Marketonomy

Turning Coke's Brands into Bonds

Victor Cook shows once again the potential for marketers with a strong financial framework to contribute real value to corporate strategy, in a recent post about Coca-Cola's options in maximizing the value of its brands. Most marketers, when they think about Coca-Cola, think about the myriad ways in which Coke has accelled in branding. After all, when you take away the label, it's just sugar water in a can--sugar water that lends Coke a nearly $120 Billion market cap.

Many students of marketing understand the tremendous intangible value of the Coca-Cola brand, and even business students were impressed when Coke was able to valuate their brand as a $5 Billion line item on their balance sheet. But this is child's play compared with the kind of strategy that emerges when you mix the idea of brand value with financial instruments like bonds.

As Victor lays out in an earlier post, there is a precedent for companies to monetize the value of their intangible brand assets by issuing bonds. David Bowie did it by issuing a bond backed by the royalties of his song catalog, and Sears evolved the concept by creating a holding company into which they transferred the ownership of their major brands--like Crasftman and Kenmore--which licensed the use of those brands back to Sears for a fee.

As Victor points out, the understanding of the word bond is a classic example of the gap between marketing and finance:

The meaning of the word "bond" is symbolic of the huge gap between the language of corporate finance and traditional marketing. In corporate finance "bond" is a noun. As used in the article "The New Alchemy At Sears" in the April 16, 2007 issue of Business Week.

In traditional marketing "bond" is a verb describing the relationship between a consumer and a brand. If you were to search the Internet for the phrase "Brand Bonds" before this Business Week issue hit the news stands, most of the returns would refer to the traditional marketing definition.

But the power of such financial concepts in the hands of able marketers takes on new meaning. In his latest post, Victor lays out a strategy for leveraging the concept of brand bonds to free Coca-Cola from a significant conflict between their tangible and intangible assets and operations. He lays out a strategy in which Coca-Cola would aggregate the large stable of secondary global brands and sell them to a non-subsidiary holding company, which in turn would issue bonds based on the royalties of those brands, and license them back to Coke for global commerce. He makes the argument that such a strategy would allow the market to more ably determine the value of the Coca-Cola brand, and would allow Coke to elvate the value of both their operations and brands as separate entities.

It's a bold and interesting idea--especially when you consider that it emanates from a marketing mindset. Not exactly the marketing mindset that currently permeates business, but certainly one we should cultivating.  

 

WalMart's Mid-Life Crisis

BusinessWeek has a cover story in this week's magazine about Wal-Mart's slowing growth and "dimming prospects". Competitors are eating into WalMart's business, and their various strategies for finding new momentum have apparently stalled. As auther Anthony Bianco puts it:

If Wal-Mart seems short of answers at the moment, it might well be because there aren't any good ones. Increasingly, it appears that America's largets corporation has steered itself into a slow-growth cul de sac from which there is no escape.

That sounds pretty severe. But maybe the problem is the expectation for continued aggressive growth, rather than optimization. Victor Cook has done an analysis of Wal-Mart's challenge with the Enterprise Marketing Framework, and believes there is a solution--hacking off the Sam's Club business and a whole lot of revenue. Could Wal-Mart actually maximize it's potential by lopping off $41 Billion in revenue? It sounds crazy, until you do the numbers and the underlying market strategy becomes evident.

Victor is putting together a compelling set of case studies that demonstrate the value of viewing corporate strategy through the Enterprise Marketing lens. This one is well worth the read. 

Corporate Strategy Through a Marketing Lens

I've been getting under way with Victor Cook on a new book about the Enterprise Marketing Framework (EMF)--a framework of strategic analysis through the lens of marketing financials, based on Victor's book, Competing for Customers and Capital. Victor is putting together a series of case studies that review major corporate events through the EMF lens.  His latest analysis looks at Microsoft's bid for DoubleClick, which has driven a lot of media attention ever since Google threw a $2 billion offer on the table.

If you want a quick background on the story, you can find a blurb that I wrote for MarketingRev. The long and the short of it is that DoubleClick is the Internet king of banner advertising, and Microsoft wants it to bolster their Internet business. Google, the Internet king of text advertising, is now threatening to win a bidding war over DoubleClick, and analysts are competing to make dire predictions over the outcome.

Victor's analysis, using the principles laid out in Competing for Customers and Capital, (reviewed here) demonstrates the unique insights that can be gained when you analyze a company's market performance in light of their enterprise marketing expenses, their market share, and their market value. In the case of Microsoft, using the EMF to compare Microsoft's software, gaming and Internet business markets sheds clear light on why Microsoft is so compelled to go after DoubleClick. I believe this is truly new ground being staked out for strategic marketers. Read the analysis on Victor's blog. 

The Marketing Duel of Coke vs. Coke

Victor Cook has just posted a great analysis of the internal battle over marketing strategy that has divided Coke since the merger of its marketing and bottling enterprises. The analysis itself is educational. But when you realize that only a small group of marketers in the country can drive, much less understand, this level of analysis, you get a crystal clear sense of why so few marketers have a seat in the boardroom.

Return on Customer ROC(SM)

When I went off on a rant the other day about social media metrics, I stepped on some unexpected toes. In casually dismissing all kinds of derivative ROx metrics, I also impugned ROC--the "Return On Customer" metric proposed by Peppers and Rogers. Don Peppers came to set me straight on ROC. He posted a comment defending the integrity of ROC and explaining its value:

"..the Return on Customer (sm) concept is not just a clever way to say "marketing." It is a genuinely different financial metric, based on a common-sense principle that is often overlooked by marketers: Customers are limited in number, and they should be treated as a scarce productive resource."

