In Search of Maximum Earnings

by Chris Kenton on November 16, 2006

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. 

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