Building bridges between marketing and finance

I recently had the privilege of talking to the inimitable Tony Lamb for a Propolis ‘fireside chat’ webinar focused on ‘How to Speak the Language of Finance’. It’s a broad a complex subject that’s, at least in my humble opinion, fundamental to a healthy, informed business.

The webinar is available to Propolis members but the webinar only covered some of the key subject matter. There’s much more that needs said, a lot to unpack, and it’s worthwhile providing some background to the conversations that led to the interview and share some insight more widely on what I think is an important topic.

This is a long article, much longer than I would normally write, but as I said there's a lot to unpack and it's a bit of a test of long-form in Linkedin.

The pre-discussion

The disconnect between marketing and finance

There’s an assumption in the minds of some marketers and some of those in finance that there’s a divide, a disconnect, even a gulf between marketers and finance. There are obviously functional differences perhaps in culture, risk profile, disciplines and processes.

However, having worked extensively in finance and marketing, at a senior level, I don’t see a divide between Marketing and Finance leadership. In fact, from a leadership perspective, while Marketing and Finance leaders may have robust conversations, it’s normally because there are significant and complex challenges to resolve. There are more bridges than barriers, more opportunities and reasons to collaborate than not and I think more resolve and need today to do so.

Bridge 1: Meaningful conversations

While I don’t think there’s a disconnect, I do think there’s a need for clearer, constructive and productive dialogue, a shared language, a common vernacular. That means marketers needs to be familiar with the language and goals of finance and finance have to appreciate the language and purpose of marketing.

At a leadership level there is a lot of common ground. The best marketing leaders have a healthy understanding of finance, and the best financial directors understand marketing. Neither should be on the leadership team if they don’t.? It’s a ‘leadership team’ after all, not a collection of individuals. It’s also worth saying that understanding the language of finance is pretty much a pre-requisite to business leadership, so too is the language of markets and customers.

More generally I think the best marketers are well rounded, T-Shaped people, even at a functional level, and have a healthy understanding of finance. There are some who don’t and maybe there is some work to do to help them become proficient in the language of finance, or at least not to have any kind of imposter syndrome when it’s used.

Bridge 2: Building confidence and trust

It’s not necessary for marketing to know everything about finance or finance to know everything about marketing. However, business competency in both, for marketers and finance personal who interact with each other is clearly preferred. It’s imperative that both parties are clear, consistent, that they use the same language, appropriate terms and know precisely what they mean.

Quantification, evidence, proof and clearly communicated assumptions also help to build confidence and trust. They help build common understanding and open the door to collaboration and alignment of goals and objectives. This requires reliable data, information and insight. Today it’s inconceivable that finance or marketing would not use the wealth of data and information available to them.

However, it’s important they use the same data sources where possible. It’s important they interpret the data in the same way and that it informs common metrics, measures and decision-making. I’ve seen instances where data, information and insight aren’t shared effectively where access to some data is difficult for one or other party, that doesn’t help build confidence and trust.

It’s also critical that from a leadership perspective the dialogue remains strategic, focused on customer and commercial outcomes and doesn’t become too tactical or focused on either marketing or finance, functional performance.

Bridge 3: Two sides of the same coin

There are many ways marketing can build bridges with finance. Some of them depend on deeper understanding of the culture, goals and objectives of finance, others are within the gift of marketing.

Finance has to be objective and rational. They have a fiduciary duty, a responsibility to the executive team, the board and shareholders to manage the financial affairs of the business responsibly. That means careful control of costs and business risk. However, it also means supporting opportunities, forecasting revenues and asset growth.

Marketings’ job is to find the best opportunities, build intangible assets and develop plans to exploit them commercially. Like any other discipline, marketing also has to optimise costs which we’ll come back to a little later. So, this is a marriage made in heaven, a symbiotic relationship focused on mutually agreed costs and commercial opportunity - it's not a divide.

Bridge 4: Orchestrating commercial strategy and operations

What’s needed is a clear viable commercial plan, endorsed by marketing and finance. A plan, that at the highest level is clearly focused on why the business should support the plan and what the outcomes will be. Those outcomes need to be explained in terms of the commercial and customer value that will be delivered and the commercial strategy and operations that will deliver them.

In my view this is not a marketing plan. It’s an integrated commercial strategy and operations plan. A marketing plan is often about execution, this is not, it’s a more comprehensive, meaningful and relevant plan to support critical business decision-making.