I couldn't agree more about the value of customers. And when I read the opening chapter of Return On Customers, I can say that I agree wholeheartedly with the underlying premise that businesses need to take a much longer view of how they create value and how they treat their customers in the process. But there's a thread that runs through the book that leaves me unsettled. It's too shiny. Right down to the conspicuous trademark that declares ROC(SM) as intellectual property. It's evident that ROC isn't so much a theory open to professional discussion as it is a product, and one designed to generate substantial revenue.

Now don't get me wrong. If I could figure out a meme that could sell thousands of books and bring business to my door, I'd be ecstatic. Peppers and Rogers have done it not once, but numerous times, with One-to-One marketing, with Managing Customer Relationships (CRM), and now with ROC. Their marketing effectiveness is genius. But that doesn't mean that ROC as a financial metric stands up the hype. And that's what I want to explore in more depth, starting out just with the bit that Peppers cites in his comment:

Let's say you were trying to evaluate which of two possible marketing initiatives to undertake. Initiative A requires you to spend $10 per customer and yields a profit of $5 per customer, for a 50% ROI, while Initiative B requires you to invest $20 per customer and yields $7 in profit, for a 35% ROI.

Any sane person would choose the 50% ROI, right? Wrong. Since both the 35% and the 50% ROI are clearly in excess of your cost of capital, your supply of funds is unlimited, but your supply of customers is not. Suppose you had just that ONE customer? Then Initiative B would create $7 in profit, compared to just $5 for A.

But here's the punchline: You should still choose Initiative B even if you "only" have a million customers, or 100 million.

We're not saying that ROI isn't important. Money does cost money, and you have to pay attention to the return you get on the money you use. But ROI is not sufficient, by itself.

So, while we couldn't agree more that almost all of the RO[X] ideas out there are not very helpful, we beg to differ when it comes to ROC, which will actually lead to different decisions.

I must be missing something. This is simply capital budgeting. Yes, most marketers need to get up to speed to understand finance, but are you actually saying a CFO wouldn't be able to figure out such a financial insight without ROC(SM)? Or is ROC just a concept for marketers who don't understand finance?

The difficulties continue the more you dig into the numbers. A big part of ROC relies on another metric called Customer Equity, which would be a great metric of actual customer value, if mere mortals could actually measure it. But it's much more difficult than it sounds to match up the theoretical value of concepts like customer equity, or even customer lifetime value, with the practicality of actually measuring it. And that, in the end, is my whole point. The theoretical concept behind ROC(SM) is something many intelligent people have argued from many different angles--companies need to value their customers, they need to measure the value customers generate, and they need to sustain those efforts beyond our quarterly-driven myopia. But supporting those theories with financial constructs opens those metrics up to honest and professional criticism. And I can think of no better way to leverage our emerging social media networks to do just that.  

Competing For Customers and Capital: Wrapup

It's now time to wrap up our online Book Discussion of Victor Cook's Competing for Customers and Capital. This has been the most sustained coverage I've hosted on marketonomy of any single topic, and I know it's left a number of readers scratching their heads. It's a technical financial topic. It's an academic topic. It can be hard to follow if you're far removed from your last class in accounting. Why spend so much time drilling down into the nitty gritty details on a marketing site? Why? I firmly believe Competing for Customers and Capital is one of the most important business books in a generation, and certainly one of the most important marketing books of all time. If that sounds overheated, let me explain why.

Marketing today is a profession adrift. After decades of outward-looking focus on customer trends, market research and branding, marketing has been caught flat-footed by a sea-change in business management that demands operational efficiency, performance accountability, and a mastery of business processes that drive shareholder value. These are practices that corporate strategists have focused on for decades, and delivered robust methodologies over the years including TQM, Lean Manufacturing, the Balanced Scorecard, and others. The best marketing has been able to do is respond reactively--and reluctantly--to the demand for accountabilty, and not very robustly at that. Most marketers today spout ROI terms and concepts with no real understanding of the implications beyond campaign efficiency metrics for customer acquisition. Hardly any understand that most popular metrics of ROI are entirely internally focused, and make no contribution to competitive market strategy. I've said it so many times you'll be tired of it by now: using most ROI metrics, you can be masterfully efficient at winning the wrong customers.

With the recent rise of the title CMO, marketers are becoming more transparent in their desire for a seat in the boardroom, but they have no roadmap to get there. Most CMOs see themselves as future CEOs, and yet marketers still can't agree on how, exactly, to define the fundamental contribution of marketing to the corporation. The only seat most marketers have a hope for in the boardroom today is the hot seat, defending their budgets and performance to a room of skeptical directors.   

Competing for Customers and Capital is the first marketing finance framework that gives marketers the tools they need to contribute meaningfully to board room discussions--beyond having to justify performance. Victor Cook's framework is not a hastily written trope to bank on the best-selling fads of ROI or customer-centricity; it's the culmination of 40 years of groundbreaking ideas connecting market strategy to enterprise finance. It's the first framework of marketing finance that provides a set of outward-facing metrics to guage competitive market performance, and that connects product and capital markets.

This is a critical book for marketers, because it drives a heavy stake in the ground right on the dividing line that will separate the marketers who will be relegated to managing campaigns and the marketers who will take a respected seat in the boardroom. Yes, it can be a challenge to tackle and comprehend new ideas, like those put forth in Competing for Customers and Capital, especially when you have to go back and relearn some fundamentals. But the stakes are high, and the payoff is clear. You either want it or you don't.

