Financial Dimensions of Marketing Decisions

David W. Stewart

• Publisher: Palgrave Macmillan
• Year: 2019
• ISBN:
  9783030155650
• Topic: Business
• Subtopic: Marketing
• Index: Business

This book is about linking marketing activities and outcomes to the financial performance of the organization. The theme of the book is that the marketing function must justify its activities and use of resources in terms of its financial contributions to the firm. More specifically, the book focuses on how marketing activities generate cash flow, growth, and other financial benefits for the organization. This perspective provides a framework for long-term investments for purposes of evaluating and ranking the funding of proposed projects.

© The Author(s) 2019

David W. StewartFinancial Dimensions of Marketing DecisionsPalgrave Studies in Marketing, Organizations and Societyhttps://doi.org/10.1007/978-3-030-15565-0_1

Begin Abstract

1. Introduction

David W. Stewart¹

(1)

College of Business Administration, Loyola Marymount University, Los Angeles, CA, USA

David W. Stewart

Email: [email protected]

End Abstract

It’s tempting to consider marketing and finance to be completely separate business disciplines. Marketing is about subjective, edgy, creative things like brands and television commercials. Finance focuses on hard, cold numbers. In reality, as most experienced business leaders know, the two disciplines are deeply entwined in the successful management of a venture. Though it’s not the only factor, marketing is one of the most essential drivers of business profitability and high valuations. Marketing is about revenue generation and growth, which is what drives the financial side of the business. For this reason, marketing and finance are two sides of the same issue, both answering the same, fundamental questions that every business must answer: who will buy our product at the best price? How do we get as many profitable customers as possible? How do we keep customers loyal and returning to purchase again and again? This book offers an approach to answering these questions. Blending basic information about both marketing and finance with case examples and thought-provoking exercises, it enables the reader to develop an appreciation for the way marketing drives finance and vice versa.

An Example

Imagine that you work for the Chief Executive Officer (CEO) of Coca-Cola. He asks you for an opinion on a recommendation by the company’s Chief Marketing Officer (CMO) to raise their advertising budget from $3.2 billion to $3.5 billion. Should Coke spend an additional $300 million on advertising? The Chief Financial Officer (CFO) is opposed, saying the money would be better spent elsewhere. Alternatively, keeping the ad budget flat will increase earnings and drive the stock price up. The CMO counters that the increase in ad spending is actually an investment in the brand, and one that will result in higher sales and earnings over time as well. This was an actual decision facing Coke’s senior leadership in 2013. Already the largest advertiser in the beverage industry, Coke was spending 6.9% of its revenue on advertising at the time (Investopedia 2018).

What should Coke do in such a circumstance? What would you advise the CEO? Is marketing an expense or an investment in an intangible, but extremely valuable, asset known as the brand? Is it both an expense and an investment? How should a company treat marketing from a financial point of view? These are the questions this book seeks to answer. The answers, in turn, are intended to make the reader a better business person and manager with an understanding of how two vital parts of a business, marketing and finance, work together to create value for customers, shareholders, employees, and other stakeholders.

Why Does This Book Exist?

There is a fallacy that marketing and finance are separate disciplines. In reality, they are closely linked. They often overlap, and they inform one another about the current and future health of the business. This is the case even when the people performing finance and marketing functions either don’t know or believe that they’re interdependent. This book’s goal is to enable you to see marketing from a financial perspective and finance from a marketing perspective. When a business leader can operate with this insight, good things tend to happen in a business and other types of organizations as well.

Looks can be deceiving. Finance appears to be a numbers game, a cold, fact-based area of the business world where money talks and everything else walks. Marketing, in contrast, is often viewed as subjective, an arena for creative, artsy types who love talking about soft-edged concepts like brand aura and emotional engagement with the customer. However, finance is not only about money and marketing is about a lot more than image. In truth, both disciplines are about the same thing: how a business sustainably earns, grows, and increases in value. Marketing is one of the main drivers of earnings, growth, and valuation. Finance is about measuring the effects of marketing—from the decisions to operate in specific markets and serve specific customers to pricing, basic advertising and messaging, product design, and the scope of product lines.

Applying these concepts to the Coca-Cola situation, consider the following conundrum: in the middle of 2018, Coca-Cola’s balance sheet showed total assets of $89 billion. Yet, the company’s market capitalization, the total value of the company, was $199 billion at that time (Coca-Cola Investors Webpage 2018). Why are the two numbers so different? The $110 billion premium of entity value over the book value of its assets signifies how the market values the Coca-Cola brand. What is it about Coca-Cola that creates such value in the investment community?

Going further, is the Coca-Cola brand worth more than that of its competitors? Perhaps, a look at the ratio between the stock price and the company’s earnings (the price-to-earnings ratio or P/E) is instructive. Coke trades at around 33 times its earnings (Google 2018a). In contrast, Pepsi’s P/E is just 21 (Google 2018b). Thus, in rough terms, a dollar of earnings generated by Coke’s marketing machine is worth $33 to shareholders versus $21 for a dollar of Pepsi’s earnings.

But wait. Aren’t stock prices based on expectations of cash flow? Yes, they are, give or take various other influences. And there is a connection between brand (powered by marketing) and future cash flows. The value of a brand surfaces in the stock price because of its ability to generate and assure future cash flows. Good products, ubiquitous distribution, television commercials, and a host of other marketing activities transform consumers into cash-generating customers. From this perspective, the intersection between marketing and finance becomes clearer.

Should Coke increase its marketing spending? We still don’t know, but this book is intended to frame an informed answer to the question. It delves into the nature of marketing and finance, both as individual disciplines and as synergistic partners. It gives you a way to assess the success of marketing as a generator of cash.

What You Will Get Out of This Book

This book is for you if you want to become a better, more informed business manager. You will only be great at marketing if you understand finance and marketing’s effects on financial outcomes. Conversely, you will only be great at finance if you understand marketing and how it affects business financial performance and valuation.

You do not have to be a marketing or finance specialist to benefit from reading this book. General managers need to understand how these two functions affect business operations. Reading this book will equip you to view and perform marketing functions with a financial and strategic mindset. These skills are essential to steering a business in the direction of strong growth and robust cash flow. Knowing how to work with marketing while applying financi...