This more comprehensive strategic perspective is, in effect, a re-definition of marketing, a new bridge between marketing and finance and any other discipline in the business. It’s not simply about marketers becoming ‘commercial marketers’, marketing in my view has always been commercial. It’s a repositioning of marketing, a rebirth of what I recognised as strategic marketing many years ago. I think it’s a reflection of what marketing should be about, and that’s the orchestration of commercial strategy and operations to build and deliver commercial and customer value.

Bridge 5: Acute focus on commercial and commercial outcomes

Re-enforcing connections with finance isn’t just about mastery of financial language, it’s about building confidence. That means explaining where the business should choose to compete, how the business will win ‘in-market’, how much it can win. In this respect a key connection is in demand planning and quantified market opportunity management, in effect, how much market opportunities are worth and when they are likely to be realised.

There are also bridges between marketing and finance in formulating pricing and perhaps more importantly discounting policy. This is a critical discussion that simply doesn’t have the profile it deserves. It’s imperative that marketing and finance collaborate on pricing strategy, that they have a mutual understanding of market dynamics and price sensitivity in specific markets. It should be an ongoing bipartisan discussion because it has a direct impact on customers, competitive positioning, revenue, margin and cash flow.

There are many other metrics and measures that reflect common interests between finance and strategic marketing. It’s important that marketing understand these, the impact of marketing can have on them and how to use them to demonstrate the contribution of marketing to the business.

Some of the key ones include Market sizing and Compound Annual Growth Rates, Market share, Revenue growth rates, Acquisition rates, Conversion rates, Sales Velocity, Win-rates, Costs of Acquisition, Cost to Serve, Customer profitability, Price variation, Price Sensitivity, Margin growth rates, Churn, Attrition and Retention rates, Revenue at Risk, Order to Cash, Cost of sales, Cost of marketing, Cash flow, Customer Life-time Value, CAC-LTV ratios, Customer Satisfaction.

Bridge 6: Prioritising margin and cash flow

Everyone would accept that revenue is a key measure for marketing. However, margin and cash flow don’t appear to have the same focus and they should. Marketing can have a direct and profound effect on margin. For example, effective brand building can help amplify customer pre-disposition, drive lower price sensitivity at the same time as reduce costs of acquisition, in effect create opportunity to maintain or increase margin.

It’s amazing how low the profile of margin management is in marketing, it’s almost never discussed, and if it is it’s one stage removed, a discussion about ‘long-term brand building’ vs activation and the 60 – 40 rule, and that’s simply not detailed enough.

Marketing also has a critical role to play in managing cash flow. For example, short term tactical campaigns can be used to drive cash flow, driving ‘good customers’ that are acquired quickly, at lower cost, that pay on-time can have a profound effect on cash flow.

Great marketers know this, but it’s arguably time that a new priority should be set in discussing margin and cash flow from a marketing not just financial perspective. The discussion should focus on the quality and rate of cash flow, what it looks like, how more can be generated in existing or new markets, what the shape and rate of that flow might look like and how it can be improved. This is an important topic for marketers and finance that directly affects strategic planning for both.

Bridge 7: Intangibles and intellectual capital

Marketing are the custodians or at least have material influence over of some of the most valuable assets any business has. These include brand, customer relationships and customer experience. They also have responsibility for some of the most powerful tools including market and customer insight, propositions, offer development, pricing, communications and advertising.

It’s incumbent on marketing that they explain how these assets and tools are being used, how they are growing or not and where possible what they are worth. This is another opportunity to work with finance team, to co-develop reference models and approaches for intellectual capital and intangible asset management. Unfortunately, however, the maps and reference models that could enable this conversation aren’t well developed.

Bridge 8: Stop talking about Marketing ROI

We didn’t discuss Marketing ROI in the webinar, but it was part of the pre-discussion. It’s an important topic, simply because Marketing ROI is a fools’ errand. Despite Sharp, Ritson, Ambler, Binet and Field all saying it’s waste of time, even dangerous, it still seems to dominate ‘marketing measurement’ conversation. Of course, some people use the term Marketing ROI as a proxy for marketing impact, efficiency and effectiveness. If that’s what’s meant, don’t use the term ROI, it’s misleading and won’t help build credibility with finance.