While this ends the discussion of Competing for Customers and Capital, I'm hoping to continue dialogs and discussions in collaboration with Victor Cook. We're reviewing a few ideas to put together a roundtable and/or seminar on Enterprise Marketing early next year. If you're interested in getting on the invite list early, drop me a note and let me know what areas of this discussion are of greatest interest to you.

Thanks to everyone who joined us to read this book dialog; a big thanks to everyone who posted; and a huge thanks to Victor Cook for being available to respond, and for putting together his narrated powerpoints to support the discussion.

Analyzing and Forecasting Enterprise Marketing Performance

We’ve arrived at the final chapter of Competing for Customers and Capital. If you’ve made it this far, you’ll see in this chapter how all the tools we’ve been discussing in Victor Cook’s marketing finance framework come together to provide a powerful tool for competitive valuation of the businesses in a strategic group, measuring the ROI for shareholders by analyzing the appreciation or depreciation of a company's stock price over time.

If you haven’t followed the discussion this far—and to be fair, Cook’s framework is both technical and innovative—I’ll summarize some of the key building blocks that will help you understand this chapter.

1)      Using financial accounting data, it is possible to analyze a strategic group of businesses and draw a direct relationship between one company’s share of group revenues and its share of market value. This relationship is called the Value-Sales Differential, and it demonstrates a company’s competitive performance in generating a share of market value relative to its share of revenue—or bang for the buck.

2)      While it’s valuable to look at this data as a single snapshot in time, it’s even more valuable to look at a broader window of time to track the volatility in a company's Value-Sales Differential. This is a Risk Adjusted Differential, and Cook’s model relies on 10 periods of data, either yearly or quarterly.

3)      By analyzing a company’s Value-Sales Differential in relation to its enterprise marketing expenses, you can measure the efficiency with which a company generates revenue and market share from its marketing resources, or its Enterprise Marketing Efficiency.

4)      By looking at the Risk Adjusted Differentials for a competitive group of companies, it’s possible to identify a point of Maximum Earnings for each company, an optimal point at which enterprise marketing expenditures generate the greatest possible earnings and market value. Below this sweet spot, the company is leaving revenue on the table, beyond it, the company is pouring marketing dollars down the drain.

5)      By comparing the maximum potential earnings of a company to its actual earnings, you can derive the company’s Relative Earnings Productivity, or its ability to optimize enterprise marketing expenditures in generating revenue.

Where we take all this information in Chapter 9, is using this data to analyze a company’s overall performance compared to its competitors, and to project trends into the future to forecast the company's stock price. This includes the development of worst-case, best-case and expected scenarios for generating future earnings and share of market value. Which in turn leads to a forecast of low, high, and expected stock prices ten periods into the future.

This level of tracking market performance may seem more relevant to investor relations than determining the levels of budget allocation for enterprise marketing. But here's the critical link: Cook demonstrates how a CMO can work with the CFO to orchestrate future spending on enterprise marketing resources that leads to a target stock price and return to shareholders. Along the way some surprising implications appear. You can see patterns that relate a company’s productivity in optimizing earnings to its efficiency in generating market value—patterns that may point to the impact of marketing and public relations events, in ways that internal Marketing ROI metrics could never hope to uncover.

Check out the narrated powerpoint for Chapter 9 for yourself, and see what we’re talking about. It's only 14 minutes, and though it may take a few reviews and referrals back to the basic concepts, it’s worth it. If you find it hard to follow, skip forward to the charts in the final 3^rd of the presentation to see how Cook uses 2003 financial data to analyze and forecast target spending, share of market value and stock prices for Novartis in 2007.

In Search of Maximum Earnings

Time for another chapter in our Book Discussion on Competing for Customers and Capital. We're on to Chapter 7 now, and Victor Cook has posted a new narrated PowerPoint as a supplement. I have to say that the case studies in this chapter broaden the implications for his framework of marketing finance tremendously, and are easy to understand even if you only grasp the basic concept of his theory.

By way of short review:

• We've learned so far about the power of using financial accounting data to analyze how a company spends on enterprise marketing.
• We've learned the value of comparing a company's relative earnings and expenditures on marketing to a strategic group of competing companies.
• We've learned that with this information in hand, it's possible to identify a clear relationship between a company's value to shareholders and the revenue it generates, as well as a relationship between revenue and expenditures on enterprise marketing.
• Finally, we've learned that it is possible to identify a theoretical point of Maximum Earnings, after which the expenses on Enterprise Marketing required to gain market share and revenues have diminishing returns, and before which the expenses on Enterprise Marketing are insufficient to take full advantage of potential earnings. IE: You're either pouring money down the drain, or leaving revenue on the table.

In this latest Chapter, Victor offers up a number of case studies that show other insights that can be gained from an understanding of Enterprise Marketing. He demonstrates with case studies that include Amazon, Ebay, WalMart, AT&T, Gannett, and Merck, how publicly available financial accounting data can present a clear picture of whether companies are growing wisely, and whether market shaping events, like mergers, acquisitions and IPOs are likely to pay off or not. All of this insight comes from being able to analyze the relative gaps between actual and maximum earnings and market share, and actual and maximum Enterprise Marketing expenditures.

Victor also introduces a new derivitive metric, companion to the Risk-Adjusted Differential discussed earlier in the book, called Relative Earnings Productivity. The Risk Adjusted Differential is simply a view of the difference between a company's stock market value and its revenue (the Value Sales Differential) over 10 quarters, which reveals both an average and a trend for that differential, thus reducing the risk of depending on a single quarter's number. The Relative Earnings Productivity tracks the difference between a companies Actual earnings, and Maximum potential earnings, thus revealing how much revenue the company is leaving on the table, or much they are pouring down the drain by investing in market share they can't sustain.

