Penetrating the Mist of Marketing Financials

by Chris Kenton on November 2, 2006

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?      

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Victor Cook, Jr., New Orleans, Louisiana November 3, 2006 at 7:49 am

MY BLINDERS

Chris, I was taught that positioning your brand in the consumer’s mind closer to their ideal than competitors was the beginning and the end of marketing’s mission. In fact I got in on the ground floor of this movement. I was a doctoral fellow at the Marketing Science Institute in Philadelphia when Paul Green was working with Joe Kruskal at Bell Labs to translate his methods of multidimensional scaling into what would become one of the most powerful marketing technologies in the world. As a point of reference see Nonmetric Multidimensional Scaling: A Numerical Method, Joseph B. Kruskal, Psychometrika, 29:2 (June 1964), pp. 115-129.

Since it was then a small organization I often found myself in a room at MSI with Paul and his colleagues as they hammered out their first applications of this psychological scaling technology to marketing.

What began as a break-through scientific paper in Psychometrika, years later took the marketing world by storm with the publication of Positioning: The Battle for your Mind by Al Ries and Jack Trout.

Later on I spent ten years working as a change agent hired by the board of a European computer manufacturer. Our mission was to get marketing and sales to work together. I put nearly 2,000 middle and senior managers around the world through my two-and-one-half day programs, including four with the entire board of directors. You can get a sense of what we were up against if you read the section on “Surround IBM” in first two pages of Chapter 5: The Rule of Maximum Earnings.

That engagement was at once a huge corporate success and a personal disappointment. It was a huge corporate success because we changed the way marketing and sales worked together, which was in some degree responsible for turning the company around. It was a personal disappointment because the Finance Director really never believed our numbers. Why? We weren’t able to link market segment profit and loss statements the company’s stock price.

My argument was this. If we maximize profits at the segment level (there were hundreds of market segments in about eighty countries around the world), then we maximize the company’s earnings. Yes, but the question remained, how did that affect stock price?

In 1986 I resolved to find an answer this question. At the time the only thing I knew for sure was this: I had to understand stock valuation models and the financial accounting data on which they relied. The problem was I was trained in traditional marketing and I never took either a finance or an accounting course. I fact, I don’t even have an MBA! These were my blinders.

The bottom line? You can penetrate the mist of marketing financials without the technical training. All it takes is dedication and hard work. And as you said, it’s critical because … 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.

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