Bring CFOs and CMOs back together with a little bit of marketing literacy.

CMOs and CFOs are less and less connected.

Over the past decade, we’ve witnessed a progressive limitation of CMO’s scope on “Marketing Communications”. Due to that, CMOs are increasingly coming from schools specialised in advertising and communication, or with a background in social or political sciences, rather than the more “traditional” business schools or Management Universities background. Through this, CMOs have progressively started losing their financial literacy. For example, CMOs are usually Top-line or volume results oriented whilst, as a CFO, you are more oriented on profitability. As a modern CFO, it’s now your role to cross the chasm.

The CFO-CMO relationship can have common positive effects in many areas including value creation, profit, pricing, revenue growth, sales or protection of intangible assets to name a few. Modern CFOs need to understand the power of marketing as a growth driver but at the same time, they need to be aware of Marketing specificities to understand and challenge the CMOs expectations. I’m not really an expert in cutting-edge finance, but my 20+ years of experience as a marketing consultant dealing with various CMOs from various industries, I learned a few useful things for both CFOs and CMOs.

Here are my top 12 takeaways, free of charge! (just don’t get used to it)

N°1: Help CMO create value by taking back the entire Marketing scope

The fundamental job of a marketing leader is to create and develop sustainable value for your company. And the marketing mix can only be efficient when it is consistent. However, over the past decade, marketers have progressively lost control over product, service, pricing or placement, some of the key levers for creating value. They are now increasingly restricted to pure promotion or doing “marketing coms”: social media posting, organising PR, optimising SEO or SEA, work on big advertising campaigns, etc. In fact, according to a study published by Forbes in 2020, this is one of the main reasons why they’re twice less likely to last in their position compared with CFOs. If they can’t have an impact and help innovate on product, service, pricing, distribution, etc., CMOs have no story to tell the market (retailers, partners and end consumers), no result to present, and therefore their job has no real purpose.

On the other hand, there’s no miracle: simply switching a product’s colour from blue to red, without any financial resources or other lever, isn’t going to cut it.

N°2: Marketing can create pricing power and value perceived beyond the brand.

In a context of major inflation, “brand preference only” based models seem to have a lesser effect on purchase decision. But Marketing has many different levers beyond the brand to create perceived value, such as new design functionalities, additional services, complements, values, etc. Ask your CMO for a brand leverage effect assessment, in order to assess and prioritise investments.

N°3: Consider the risk of NOT taking action.

As a CFO, you are best placed to assess the risks in taking action, but there isn’t any method or Microsoft Excel formula to assess the risk of doing nothing (in terms of sales, intangible assets, facing a competition which is acting). Connected to market trends and competition, your CMO may be better to assess this type of risks. Bear in mind that, when you are investing, you are not predicting the future, you are actually paving the road to it.

N°4: Adopt a “Marketing as CAPEX” mindset.

There are a lot of rules for stock markets and local tax authorities that you can’t avoid. Here, I’m talking more about your mindset rather than your balance sheet. If it creates value or goodwill, and if it’s measurable, beyond finance convention, brand building should be valued more than just OPEX. CMO are often short-term oriented too. Try to challenge your CMO to consider “MAPEX” more as “CAPEX” than “OPEX”, and it will most likely change its own point of view, from “using and trashing something” to “invest on building something strong”, with long-term perspectives.

N°5: Benchmark the market to challenge your CMO’s results

Marketing budgets are usually expressed as a proportion of turnover. Whether you’re a B2B or B2C company, if you’re investing less than 2% of your turnover, you’re not really doing marketing. And if you’re a major FMCG or B2C brand, you should actually be investing around 10% minimum…

Because of a bunch of parameters, marketing can either work, exceed expectations or… not. It will be the same for the whole market. Open your eyes, ask your CMO for an industry benchmark of marketing budget and results. Challenge Marketing team performance objectification by comparisons. For example, compare share of voice (% of paid media expenses) VS market share (%). “Extra Share Of Voice” (ESOV = Share Of Voice minus Share Of Market) is a good performance indicator. Or compare sell out performance during marketing activations or after a specific change on the marketing mix (price, feature, etc.).

You WILL need data to compare (sell out panels, market media expense, consumer studies, etc.). So, check that your marketing team didn’t forget to consider a part of the marketing budget for data and studies, which are equally important for you.

N°6: A not so comfortable “direct vs indirect costs” rule.

Direct vs indirect costs allocated as specific cost to a specific products line/activity, especially if your company has a “business line” organisation, is a traditional and mature way for cost allocation. But advertising and marketing communications on a specific product line also have an impact on awareness and attractiveness on other product lines. It’s called “the brand halo effect”. When Apple invest on “iPhone” visibility, it has an impact on brand awareness and desirability on “Mac Book” too.

So, for example, you shouldn’t consider advertising or marketing costs only as a direct specific fixed cost if all your product lines have the same brand.