If this sounds too wonkish, just listen to the chapter summary and soak in the concept of being able to look at a company's earnings and expenditures, and have a framework for understanding whether or not that company is leveraging its Enterprise Marketing resources wisely. Should the company be spending more? Spending less? Merging with a competitor? Lopping off a division? Imagine as a marketer being able to make the case for one of those courses of action, framed from the standpoint of marketing, but in language the CEO, CFO and investors understand.

This is big iron for marketers. 

Enterprise Marketing: The battle for Your Desktop

I'm running a little behind this week as I catch up on business demands, but we're getting into the home stretch on this Book Discussion about Victor Cook's Competing for Customers and Capital. Best of all, we're reaching the point in the book where there's a significant payoff for the hard work of wrapping your brain around new concepts that involve numbers.

I'm going to launch a discussion now of Chapter 6 (you can find a supplemental narrated PowerPoint here), which is a fantastic case study for applying the Rule of Maximum Earnings to an analysis of one of the world's most infamous corporate corrections--IBM's dramatic loss of market share during the 90s, and the rise of Dell. There are many ways to retrospectively read that market's evolution and IBM's fall, but in the context of a theoretical Maximum Earnings threshold that IBM substantially overreached, it has substantial value in highlighting the strategic importance of Enterprise Marketing. It's interesting to me that at the time, Gerstner and his financial team figured out that they were dramatically overpaying for market share and a made many controversial moves to correct it, but the conventional wisdom still suggests that the real problem was manifest during the fall from the pinnacle of market share, rather than any problem, like over-investment, during the climb to the top.

One thing that seems to be a challenge in the application of the Enterprise Marketing framework relates back to chapter 3, and the definition of a strategic competitive group. IBM's competitive group changed substantially during the 1990s, from a significant focus on systems and components to a focus on software and professional services. Microsoft and HP are two other 800-pound gorillas with such a diversified portfolio of products, it's hard to shoe-horn them into any single competitive group, where the Enterprise Marketing expenses can be assumed to be evenly distributed over their various product categories.

Given the value of the Enterprise Marketing framework, I wonder if there are any potential strategies to unwind some of the financial data in ways that could shed more light on the various Enterprise Marketing expenses within a single companies product portfolios? I know it's not a perfect solution by any means, but could enterprise-wide SG&A expenditures be allocated proportionately to various product groups based on group revenues, so that some comparison to other pure-play businesses in the strategic group could be made? I know each product group would probably have different levels of product marketing efficiency, but how different would you expect the corporate marketing efficiency to be across product groups? 

The Rule of Maximum Earnings

I've just spent a couple of days struggling through Chapter 5 of Competing for Customers and Capital. I suspect we're going to lose a lot of marketers at this point, because the concepts are not familiar, and it takes some time to rearrange your synapses and understand them. But I'll state once again for the record that these are concepts fundamental to the future of marketing. If you want to someday have a seat in the boardroom, do whatever it takes to get your mind around these concepts.

I'm going to start this thread by cutting right to the core concept that drives this chapter. There are a lot of steps to getting to main idea, but if you understand the main idea, it may make the steps more clear.

First of all, remember that the fundamental frame of reference is a strategic group of competing companies. You're not looking at your company in a vacuum, and just calculating your cost of acquisition, for example. You're looking at a competitive set of companies, and looking at what it costs for you to generate value as a share of the total value created by your strategic group.

The main concept in this chapter is the notion that there is a sweet spot where a company achieves the greatest marketing efficiency, and the greatest share of market value relative to its earnings. Why is that important? Because most companies approach growth like a cancer cell--Grow. Grow. Grow.--without any critical analysis of diminishing returns on the investment in growth, much less an application of this knowledge to marketing operations. It turns out that there is an identifiable curve, defined by the dynamics of your competitive strategic group, that demonstrates the optimal point at which earnings and market value are maximized.

Imagine if you had this knowledge, and could work backwards to calculate a marketing budget based on a clear understanding of how your market growth would impact market value relative to a group of competitors. Well, you can, and it isn't that difficult, once you get your arms around the concept. It's like riding a bike. It isn't easy at first, but you'll never forget how to do it once you know.

Victor has put together another narrated powerpoint summarizing the major concepts in Chapter 5. Jump into it and ask questions. Victor is following the thread and will respond to any discussion about the concepts.

The Mysteries of Enterprise Marketing

We're moving this week into the heart of our book discussion on Competing for Customers and Capital, and we're also making some adjustments as we go. After looking at the data showing how readers were going through the narrated powerpoint slides, and noticing a significant early drop-off, Victor has been editing down his supplementary presentations to make them more streamlined. I started a "cheat-sheet", putting in lay terms the Enterprise Marketing concepts that form the core of Victor's framework, which I'll post as soon as possible.

Today we're going to move on to Chapter Four, and start getting into a practical discussion of Enterprise Marketing expenses--or, what counts as marketing? One of the significant challenges to marketing's ascension into the board room is the lack of clarity in defining exactly what consititutes a marketing expense. You may be surprised at the wide gap between what marketers typically consider a marketing expense, and what investors consider a marketing expense under Sales, General & Accounting numbers--not to mention the variations across industries and companies.

In this chapter, Victor discusses the definition of Enterprise Marketing expenses, and lays out specific categories or domains of enterprise expense that relate to the intangible value that makes up such a significant portion of a company's market value. One interesting observation on this chapter: in the case studies that highlight businesses that have returned the greates value to shareholders over the past 30 years, it is the companies that have succeeded in effective Enterprise Marketing that are on top--not those that have pursued the kind of corporate strategy that minimizes marketing to a managerial function.