‘Marketing ROI’ persists even though it can’t be calculated and even if it could, it doesn’t inform marketing strategy or operational decision-making. There are far better metrics and measures to use, ones focused on commercial outcomes, ones that are useful and ones that provide deeper insight into marketing efficiency and effectiveness.

So, what is ‘Marketing ROI’, well let’s start with ROI as an investment calculation:

ROI = (Net profit or return / Cost of investment) * 100

However, here’s what’s wrong with Marketing ROI:

• For any ROI calculation you need to be very clear about what you are ‘investing’ in. The definition of what marketing is in most businesses is unclear and inconsistent.
• Marketing is a mix of cost, expenditure and investment – ROI is about investment
• Marketing has no start or end – it’s a continuous process – ROI is about returns from a ‘defined investment’, with a start and an end – it could arguably be used for campaigns, but why would you, there are better measures of campaign success.
• There are real challenges attributing revenue and costs and the cost of investment can also be difficult to calculate with any accuracy
• It’s not a comparative metric – the conditions for comparison have to be identical and in marketing they are not, even from one campaign to the next – it can’t be used for benchmarking or comparative performance over time.
• It doesn’t distinguish between long- and short-term investments
• It’s easy to manipulate – reduce investment, ROI goes up
• It's actually a measure of a point in time - the point at whichj you make a retrun, not to be confused with maximising profitability.
• It doesn’t really tell you anything – based on the above, what action would you take based on an ROI calculation?

Here’s a question – as a marketing leader, do you really want to be tied to a single meaningless marketing measure like ‘Marketing ROI’? No, develop variable scorecards that reflect the commercial strategies and operations you’re trying to execute, make the measures match the strategy.

The webinar

In the webinar Tony asked 5 key questions about how business leaders perceive the value and contribution of marketing to the business:

1. How are marketing efforts aligned with business objectives?

• Leadership know marketing is important – Most business leaders know marketing is important, they appreciate what it does. What they’re looking for is clear explanation, in business and financial terms about its contribution, not marketing ROI, but why certain commercial strategies and operations are important and what their commercial and customer impact will be.
• Focus on why and outcomes, not how – For marketing to be ‘in the strategic conversation’ and part of goal setting it needs to focus on why the business needs to do something and the customer and commercial outcomes that should be expected. While execution and principles of operation are still important, that means leaving the functional conversations, the execution, to the functions, focus on why rather than how.
• Clear definition is critical - To know how marketing efforts are aligned we first have to be clear about what marketing is, it’s strategies, operations, disciplines, processes, responsibilities, performance and outcomes. Often, the definition of marketing is not clear or it’s too tactical, making measurable connection to business outcomes difficult. There needs to be an agreed reference model. I’d argue that reference model is not just about marketing but should reflect all commercial strategy and operations disciplines and how marketing is in a unique position to effectively orchestrate them.
• Focus on business outcomes - There are many connections that can be established to align marketing with business outcomes. That means marketing focusing on real business outcomes like market growth rates, market share, quantified market opportunities, revenue, margin, cash flow, acquisition rates, retention rates, CAC, CTS, Sales velocity, win-rates, CAC-LTV ratios, intellectual capital and intangible asset value, VoC, Customer satisfaction and so on. Marketing must demonstrate that it understands these linkages and knows how to manage them, which levers to pull and their consequences.
• Alignment through GTM strategy – marketing is in a prime position to set business objectives, at least regarding GTM strategy and execution. That’s if you consider a more expansive definition of GTM strategy, not one just focused on ‘marketing’ and communications, but a strategy that coordinates everything from the ‘big idea’ through market prioritisation, customer profiling, opportunity and offer management, product and service configuration, how to win in market, pricing & discounting, market fit, market entry, adoption, accelerated growth, expansion and ultimately exit.

