Creating A Common Economic Purpose For Long-Term Growth Investment

Despite big investments in digital, data-driven, and modern marketing – many organizations struggle to make investments that drive consistent revenue, profit and share price growth. “One of the most important strategic objectives for marketing and C-suite executives is to make marketing investments to build strong, enduring brands that provide superior long-term financial performance that drives growing shareholder equity,” Reports Bob Liodice, the CEO of the Association of National Advertisers. “Building brands and brand value becomes a primary objective of a CEO and the Board of Directors because these assets are foundational to the roles of the CEO, the CFO and the CMO. Without consistent investment in brand value over the long term, the ability to sustainably grow revenues and profits becomes increasingly difficult and is accompanied by declining probabilities for success. Those institutions that follow this well understood “formula” will be rewarded with distinct competitive advantages and higher probabilities for generating superior returns on investment.

A big reason corporate leadership struggles with the long-term growth formula is they can rarely agree on the big questions about their growth strategy and a common economic purpose for marketing. “With all the focus on advanced analytics and data-driven marketing, much progress has been made in tactical aspects of marketing execution, but not necessarily on the fundamental math of growth in a business”, reports Professor Dominique Hanssens of the UCLA Anderson School of Management, the co-founder of the marketing mix modeling company MarketShare, and Author of the book the Long Term Impact of Marketing. “In my experience, executive teams that make the big growth bets often lack consensus and alignment on fundamentals like the long-term value of the brand to their business, the true cost of customer acquisition, and the right balance of customer acquisition relative to customer retention”.

So why is aligning around a common economic purpose for long-term growth investment so important? To begin to understand the implications, consider the big bets organizations are making to drive the corporate growth agenda today:

·        Brand Building – Investment in brand building has more than doubled in the last five years according to the Duke CMO Survey as firms seek to protect and grow their greatest financial asset;

·        Sponsorships – brands will spend over $66 Billion globally on sports, entertainment and cause-related sponsorships in pursuit of “live eyeballs”, unique experiences, and credibility with socially conscience consumers;

·        Customer Experience - Worldwide spending on customer experience (CX) and relationship management (CRM) software grew 15.6% as 81% of marketers say they will compete completely on the basis of CX according to Gartner;

·        Big Data And Analytics - Advanced analytics will make up 11.5% of marketing budgets by 2020 according to the most recent Duke CMO survey;

·        Account Based Marketing – B2B CMOs will spend over a quarter (28%) of their marketing budgets on Account Based Marketing programs this year according to an ITSMA survey of B2B CMOs.

All of these “big-bet” initiatives have two things in common: they’re all proven to be effective at growing future revenues, cash flow and profits; and they are all long-term growth investments that will take more than a year to pay off in future revenues, cash flow, and profit. 

The second point is the challenge. These growth strategies represent significant “capital expenditures” that will deliver significant payback down the road in various forms—but not in short-term sales bumps. These are growth assets that change customer behavior in ways that will generate future revenues, cash flow, pricing power, and profits. For example, brand preference, owned digital marketing channels, and marketing capability (organizational know-how) are long term investments that are causal of firm value according to academic research compiled by the Marketing Sciences Institute—but their payback is measured more in years than months.

This growing role of data, technology, content, owned marketing channels and cause-related sponsorships has turned up the dials on one of the fundamental tensions of the CMO role: balancing long-term strategic investments with short-term performance tactics. The CMO is being asked to raise funds for a multiyear technology, brand, and sponsorship roadmap to support the customer experience and long-term brand building, while at the same time balancing short-term demand generation tactics to drive sales. But the deck is stacked in favor of short-term initiatives and CMOs struggle to muster credible rationale for their longer-term strategies.

There are several reasons for this short- vs. long-term imbalance.

The first problem is that conventional measures of marketing effectiveness such as marketing attribution, ROAS, and mix models are not good at quantifying the value of long-term growth investment. They are far more tuned to optimizing a narrower set of short-term initiatives. “Marketing attribution and mix models are useful but are limited because they only look at part of the marketing equation and tend not to balance short term and long-term impact of marketing investment on firm financial performance,” says Professor Hanssens. “Marketing attribution models are mainly used for tactical purposes, making each advertising and sales promotion campaign a little better. Marketing mix models are more comprehensive since they look[ph1]  at more aspects of the marketing mix beyond media - but most applications have a short-term focus”.