To pick up the conversation where we left off, visit Victor's narrated powerpoint on Chapter 4. If you're joining this book discussion for the first time, you can get caught up by visiting the book discussion index.

Penetrating the Mist of Marketing Financials

We're getting into some of the critical nitty-gritty details in this book discussion of Victor Cook's Competing for Customers and Capital. We've been talking this week about how companies generate value, and getting into numbers, ratios and differentials. This is where it becomes an uphill struggle for a large number of marketers who haven't studied finance or statistics. It may feel to a lot of readers like groping in the mist, but it's critically important to push ahead and absorb whatever you can. If marketing as a profession is unable to climb this hill, we're in trouble. Trying to drive marketing strategy without understand the underpinnings of how value is created would be like popping the hood of a broken-down car to try and get it running, with no understanding of how an engine works.

I can't state this any more clearly: for any marketer that hopes to one day sit in the boardroom, this is a step you can't skirt--and it's one that's been made a whole lot easier by this book. You don't need to become a CPA. Just push through and absorb what you can. The view is a lot brighter up ahead.

Okay. So maybe over the next two days, we can drill down for a little more clarity on the most important concepts that run through this book before we go on.

The first critical concept is the Value-Sales Differential, since I think most of the analysis derives from this metric. The idea behind the Value-Sales Differential is that you take a group of competing companies and add up all the revenue they generate in a given period. Then add up the entire market value of those companies (they must be publicly traded for you to get that data, but the data is free). What the Value-Sales Differential does is look at the difference between one company's share of the total revenue generated in its competitive group, and compare it to the same company's share of market value within that group. When you do this for all the companies in the competitive group, the picture can be astounding.

In the case of Southwest, which we've been discussing this week, compared to its competitors, like United Airlines or American, Southwest doesn't have the largest share of revenue, but it has an overwhelming share of market value. That means that Southwest is able to generate shareholder value with vastly fewer resources than its competitors. Given that capability, it's worthwhile to ask how that extra value is being created. And guess what? A lot of that capability is directly within the domain of marketing. That's why this is so critical--for the first time, we have a doorway into a financial system of measurements that allows us to start demonstrating the value-creating capability of marketing in terms that any CEO or CFO could appreciate.

Vic: what's the next critical path concept behind Value-Sales Differential that a marketer would need to understand before we move on to some of the analysis and implications in the next chapters?      

How Marketing Creates Shareholder Value

Last week we talked a lot about how the value of a company is measured, and ended up with an incredibly incisive discussion about how marketers contribute to that value. This week, we're going to look at Southwest Airlines, and some new ways to understand how marketing has helped them consistently beat the competition. If you're just joining the discussion, you can get up to speed by visiting the index to this Book Discussion on Victor Cook's Competing for Customers and Capital. If you missed the last thread, I highly recommend reading Vic's comments on how marketers can demonstrate the contribution of value to the bottom line in a way that's relevant in the boardroom.

Once again, Vic has put together a narrated PowerPoint to discuss the important concepts in his analysis of Southwest Airlines. This section looks at Southwest the same way a savvy investor would. But instead of looking at typical ways to measure stock performance like, say, a price/earnings ratio, Vic introduces a number of measures that look at a company's performance within a competitive group, and at how marketing impacts performance.

One example is the Value/Sales differential, which clearly differentiates the winners and losers of a competitive group according to their ability to generate shareholder value, relative to their share of revenue. Southwest consistently soars above the competition in its ability to generate a higher premium for its stock among investors, compared to its share of revenue among competitors. There are a number of marketing factors to consider in explaining the relative market value of a company among its competitors, which Victor will help elucidate this week.

As a lead in to this week's discussion, I'd like to ask Victor to discuss what has been missing from the investor's tool kit in measuring the value of a company on the stock market, and how that relates to marketing.

Getting Your Arms Around Intangibles

If you're just joining us, we're having a fascinating discussion about the future of marketing in light of significant changes in the business environment. We're discussing Victor Cook's new book, Competing for Customers and Capital. If you want to get up to speed, hop over to the Book Discussion page to get started.

Okay, let's move on to the second bullet point in this discussion.  I'd like to propose some questions for Vic (and Jonathan, I hope you don't mind being brought in on this one).

First, I think some of those who have read your posts and reviewed Vic's narrated power point are a little bewildered. On the one hand Vic says in the power point presentation that intangibles are like "clouds in the sky," which makes them difficult to measure, at best. On the other hand you both reported in your last posts the percentage of market value accounted for by intangibles. How did you move from the clouds in the sky to percent of intangible value? Can anyone apply your methods? Please give us some examples of where you got the data and how you used it to come up with these results.

Second, you both provide a list of the types of intangible value. Vic, on page 16 of your book you say intangibles are created from the following list of "assets," and point out they don't actually appear on the company balance sheet:

technology-based
customer-based
market-based
talent-based organizational related
contract/statutory based

In his post yesterday Jonathan said they are:

technology-related
contracts
artistic content
customer knowledge
marketing-related

Looks to me like you guys agree on the framework to describe these "assets." This is a good start.  Now, can you give us some idea how to measure the costs of those "assets"? And maybe say something about why they don't show up on the balance sheet?

Competing for Customers and Capital

Today is the launch of an extended book discussion on Victor J. Cook, Jr.'s new book Competing for Customers and Capital. If you have any interest in marketing beyond managing campaigns, this is the book that puts marketing on the map of boardroom business strategy, detailing a framework that demonstrates the connection between marketing processes and shareholder value.