2. How does marketing impact contribution?

• It’s about more than ‘marketing’ – leaders want to understand commercial strategy and operations, the impact the business will have on customers and markets. That’s something that marketing should ‘step up’ to, it’s something marketing is in a position to explain. ?But it’s not simply about distribution of marketing spend, communications, campaigns, that’s the how. In terms of financial contribution, leaders want to know what’s the commercial impact, how will specific initiatives affect revenue, costs, margin and cash flow, how will the initiatives build capital asset value and drive share price. Marketing needs to be able to explain this.
• Contribution margin marketing - Marketing creates revenue opportunity and has significant influence over contribution margin, that’s the margin encompassing variable costs only (rather than all costs which would be gross margin). Through brand building and effective pricing strategy, marketing can create, protect and grow margin. In many ways it’s a reflection of marketing performance, the ability to drive significant sustainable contribution margin over time. No one would argue that revenue isn’t an important metric, but arguably for marketing contribution margin is more important. Marketing is in a unique position to influence contribution margin and margin, along with cash flow are the lifeblood of the business.
• Clean cash flow – Nothing hurts a business more than slow, inefficient or dirty cash flow, other than no cash flow at all. Marketing has a role to play in ensuring good, clean cash flow. They can help drive short term cash flow through promotions, focus on acquiring better customers that are easier to sell to and pay on time, have lower CAC, lower cost to serve, who are regular, reliable repeat buyers. All of this helps create steady, efficient cash flow. This is a conversation about the flow of business and cash, it’s how marketing can talk the language of finance.

3. How does marketing impact our relationship with customers?

Marketing clearly has a direct effect on the business’s relationship with customers. Most of marketings objectives have some impact on the relationship with customers. However, the value of that relationship is rarely quantified properly.

Historical CAC and LTV are relatively easy to calculate, predictive CAC and LTV are notoriously difficult and challenging, both historical and predictive are often cited as measures of customer relationship value. But there’s often an overemphasis on Customer Life-time Value, and less emphasis on Cost of Acquisition and Cost to Serve, when what’s required is a more effective CAC+CTS to LTV Ratio.

However, although these measures reflect cost and longevity, and are useful, even these kinds of calculation don’t explain the true value of the relationship, they’re more an internal customer value calculation. The value of the relationship lies in its stability, perception of value, pre-disposition, reach, mental availability, stickiness, persistence, price, willingness to pay, fulfilment, feedback, co-creation, VoC, mutual trust and confidence – there’s a lot of work to do to understand more about the intellectual capital and intangible asset value of relationships and what they are worth to the business. This is something that marketing and finance can work on together.

4. How are marketing efforts differentiating the business?

Putting aside the debate about differentiation and distinctiveness, leaders in business want to know how commercial efforts make a difference in the market. They want to know relative market performance, where new opportunities are, relative competitive position and reputation in-market, it’s pricing strength and elasticity.

It’s not really a question of differentiation, it’s a question of how to win in market, it’s market strength and opportunity. And the strategies developed to answer that question are important, they affect financial performance in terms of the balance sheet and P&L, but they also affect external investment and share price.

It’s also a question of core competency or hidden competitive advantage, the proprietary capabilities and knowledge that a business has. Some of these assets which are extremely difficult for competitors to replicate are heavily influenced or indeed controlled by marketing, or at least a more expansive form of marketing orchestrating commercial stategy and operations. Intellectual capital and know-how like effective opportunity management, brand-building, relationship management, channel management, customer experience management and so on. How a business is positioned and perception of its relative success and potential future affect its value.

5. Where is business growth coming from now and in the future, and how do we capture it?

Leaders are keen to understand where growth comes from, and marketing are in a position to help. They need to help leadership focus on the right customers and market opportunities and unravel market, customer and operational complexity so that the right decisions can be made.

This is a question of quantifying and prioritising market and customer opportunity, why specific opportunities have value and how to manage them effectively now and in the future. It’s a question of which customers are valuable now and, in the future, and how the business remains relevant to them.

To an extent data, proprietary market and customer insight can help here, so too can predictive, causal and probabilistic analytics, Marketing Mix Modelling and econometrics, data mining and AI, but it’s strategic choice and decision-making regarding customer and commercial value that matters more. These choices and decisions rely on effective collaboration between finance and marketing.

There’s a growing recognition that different approaches are required to understand and respond to the complexity of markets and operations and that solely relying on the linear, predictive and rational models we are all so familiar with don’t really cut it anymore. New ‘shorter’ iterative but nevertheless strategic approaches, sensing and probing markets and customers, digging deeper into behavioural economics, the ‘language and culture’ or customers, the psychology of customer perception, choice and decision-making may hold many secrets, some will no doubt be the keys to growth and smarter commercial decision-making.

Conclusion

It’s time to abandon the parochial debates around ‘marketing performance’ and get back to a bigger picture about commercial strategy and operations and the delivery of commercial and customer value. This isn’t something new, a new kind of marketer, a commercial marketer, it’s a re-focusing of commercial strategy and operations on business and customer outcomes. It’s re-setting the agenda for reintegration and orchestration of multiple commercial disciplines, the removal of silos and partitions.

