Let’s face it: Finance speaks the language of business. The CFO aligns her communication with the ideas and the metrics that the CEO, Board of Directors and Investors care about: EBITDA, ROI, Free cashflow.
The truth is the CMO’s message is just as important: Marketing is the engine of growth and expectations of growth account for over half the firm’s market valuation. But the CMO and the whole marketing team, as well, need to translate the language and metrics of Marketing into Finance so the CEO can make the right decisions and investors have the right expectations of growth.
The challenge is that it is not simply a matter of using different words. Marketing’s metrics and ways of thinking are fundamentally different and need to be linked to Finance.
The CMO recognizes the significance of his team’s accomplishment when they launch a YouTube video brand story that gets millions of views and thousands of clicks through to the brand website. The CMO expects this and other programs and actions will result in increased mindshare and ultimately increased market share.
The CFO is certainly proud of the video and impressed by the millions of views, but she doesn’t see what she is looking for: Increased free cash flow. The CMO and his team need to make the connection for her.
The Rosetta Stone Model
Our translation of Marketing into Finance enables us to say, “If we spend $1 million on program X, we will increase revenue by $10 million.” Even if Marketing has done similar programs in the past and can back up this statement with historical data, it is useful to unpack the translation, so Finance appreciates how Marketing thinks and works.
Marketing starts with programs and actions like advertising, digital marketing, direct marketing, sales, pricing, channel strategies, etc. The immediate goal of these actions and programs is to change customer thinking and decision processes. Marketing uses metrics such as brand affect, mindshare, recall, brand perceptions, and customer feedback to gauge the effectiveness of these actions in changing customer thinking.
Marketing knows that changing thinking is not sufficient. Customers must act on their new way of thinking and change their behaviors. Marketing uses metrics like visits to the web site, minutes spent per visit, number of touchpoints, responses to promotions, store visits, and ultimately purchases to see that the Marketing actions have resulted in the desired behaviors. Once Marketing is measuring changes in purchases it can calculate the financial impact of the new purchases and compare this increase to the cost of the programs that it took to effect them.
Importantly, Marketing can connect these actions to finance metrics – by measuring the number of new customers acquired and the cost of acquiring them, the number of customers retained and the cost of retaining them, the amount of cross-selling and the cost of increasing revenue per customer, etc. With these metrics, Marketing can calculate Customer Lifetime Value (the economic value of each customer) as well as Customer Equity (the sum of the CLVs of all present and future customers).
Marketing is in a position to answer a central Finance question: If we need to promise Wall Street x% annual growth in free cash flow, how much do we need to spend on Marketing?
In general, Marketing needs to express the results of its programs and actions in Finance terms: Increased revenue, Customer Lifetime Value, Customer Equity, annual percentage growth and so forth. And, Marketing needs to get buy in on these calculations from Finance – in advance.
In their seminal article, “Customer Metrics and Their Impact on Financial Performance,” Sunil Gupta and Valarie Zeithaml demonstrate the “the linkage between perceptual and behavioral metrics and their impact on financial performance.”
Marketing is Learning
When Marketing has tracked the results of its programs it has quantitative evidence of the validity of its Financial predictions. But if Marketing has not already set up Financial tracking, it may be objected that Marketing doesn’t have the credibility to claim increases in Customer Lifetime Value, market share, revenue or profitability for its actions and programs.
In this case, Marketing must lay out the assumptions that lie behind the translation, measure and identify variances from the assumptions, and learn from these variances, so that future projections are fact-based and credible. It’s essential that the metrics be tracked over time so that the effect of different actions at different times can be calibrated.
Frank Grillo, Chief Marketing Officer of Harte Hanks, observes, “Variances are an important source of marketing innovations: The marketing program that works better than expected. The program that doesn’t work that should have worked. Both are telling you something important about your customers and competitors. It’s essential that you translate your metrics into financial terms so you know how important each learning is.”
What the CMO needs to do
In a working session of the Harte Hanks Marketing Advisory Board, the authors cited Gupta and Zeithaml’s “Customer Metrics and their impact on Financial Performance,” as well as Rajan Varadarajan’s ideas in “A Commentary of ‘Transformative Marketing: The next 20 years’” to lay out five steps that the CMO can take to better communicate the important role of Marketing in his company:
- Use the language of Finance. Explain the marketing plan in terms of the financial results the actions are going to produce. Put the details into a firmwide strategic context.
- State your assumptions. Spell out how each stage leads into the next and ultimately connects marketing actions to financial outcomes. Explain the key metrics that track these assumptions and publish how they are trending overtime.
- Invite the CFO to your strategy and performance review sessions. Have the CFO be a working partner in your strategic development and performance review process. Get her to participate in your discussions about performance expectations of specific campaigns, as well as variances in performance – what caused them, and what to do about them.
- Be open about your learning. Measure to learn, not to punish. Make it OK to fail – and learn from it. If you measure to punish, pretty soon all your programs will appear to be successes and you will never learn again.
- Celebrate success. The old management saw goes, “Success has a thousand parents….” Because it really does. Celebrate your successes and let everyone who took a part in it be acknowledged. Let everyone know about the contributions operations, IT, customer service, and, yes, Finance, made to the success. Acknowledgement breeds cooperation. Success breeds success.
Marketing is a team sport
A better working relationship between Marketing and Finance begins with the CMO and the CFO agreeing to collaborate. As CMO, invite your CFO to lunch and discuss how you can collaborate to make Marketing more effective, to support the CEO in making better investment decisions, and to increase your company’s market value. Once you explain your assumptions that connect Marketing actions to Financial results, what you know and what you need to learn, how you are measuring to learn, and what your big picture strategies are…you may very well win an ally and a partner in progress.
Increasingly CEOs are relying heavily on the collaboration of their CFO and CMO. They recognize that creating shareholder value takes both the discipline of financial control as well as the creative growth strategies of marketing. Having Marketing speaking in Financial terms lets them concentrate on making good decisions for their shareholders.
Additional sources and reading:
Katherine (Kay) Lemon holds the Accenture Professorship in the Carroll School of Management at Boston College. Her research and teaching focuses on key drivers of firm growth from a customer perspective, developing models of customer experience, customer loyalty and customer equity that enable firms to significantly increase return on marketing investments.
Jon Biro is the Chief Financial Officer at Harte Hanks.