Mr. Cook is joining us for this online discussion, and is even making supplementary materials available that he uses for his graduate courses in marketing at Tulane, including narrated powerpoints to elaborate important ideas. If you'd like to join the discussion, there's no fee or registration. Just click over the Book Discussion page where you'll find some background on the book and a permanent index to all the discussion topics that emerge over the next few weeks.

This week we'll be discussing only the first chapter of Competing for Customers and Capital, which lays the foundation for Cook's framework and introduces some new high-level concepts in marketing performance measurement. This chapter covers three broad concepts:

1. The role and importance of Intangible Value in creating shareholder value.
2. The need for a common framework that marketing and finance managers can use to measure the cost of enterprise marketing and its impact on shareholder value.
3. An introduction of that common framework, with a brief discussion of various comparative measures that use financial data to link the enterprise marketing processes of competitors with relative market share.

If you haven't yet picked up a copy of the book, you can gain some understanding of the material by clicking over the Book Discussion page and reviewing the supplemental material linked under Chapter 1.

Today, it seems the most logical place to start the discussion is a focus on the role of Intangible Value. For those new to this discussion, a business creates value by using its tangible assets (e.g.: printers, machinery, factories) and intangible assets (e.g. patents, relationships, intellectual property, brand loyalty). The tangible value of a company can be fairly easily measured by adding up the current value of tangible assets. But intangible value is much harder to measure. How do you measure the current value of a set of relationships, or the good will of a loyal customer base that will always buy your product?

Since the true value of a company is a combination of both tangible and intangible value, it's important to have meaningful ways to determine and measure all the intangibles. The reason becomes clear when you look at the sometimes dramatic difference between the tangible value of a company and its value on the stock market. If you look at, let's say, a paper mill, the difference between the sum total of the company's tangible assets (it's mills and machinery) and the company's value on the stock market may not be so great. But if you look at Amazon.com, the stock value soars with seeming "irrational exuberance" over the relative value of Amazon's tangible assets (it's offices, computers and warehouses). The obvious implication is that Amazon has phenomenal ability to create shareholder value with intangible assets--those things that are really hard to measure.

For some reason--and this will be my question to Victor today--the importance of intangible assets has grown tremendously in importance over the past decade or two. Back in, let's say, the fifties, an overwhelming proportion of a company's value was defined by its tangible assets. Today, the tide has turned dramatically, and for companies in many industries, more market value is determined by intangible than tangible value. Can you talk a little bit about this shift and what it means for businesses and shareholders? How dramatic is the change, and where does it appear to be heading? And how are businesses, investors, and of course marketers, responding to the changing determination of value?

The Future of Marketing

If the traffic and discussion from this week are any indication, we should get some good steam with the dialog about marketing finance that will kick off here next week with an extended discussion of Victor Cook's Competing for Customers and Capital. (Background on the book and discussion.)

As the dialog in the comments over the last two posts shows, this dialog moves very quickly toward a discussion about the future of marketing, which is exactly why I chose this book. Marketing is in the midst of a dramatic sea change, and is currently bobbing around in the shifting tide like a boat without a rudder. Marketers are buffetted with new theories and best-selling fads at every turn--It's About the Customer, No It's About Metrics, No It's About Leads, No It's About Brand. Meanwhile, the CEOs are saying, look, tell me exactly what it is you actually do that delivers revenue. Well, that would be a nice CEO. Most are really saying, hey, just go report to the sales department.

Competing for Customers and Capital is a watershed book that lays the foundation for defining marketing's relevance to business strategy. We're not talking about campaign metrics or brand measurement. We're talking about how marketing processes increase revenue and shareholder value. This is a story any marketer must understand if they have any aspirations toward a seat in the boardroom.

Please join us next week to kick off the book discussion, and invite a friend.

Measuring Intangible Value

I've been talking this week with Victor Cook as a prologue to next week's launch of a book discussion on Competing for Customers and Capital, which you can learn about here.

In order to get the discussion rolling, I'd like to post some questions for readers to answer in the comments section. This dialog can't happen without you, so if you want to see useful content, please jump in and help get us spark it.

Over the past few years, the defining challenge for marketers has been proving performance. It shows up in the buzzwords about ROI, the popularity of dashboards, and the day-to-day demand for accountability. Marketing's dilemma is that so much of what we do is intangible, and the path to the bottom line is anything but clear. So what I'd like to ask of readers on this thread is to respond to one of the following questions, or both:

1. What programs, activities or events do you believe influence the intangible value--or the perceived value--of your company to investors. This applies whether you're publicly traded or not.

2. How can you trace the cost or expense associated with those programs, activities or events back into your company's financials? And do you currently do so?   

Competing for Customers and Capital

Today I’m kicking off Marketonomy’s first Book Discussion, featuring Victor Cook’s Competing for Customers and Capital. This week we’ll be talking with Victor about the general concepts behind the book, before diving into the book material next week. If you want background on this book, or how the book discussion works, click through to the Book Discussion page.

I want to kick off today by saying why I chose Competing for Customers and Capital as the first book to dialog on Marketonomy. Victor Cook has been a top marketing scholar for more than 40 years, and has written some of the most influential works on marketing strategy and finance. True, he hasn’t written the kind of Snappy and Sappy marketing books that might have made him a pop guru. Instead, he has consistently developed incisive theories that challenge the status quo. 

His latest book cuts right to the heart of today’s marketing dilemma: demonstrating the bottom-line value that marketing delivers to successful businesses—and he does it in an unexpected and ground shaking way. This is not another book about Marketing ROI, or dashboards, scorecards and campaign metrics. This is a book directed straight at the boardroom, demonstrating through financial accounting data how business and stock performance can be critically and effectively measured in light of enterprise marketing processes. In other words, measuring a company’s revenue and market value is important, but you can learn much more by comparing how efficiently and effectively companies use their resources to generate that revenue and market value.   