Marketers need to demonstrate competency in customer and commercial value management, mastery of commercial strategy and operations. They need to be conversant and in some cases expert in the use of financial language. However, they also need to lead the discussion, engage key stakeholders in new strategies to find new market and customer opportunity and explain how the business can win in-market.

The bottom line for me is that marketing needs a new narrative, a more comprehensive remit, a strategic perspective focused on orchestration of commercial strategy and operations and the delivery of customer and commercial value. It’s this that will elevate the debate and reposition marketing as the strategic business driver it should be.

Supplementary questions

How do you see the increased focus on the customer changing the role of marketing in organisations?

This is a bit of a tricky one. Firstly, I don’t see an increased focus on customers. Great businesses have always focused on customers and in my view great business leaders have always focused on three things employees, customers and other stakeholders. There isn’t a new or renewed focus on customers, it’s just that it’s easy to get wrapped up in internal issues and everyone needs reminded from time to time that there are customers out there paying our salaries.

Marketing, as the Voice of the Customer, can be the business’s conscience, a constant reminder about current perception, reputation and customer value. Marketing should be orchestrating the strategies and operations that deliver customer value, communicating that value widely in the business, that’s not new, it has always had relevance and in my view is one of the primary responsibilities of marketing, at least a more expansive form of marketing.

Why do you think it’s important to have marketers in the boardroom?

This is another tricky one. On one hand there is little or no value in ‘execution-based’ marketing being in the leadership team or in the boardroom. By that I mean, ‘marketing’ focused on tactical communications, campaigns and channels – the how.

However, marketing that’s broader in scope, encompassing commercial strategy and operations and the delivery of customer and commercial value. This kind of marketing is absolutely critical to effective business leadership and should be in the boardroom, and here’s why:

1. Business is about three things: (i) Customer value creation and delivery. (ii) Commercial value creation and delivery. (iii) Stakeholder returns
2. Marketing (or an extended version of marketing that transcends commercial strategy and operations) has a pivotal role to play in all three
3. Arguably a board without marketing is blind to the dynamics of markets and the needs of customers, it may fail to amplify opportunity and intangible value that marketing can create – and up to 80% of corporate value is embedded in many of the intangible assets and intellectual capital that a broader more strategic marketing effort would include.
4. Effective marketing is largely about proprietary insight, management of perception and reputation and the VoC, it’s also the conduit for customer and operational alignment. Marketing in a strategic capacity is essential to the creation and delivery of sustainable differential advantage, customer and commercial value, it’s a critical, component of business.

Do you have 3 top tips for Marketers to help them make the transition to the top table of the organisation

1. Stay strategic – focus on why the business should prioritise and adopt specific commercial strategies and the outcomes that will be delivered in the form of customer and commercial value – remain obsessively focused on current and future markets and customers and where value can be created and delivered by the business now and in the future
2. Be crystal clear about commercial strategy and operations and make sure they are aligned to objectives, metrics and measures that matter to customers and the business
3. Build commercial operating models that deliver commercial strategy and make it easier for customers to buy from the business

The final question...

With your Adaptomy DNA framework, how have you seen organisations using this to gain internal support and build more value for the customer?

• AdaptomyDNA is a customer and commercial value management framework – entirely focused on commercial and customer outcomes
• Originally created to overcome the lack of effective measurement, clarity, consistency in marketing – over may years of practical application it has expanded to cover commercial strategy and operations – it expanded because there is no commonly accepted definition of marketing and there’s a clear need to integrate commercial disciplines
• It’s a methodology developed through research, theory and practical application over the last few decades.
• It’s a non-prescriptive, configurable method for systematic development and execution of commercial strategy and operations
• There are over 70 discrete but connected commercial disciplines, processes, diagnostics, metrics, measures, tools and techniques
• It’s used to create a common language and vernacular – a way for anyone involved in commercial strategy and operations to be clear, to be consistent
• It’s used to build and navigate critical paths for scale-up and commercial growth, to help deliver GTM strategy, ABM+, Commercial Due Diligence
• It’s a reference model, a framework for commercial capability building, intellectual capital and intangible asset management
• AdaptomyREACH is a new community to share it with like-minded commercial innovators - it is a unique combination. You can find out more and register interest here .