N°7: Be careful about the “more contributing product”

As the “brand halo effect” seen before, there’s a “product halo effect” that you need to consider.?“Product halo effect” is typical for premium and luxury brands. Several years ago, I’ve worked on advertising campaigns for renowned French design and furniture brand “Roche-Bobois”. What was interesting here was that we used some iconic premium and expensive products on ads to create attraction, “willingness to pay” and drive traffic in stores. In the end, the advertised products were never the best sellers or the most profitable, but the one’s that created business value for the whole range and the brand. People wanted to buy a product from the brand which creates this “such an iconic product” feeling, but they didn’t want to spend the money to buy said iconic product. With this value and image transfer phenomenon, they purchased cheaper products from the same brand.

As a CFO you need to understand the difference between contribution to profitability VS contribution to image or traffic – and be careful not to make the mistake of investing in marketing only on the more profitable product with the biggest contribution margin.

N°8: The tricky “Working vs Non-Working” thing…

When I started in the business, 20 years ago, budgeting advertising campaigns was simple. Marketing budget was around 10/15% of global turnover. 80% of advertising budget was used for paid media expenses, 10% for creative consulting fees and royalties, 8% for production and 2% for media planning consulting. Creative or content assets had a life cycle of 2 to 3 years.

The advent of digital and social media turned this system on its head by making online advertising more affordable. The minimum level of paid media investment required to be visible went down. A lot of companies, which up until then were totally unknown, became “baby advertisers”. For the biggest advertisers, frequency of paid media investment became more intensive, and creative assets became commodities with a short life cycle. Now, in terms of budget, most CMOs are worried about balancing their “working” (media) VS “non-working” (asset creation) expenses (which really translates into: “How can I pay less for creative assets to give more to Google?”). This became unbalanced in favor of creative assets simply because how much cheaper the entry ticket to paid media became.

It may be quite confusing for a CFO, because “non-working” called assets can be “amortised” over several uses or years, but instantly burned (“working”) paid media can’t. So, as a CFO you can counter-intuitively conclude that CMO want to invest more on “Marketing OPEX” than “Marketing CAPEX”. And that’s the way it goes.

Looking at your budget, keep in mind that under a certain level of budget:

• It will be cheap, and the “non-working” part won’t work, like really not.
• It will be the same for the “working” part of the budget.

If you don’t have enough money to do both in a suitable way, then don’t. Save your money by making bigger bets. Keep the budget aside and double it next time.

N°9: To have an impact, stay focus and don’t dilute your budget

Spreading marketing budget in lot of little budgets, for each product manager or business line, is a counter-intuitive way of working for every experienced marketer. For bigger impact, consolidating budget on bigger bets is often better. Unfortunately, experience taught me 90% of marketing teams don’t work like that. To paraphrase a French saying, marketing budget [confiture in the original saying] is a bit like confiture … the less you have the more you spread it.

N°10: Fixed vs variable costs DO exist in Marketing too!

As a CFO, you often consider marketing expenses as fixed costs. But some marketing levers are in a way variable such as affiliation, CPA, SEA or, for example, some social influencers who are OK with incentive depending on results. Your marketing team can’t manage a long-term brand & equity performance through this type of marketing lever, but for activation plans or online sales, variable marketing costs can be relevant.

N°11: Marketing is a Marathon, not a sprint

Differentiation strategies work, but it requires efforts in building brand equity. In their study “The Long And The Short Of It”, the Institute of Practitioners in Advertising (IPA) unveiled that judging success only over the short term can be dangerous. Particularly because levers to obtain short (volume) and long-term (pricing/value) effects are both different and complementary in a long-term view. They suggested an optimum balance of 60/40 between brand and activation expenditures.

Following these observations, it can be cruel, but keep in mind that long-term awareness gives a strong “equity effect bonus” on activation. You’d probably need 2 EUR investment on an unknown brand to have the same activation effect than 1 EUR invested on activation for a well-known and reputable brand.

N°12: sometimes Marketing works, sometimes it doesn’t…but it’s not always because of Marketing!

Marketing is a complex mix of certitudes and luck. External elements can have a negative or positive impact on your results. Your own marketing mix is a driver (communication, pricing, new product, etc.) but external drivers are important too. For example: seasonality, competition activity & pricing, regulations, inflation, unemployment rate, etc. To better understand the impact of all these elements on your business, you should give and additional budget to your marketing team to implement a Marketing Mix Modelling solution or to deploy test & learn processes (dynamic pricing, test on sample, market tests, etc.).

Part of your job is to assess risks, so don’t be shy to ask your CMO to assess best and worst cases scenarios with an estimated probability.

As way of conclusion, bear in mind that, as a CFO, your job is to better understand marketing. By the same token, your CMO must better understand finance. And BOTH OF YOU have to better understand data in order to make informed decisions.