Another problem is these models tend to ignore important pillars of growth such as the effects of customer equity, brand equity and innovation on financial performance and firm value, according to Hanssens. So they tend to be useful for the optimization of media, campaigns and tactics – but much less so to inform corporate growth strategy. “There is no A/B test for the big strategy and trade-off decisions the CMO needs to make, where you are either all-in or out,” according to Elissa Fink, former CMO of Tableau.

More fundamentally, the marketing mix and attribution models do not clearly describe how a business grows and their “black-box” designs are often poorly understood by the executives[ph2]  that are being asked to trust them to make investment decisions. So it’s not surprising that most CMOs are not using data to support their growth strategy and resource allocation decisions, and two thirds could not demonstrate the contribution of marketing to firm sales and profits with the data they have, according to a survey of 500 Global CMOs in the Forbes Marketing Accountability Report

The ultimate problem marketers face in proving the value of long-term marketing strategies is they try to run before they can crawl or walk when it comes to analytics. Many try to tackle advanced calculus in their zeal to be data-driven and fact-based when their leadership team doesn’t even agree on the basic arithmetic of how their business grows. Most CMOs tend to jump to highly sophisticated, proprietary and laser-focused models of marketing performance when their peers in the C-suite don’t understand or even agree on points like the role of the brand on customer loyalty and pricing power, or how much innovation or customer experience investment is required to acquire new customers.

The answer to these problems is surprisingly simple: don’t try to run to fast analytically before you can crawl or walk.  Start with the fundamentals by describing how your business grows, and then build models that can evolve from conceptual frameworks to gradually more sophisticated analyses that can predict and then prescribe how to grow faster and more profitably.

One simple way to do this, without asking for a faith-based leap into an expensive black-box model, is to leverage the Marketing Value Chain as a framework to align leadership around a common view of how your business actually grows.

The Marketing Value Chain is an academically vetted, financially valid and simple five-step framework that connects every possible marketing action and investment to firm value and financial performance.

Unlike traditional multi-touch attribution, marketing mix, and econometrics models, this method for quantifying the contribution of marketing to the business is transparent, simple, objective, and balances a wide range of short and long-term growth investments such as brand building to maximize future profits. United Rentals CMO Chris Hummel points out this dynamic in the Forbes Proving the Value of the Brand ReportThe Marketing Value Chain takes the critical yet complex task of measuring the impact of brands and turns it into a natural, clear and logical management discussion about how marketing can create business value.” 

A smart way your leadership team can create a common economic purpose for long term growth investment is to take a top down, “walk-crawl-run” approach:

1. Start by agreeing on the basic arithmetic of growth for your business. Get all the senior stakeholders in a room and use a tool like the Marketing Value Chain as the basis for surfacing basic facts, beliefs, and assumptions about how marketing investment grows revenues, profits and firm value. This helps leadership teams to collectively agree on basic math that describes how their business grows and can resolve basic disconnects between the CMO, CEO and CFO about growth fundamentals such as the role of brand preference equity in driving profit growth through more choice, greater pricing power, referrals, and simpler cross sell.

2. Then document the core assumptions behind your growth strategy. Once your team can agree on the basic math of growth for your business, it’s important to document collective assumptions about the interactions between marketing activities, customer behavior and financial outcomes. Documenting and agreeing on the core assumptions about growth (elasticities, hypothesis, beliefs) makes it much easier to develop financially valid KPI, credible business cases, and scenario planning tools to direct investments, budgets and resource allocation. This also fosters[ph3]  better collaboration as the multi-functional works from a common set of measures and incentives that they trust and accept.

3. Use your research, customer insights, and program tests to validate, refine and model your growth equation. Documenting and quantifying growth assumptions provides scientific discipline to help the analytics team to first describe how growth happens, then predict how growth will happen, and ultimately proscribe how growth can happen faster and more profitably. This focus allows your analytics team to better leverage existing market research, customer insights, and program tests to validate critical growth assumptions to the degree they can. If more confidence and predictability is required, the analytics team can be much more surgical about designing further research, in-market tests, and models to build marketing performance measurement and models that are increasingly accurate, predictive and proscriptive.

You can learn more about the Marketing Value Chain in this short video or by seeing it applied to brand valuation in the Forbes Proving the Value of the Brand Report.

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I direct the Forbes Marketing Accountability Initiative where I teach CEOs, Boards, CFOs and CMOs how to prove, measure and grow the contribution of marketing to the bu

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