Category Archives: 3. Marketing Financials

The Thinking Person’s Social Experience

My friends and frequent business partners at Miner Productions are at it again, driving production on a new social networking community called the Ideas Project, an interactive site featuring videos and threaded discussions on a wide variety of topics anchored by prominent thought leaders. The published content is organized primarily into Themes, People and Technology, with user generated content in the form of Questions, Ideas and threaded comments tied to the published content. There’s some interesting navigation devices used for exploring related ideas and contributors, but it’s really the quality of the thought-leader content that stands out. It’s kind of like a TED-style conference in the sustained format of an online social network.

It’s a cool idea and the content is definitely worth exploring. I’m currently listening to a video by Jerry Michalski on how the Internet represents the development of a “global brain”— check it out. The project was sponsored by Nokia, and developed in partnership with Xigi and Axis 41. As always, great work, Miner. I’m looking forward to our next collaboration.

Marketing Trends: Public Relations Budgets going Social?

Sudden stormI haven’t been up for air in weeks. Somehow, despite the economic downturn, despite the nuclear winter in venture capital markets for early stage startups, SocialRep is humming. I’ve been buried in social media tracking scans for customers and prospects, and new inquiries are coming in over the transom. I’m also excited about an invitation to present at Thunderbird’s Winterim in New York in January, where I’ll be talking about our emerging framework for integrated social media marketing and technology. So how can I account for the uptick in energy despite the gloomy market? I’m starting to see my theory about natural selection play out.

Over the past couple of months, SocialRep has been tracking a massive swath of online dialog about marketing. Not surprisingly, the trends in dialog are overwhelmingly focused on the impact of the economic downturn, with various flavors of speculation, panic and punditry. Some examples:

  • A few weeks ago, various reports on budget planning for 2009 highlighted a marked migration in marketing spend from traditional to digital media. The nearly universal read on this move is that online marketing is more measureable than offline, but there was surprisingly little citical analysis of  the challenges with online metrics, and how those challenges are being addressed.
  • As the economic crisis deepened, the panic did too. Sequoia Capital stoked the flames with a presentation they posted online telling their entrepreneurs to “get real or go home”. The presentation went massively viral, spreading the talking points for belt tightening and death pool speculation for various startup sectors, but few specifics on the tactics companies should pursue to refine their market approach.
  • As if in response to the panic–and mindful of the bloodbath marketing usually suffers in a downturn–marketing pundits took up the mantra that, whatever you do, DON’T STOP SPENDING. Some (myself included) cited the anecdotes that companies like P&G, Kellogg and Chevy increased ad spending during the Great Depression and pulled ahead of competitors. But most simply pronounced the incantation forcefully, that smart companies don’t cut marketing, but didn’t offer specifics on how companies should adjust their programs. Jonathan Baskin called this trend perfectly.

Notice a pattern here? Lots of punditry and trend analysis, but very few specific recommendations for how companies should adjust their marketing programs to deal with the economic crisis. There were a couple of exceptions, most notably a lot of dialog about the dangers of discounting and how price cuts undermine brand equity. But in terms of substantive recommendations for adjusting marketing strategy and operations, not so much. So I was interested to see a tangible sign of how some companies are adjusting based on the sudden increase of inquiries at SocialRep.

~  free  ~We’re still in the early stages at SocialRep. After beating the streets for Series A funding over the summer, we read the tea leaves and readjusted to focus our energy on customers and product. In this market, we’re going to live or die by our success in serving customers, not VCs. But bootstrapping a technology company can be tenuous. You need customers, but if you’re too opportunistic and grab at anything you can drag over the doorstep, you’ll quickly fragment your product and team by trying to be all things to all prospects. So you have to be deliberate in choosing customers, which means being a little more slow and quiet than would otherwise seem prudent. When you find a good market vein, you mine it, and pay close attention to the way your prospects frame the problem they want you to solve.

What surprised me was the sudden influx over the past few weeks in the number of companies that found us, and how they framed their interest in our social media offering. The common refrain was that, in the face of an emerging recession, these companies were aggressively reviewing every dollar of their marketing spend. One area in particular was not standing up to scrutiny: Public Relations. These companies complained about spending 5-figure monthly PR budgets on activities that produced activity without results. The mandate these companies had been given was to take the PR budget that was not performing and invest it in something innovative, like social media marketing.

Silencio!!! by Loud VillaNow I know this will provoke some howls, so let me make a preemptive disclaimer. I believe in PR. Or, I should say, I believe in good PR. And having spent 15 years on every side of PR, I can define the difference between good and bad PR. Years ago, when I was the editor of a magazine, my inbox overflowed every day with pitches and press releases that had absolutely no relation to what my magazine covered. Today as a blogger, I still get totally irrelevant PR-spam, more artfully framed as “blogger relations”. This is the lazily “scientific” ethic of bad PR: blast a fire hose of pitches and press releases at everyone that looks like they might be a journalist or blogger, and hope someone picks up your story. In the place of actual stories that influence the market, this approach produces monthly “activity reports” and media mentions in off-the-beaten-path blogs or news feeds.

Good PR is different. It’s about relationships and market expertise. PR companies in this category take the time to hire and train smart people who get to know a market, the competitive landscape, the products, and of course, the analysts, reporters and bloggers. They don’t spam their contacts with press releases; they build relationships based on sharing knowledge and insight. Reporters and bloggers answer their calls because they know their time won’t be wasted, and they may get an important tip. This kind of PR produces relevant stories that influence markets.

The problem is, the ratio of good to bad PR is not good. And even among the better PR companies, an understanding of how to manage the dramatic shift from traditional to social media is still largely predicated on the notion of cultivating asymmetrical influence more than reciprocal dialog. Moreover, few traditional PR companies have the culture to passionately embrace the tech-driven social media paradigm. So in the face of a market downturn, when belts are tightening, we’re seeing companies looking at the money poured into PR, and deciding that now is the time to try something new.

What does “something new” look like? That’s the topic of my next post. In the meantime, here’s a hint: social media marketing is just like PR, in the sense that there’s “good” and “bad” SMM. And the distinction is based largely on the same dynamic–activity vs. results, influence vs. relationships.

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 3rd 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.