FEBRUARY 15, 2005

By Christopher Kenton

The Value Challenge for Marketers

They need to forge a deep understanding of how marketing activities affect the bottom line -- and the ability to communicate it

In his book, Management: Task, Responsibilities, Practices, Peter Drucker states: "Because [the] purpose [of business] is to create a customer, the business enterprise has two -- and only these two -- basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business."

Compare the gravity of that statement to the street credibility of marketing as a profession today. A more accurate statement of reality would be: "Marketing is an obligatory cost of doing business that needs containment."

So what happened? When did marketing lose its moorings, and how can it be redeemed? After visiting with Brand Finance's Jonathan Knowles to talk about the impact of business valuation and intangibles on the role of marketing, I was interested to learn his opinions about how marketing needs to reform.

EXTERNAL VS. INTERNAL.  The Drucker quote came by way of an article in Professional Investor, in which Knowles explores the breakdown between marketing and finance, and the implications on market performance. Knowles' analysis' has a lot of depth, but the article's crux centers on differing definitions of the concept of "value" between marketing and finance people, and how value is created.

From the marketing perspective, Knowles argues, value is a customer concept. It represents the ratio between the perceived benefit that a product or service offers and its cost to the customer. In essence, value to marketers is a concept external to the company. From the finance perspective, the notion of value is about the bottom line. It represents the ratio between the price you can get for a product and what it cost to produce and deliver it. To finance professionals, value is a concept internal to the company.

These differing concepts about the meaning of value aren't just philosophical -- they drive everyday decisions with real implications for business performance. Finance managers are highly focused on operational efficiency, while marketers are typically focused on innovation. The resulting conflict, Knowles points out, leads financial professionals to harbor the belief that marketers are ignorant about the economic consequences of their actions, while marketers accuse finance of knowing the price of everything and the value of nothing.

Both perspectives contain some truth, but the real danger is that both miss the complete picture.

BALANCED FOCUS.  Says Knowles: "The fundamental challenge of business is to understand how to deliver customer value. But for the business to be sustainable, you need to understand how to do so at a cost that leaves you with adequate profit." He goes on to provide an equation that defines market success as a quantifiable customer benefit divided by its economic cost.

If that sounds hard to follow, think of it in simpler terms. If you focus too much on the customer benefit, you risk going bankrupt. If you focus too much on minimizing costs, you risk losing your market.

The challenge is finding balance between the discipline of efficiency and the craft of innovation. No, that isn't code for safeguarding the right for marketers to claim their practice is an art, any more than it's justification for CFOs to turn marketing into a customer assembly line. It's a reminder that dogmatic dedication to efficiency alone, or innovation alone, is a recipe for disaster. But the balance is tipping ever more forcefully toward efficiency, and marketers haven't figured out how to slow it.

PARROTTING WON'T CUT IT.  It would be ideal if financial professionals appreciated the uncertainties and imprecision of marketing reality. Customer relationships are difficult to measure, much less measure for predictive analysis. While technology is vastly improving analysis, areas will always exist that resist financial modeling. Einstein himself once said, "Not everything that counts can be measured, and not everything that can be measured counts."

But marketers aren't in a position to change the mind of financial professionals or to attenuate the appeal of disciplined efficiency. The only option for marketers is to improve their ability to communicate meaningfully in financial terms in order to provide a credible justification for their programs and strategies. Learning to parrot financial language won't cut it. When, for example, marketers talk about ROI as a synonym for "beneficial outcome," they're simply making fools of themselves.

More important, when marketers frame the increasing demand for accountability as an exercise in performance metrics, they're missing the point. Marketers need to forge a deep understanding of how marketing activities affect the bottom line, both in terms of generating top-line revenue and drawing on bottom-line profits. The danger with metrics is that they often give marketers the false sense that they're proving value, when many of the most popular metrics -- like brand awareness or market share -- have very little use for predicting future financial performance.

BEYOND REACTING.  This simply elevates the stupidity of parroting financial terms to the parroting of financial tools, without understanding that the purpose isn't just to put some numbers up on a chart but to improve the real market value of the business.

The clear message is that the necessary reformation of marketing requires more than just reactive measures. While marketers should never retreat from their dedication to innovation, they need to learn the discipline of efficiency in the service of creating value -- not just for the customer, but for the company.