I’m starting with this book because today marketing’s biggest dilemma is not about performance metrics or customer intimacy or new communications technology, even though these are all mission critical challenges. Marketing’s biggest dilemma is the lack of a guiding principle that defines a clear and consistent strategic role in the corporation. So many marketers dream of gaining a respected seat in the boardroom, and yet most can’t articulate the business strategies that drive boardroom decisions, much less stand up and argue effectively for the value of marketing processes in informing those decisions. Now is the time, and the opportunity, to turn the tide.

Victor Cook’s new book bridges the gap from marketing to boardroom strategy by clearly establishing the relevance of marketing processes to the creation of shareholder value. This is an important opportunity for marketers to gain a better understanding of how marketing fits into the strategic business landscape. And in the light of that understanding, the cyclical trends that continually redefine marketing—from branding to customer intimacy, from lead generation to marketing ROI—will make far greater sense in the larger scheme of improving the practice of the marketing profession.

So Victor: as a lead in to this in-depth discussion, maybe you can tell us where this book originates in your work over so many years.

Measuring Marketing Performance

I’ve been digging in to Victor Cook’s new book about marketing finance, "Competing for Customers and Capital" and in there’s a lot to chew on. The essential premise of the book is that marketing adds value not only to customers and the bottom line, but that marketing performance has a direct and measureable link to shareholder value. The more investors can measure the investment a business makes in marketing, including the efficiency with which marketing dollars return revenue and market share, they can develop a much clearer picture of the company’s health and relative risk.

Cook describes some of those measurements, and a number of differentials and derivatives, that spotlight critical performance metrics such as a company’s marketing efficiency, the ratio between a company’s share of market value and share of market revenue, and the maximum earnings a company can profitably generate from its market share. You may need to brush up on your accounting fundamentals to fully appreciate the financial mechanics, but that’s pretty much a given if you want to advance in marketing these days. Even if you’re rusty at numbers, the implications of Cook’s emerging framework are stark and easy-to-understand reminders of how marketing is being reshaped to respond to the growing pressures for accountability.

“[Marketing managers’ P&L statements] are not charged interest for the capital invested in product markets. There are two important implications of this practice. First, marketing managers will quite properly think money is free. If you’re spending ten million bucks on an ad campaign in a company with a 12% weighted average cost of capital, the cost of that capital does not appear on your P&L statement. But, you say, you didn’t actually borrow the money. True, but someone is paying the $1.2M cost of that capital. If the bank isn’t paying for it, then your shareholders are. Second, if marketing managers were charged the cost of the capital they use, you would find them giving much more serious attention to “return on investment” (ROI). And senior managers would take their plans more seriously.” 

If that’s not a wake-up call, let me put it in clearer terms. We’re not talking about how well your latest campaign performed—cost per click, cost per lead, etc.—we’re talking about how effectively your campaigns have delivered market share and profit. If the emperor has new clothes, you can think of this as a production line of mirrors.

More to come...

Meeting a Marketing Finance Luminary

Writing can be one of the loneliest tasks imaginable. Even when you write publicly, you often sustain long stretches of silence when you wonder whether or not anyone even reads. Responses to writing, even blogging, are few and far between, and often the responses that do come are not of the encouraging variety. But every once in a long while, someone responds to something you say in a way that makes everything worthwhile.

As a dedicated academic poser, every few months I download a big batch of articles on business and marketing from various academic journals and go on a reading binge. It can be a huge slog to get through the often opaque writing, grand theories, and rigidly defined methodologies that in the end, produce little more than the slightest philosophical tweak on what 20 other scholars have been saying for 50 years. But in the middle of what seems a big pile of academic deadwood, there are some incredible diamonds--ideas that shed light on the kabbalistic structures of market strategy, and change the way you think about business.

Victor Cook, Jr., now Professor Emeritus of Marketing at Tulane, has produced a number of those diamonds over the past 35 years. His papers on marketing strategy for the Journal of Marketing (e.g.: Understanding Marketing Strategy and Differential Advantage, 1985, Vol. 47, Issue 2)  gave me my first clues to the financial underpinnings of marketing, and what financial equations can reveal about market strategy. 

So imagine my surprise at getting an email from Victor Cook. He was just dropping me a courtesy note to let me know he had published a new book, and he had used a quote from a BusinessWeek Column I wrote years ago about marketing's ironic inability to package and position itself as a profession. I just about fell out of my chair. Okay, I know academic marketing is the ivoriest of towers. But this wasn't some doctoral student whose only contribution to the literature was a rehashing of 40 years of competing theories; this was someone with a history of forging important ideas. He not only read something I wrote and quoted it, but he took the time to let me know and sent me copy of his book. Well, it made my day, and my week. 

So I got a chance to spend some time on the phone with Cook, discussing the future of marketing. His new book, Competing for Customers and Capital, lays out an explicit framework for tying marketing performance to shareholder value. This is the holy grail for the next generation of CMOs, who are sorely lacking a key to the corporate boardroom. I've just gotten the review copy, which I'll be pouring over and discussing here over the next few weeks. But for all the heady discussion about theory and frameworks, one story Cook told me has been ringing in my head. He developed a course to teach these financial theories of marketing to actual marketing students, but the course was challenged on the grounds that it didn't belong in marketing, but in finance. Who challenged it? Other marketing faculty.

This revolution may take longer than expected.

Marketing Performance Measurement

Just posted a new article at B2B Magazine on a study we're getting set to release. Not good news for most marketers.

The Downside of Marketing ROI

File this under: Oops.

