their marketing messages are therefore shorter-lead. This is particularly true of retailers, telecommunications, airlines and other sectors that are heavily dependent on promotions and sales to drive volume.

Marketing investors can set short- and medium-term metrics that satisfy sales needs and their brand aspirations, allowing them to gauge the value of their marketing communications at both a tactical and a brand level.

Working with colleagues
The second part of clarifying objectives is then making sure your nonmarketing colleagues know just what marketing intends to contribute in terms of profit, how much it's going to cost and how it's going to be measured. This will ensure marketing is integrated more seamlessly with the goals of the rest of the organization.

The third part of this is distinguishing between growth and maintenance objectives. If you want to grow, your objectives are to increase consumption, increase number of usage occasions and usage per occasion, attract new users and -- potentially -- launch more products. Maintenance, on the other hand, is about minimum investment levels to keep the brand healthy and profitable.

Finally, CMOs must establish risk. Calculate investment returns and compare them against not investing, as well as against alternative investment options within the company.

Glossy brochures from financial institutions never fail to warn that "investments may go down as well as up." Risk is inherent in all decisions, so for an investor it is impossible to eliminate it entirely. Even the most respected fund managers on Wall Street expect to lose on some stocks they recommend. No one -- marketers included -- is immune to risk. A good CEO or CFO understands there are no guarantees, just good risk management.

Weighing risks
In marketing, as in investing, there are several strategies that can be deployed. They'll vary in different budget scenarios, different channels or different creative approaches. Some will involve higher or lower perceived risk for the marketing investors. A company's level of comfort will depend on its situation and its CEO. Established brand leaders might feel they can afford to take fewer risks, but be more consistent in their marketing; challenger brands might need to take bigger risks to have a chance to win.

An investment adviser explains the 40/40/20 rule as follows: "Put 40% of your budget in safer bonds and property, 40% in slightly riskier equities and a further 20% in speculative opportunities." Marketers can apply this principle to their investments by splitting their budgets 80/20. Eighty percent can be spent on "bankers" -- in other words, the marketing channels and media that have proved their effectiveness through measurement that shows they're making a positive return. For example, Procter & Gamble continues to bank on TV to drive the majority of their brand marketing, despite new-media experimentation.

Using this model, 20% of a marketing budget should be allocated to media and message tests. As the McKinsey report points out, "One of the best ways to diagnose a marketing organization's ROI discipline is to assess the extent and quality of the media and messaging tests in progress at any given time." That means keeping tabs on how well each component is performing and adjusting as needed.

As said at the outset, the place to start a revolution is with the language. The basic concepts that form the backbone of ICE -- identify, clarify and establish -- will allow marketers to better speak the language of their CEOs, who deal with a vastly complex series of investment decisions.

If John Wanamaker, the legendary merchandiser who famously wondered which half of his advertising budget was being wasted, were to meet up with today's Sage of Omaha, they'd be able to talk about the same things. If marketers follow the prescripts outlined here, I'm sure they'd be able to join in the conversation.
Antony Young is president of Optimedia US in New York. He has worked globally on brands such as Sony, Coca-Cola, HSBC, Nokia, Procter & Gamble and Toyota. He launched Zenith in Asia, establishing the region's first group agency media specialist. His first book, 'Profitable Marketing Communications,' was published earlier this year.
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