Google's stock has flown high on revenue from paid search and advertising. One of the most compelling motivations for allocating a bigger chunk of your marketing budget to paid search and online ads is the measurability of the click-stream. When you run an ad in, let's say, a newspaper, you have to do a lot of engineering to create a campaign where impressions can be tracked to top-line revenue. Special discounts, special URLs or phone numbers, staggered drop dates--all just to be able to pinpoint how many people read the ad and then bought what was advertised.

On the Web, you can follow the clicks from an advertisement or listing directly through to the order page. You can adjust your campaigns to improve performance rapidly by testing different types of ads,  messages and placements until you identify the package that performs the best. Good marketing.

So Google, raking in the ad dollars hand over fist from the frenzy of marketers who want campaigns they can track, decided it would be a good idea to enhance their Advertising offering with Web analytics. If customers are coming to you because they can better track their marketing ROI, why not up the ante and provide them more powerful tools to track it? Brilliant.

Google went out and bought Urchin, a Web analytics company that's been around for years offering  simplified reporting tools for tracking page views and visitors and other statistics about Web site performance. The plan was to provide Google's advertisers with a way to track the click-throughs and conversions on their campaigns. They called it Google Analytics.

Unfortunately, Google went from raking in the cash to stepping on the rake and getting nailed by the handle. Forget about the debacle they had during their launch, the real story is that some users are beginning to find the analytics so useful they can slash their budget for paid search and online ads. The CEO of a well-known hosted application company told me that the analytics opened his eyes to the poor ROI of his online spend with Google, and now he's looking for other channels to replace it.

I don't know, is that like upselling the emperor on a big mirror so he can see the nice new clothes he just bought?

Don't get me wrong--I think Adwords is a great product for certain types of marketing campaigns. But so many marketers have become double-fisted drinkers of the Adwords Kool-aid, I think the whole thing's a little Bubble-icious. I just never thought it would be Google supplying the pin to pop it.

The "New" CMO

There's an article posted in the current issue of CMO Magazine describing "The Future CMO". You should read it, because it's a perfect guide to how marketers can continue to crash and burn. On the surface, the article is right on target. It resonates perfectly with the marketer who has his back to the wall, offering a clear antithesis to all of the complaints about marketing coming from the boardroom, but providing no real clue to the underlying dry rot of the marketing practice. "Here I come," it seems to say, "responding to the pressure for accountability with snappy financial lingo, crisp analytics, and a  network of engineers who respect me." It sounds like the vision of marketing by a clueless Marketing Executive staring lovingly in the mirror.

The current obsession with financial issues simply reflects that it's through the window of performance metrics that we're able to see that marketing is broken. Learning financial concepts is important because it makes your understanding of the indicators more acute--but it doesn't solve the problem. The CMO Magazine article articulates many of the shortcomings of the marketing function--inability to link programs to the bottom line, failure to integrate with other functions, myopic focus on soft campaign measures--but seems to suggest that the solution lies in restating attacks as declarative statements of what marketing will be, some misty day in the future. What? You say we don't have metrics? Well, in the future we WILL have metrics.

What really annoys me about this depiction of the future CMO, is that it paints the picture of some slick executive deftly navigating the c-level suite, as if simply rowing to the pounding drumbeat of the current trend will open all the right doors. What the future CMO really needs to do is roll up his or her sleeves, get down in the trenches and serve sales, engage with customers, listen to engineers, and start playing an active, service-oriented role in the organization at the bottom first. If the future CMO can't solve real problems on the front lines, their lofty dream of "reaching across" the whole organization to pull together all of the corporate elements and set strategic direction is nothing more than a sales brochure for an expensive marketing MBA.

The most amazing section of this article is this statement:

To their surprise, the group's findings suggest that the biggest challenge may not be getting CEOs and CMOs to see eye to eye. One may speak the language of revenue while the other may prefer talking about customer satisfaction and brand awareness, but the research indicates that these groups are on the same page when it comes to identifying a company's most pressing marketing concerns.

"We did not find any major difference between the CEOs and CMOs on any major topic," says McNally.

CEOs and CMOs with no difference on the most pressing marketing concerns? This says everything about the actual survey, which I'd love to see. Where are CMOs and CEOs perfectly aligned? Tactical management of the marketing function. Where are CMOs and CEOs standing on opposite sides of a tremendous gulf? On defining the strategic contribution of marketing to the organization. Apparently the survey didn't dig into the debate over the ultimate role of marketing in the organization, or it polled only those executives who accept the notion that marketing is little more than managing lead generation. If you want to talk about efficiency, CEOs and CMOs are aligned, because it's all about tactical improvements. If you want to talk about effectiveness, CEOs and CMOs are in different worlds, because it requires a view of marketing that includes corporate strategy.

Most CEOs in America are weaned on the Porter, TQM, Balanced Scorecard, Core Competency, Lean Production, Six Sigma, Resource-based mindset of corporate strategy, which essentially relegates marketing to a line function to be managed as efficiently as possible. Strategy is a pre-packaged mandate and the title of "CMO" is given out to soothe the egos of glorified marketing program managers. That's not true at all companies of course, but it's the mass of the bell curve. How do CMOs change the tide? Not by dipping their oars into the surface currents while the deeper water sweeps them out to sea.

Personally, I'm looking for a Future CMO who has an open invitation to the strategy discussion because they have retooled their marketing organizations from the ground up by actively serving their internal teams as well as they serve customers; they have engineered processes as efficient as they are effective; and they have relevant contributions to make to the strategy debate based on real world experience in market development, customer intimacy, competitive positioning, and brand management. Not because they've learned to keep "ROI on the tip of their tongue".