Marketing is almost always seen as an operating expense rather than an investment in the future.
This reality poses an absurd paradox.
We treat investments in capital equipment for our businesses, and various financial instruments for our own wealth generation, as items on a balance sheet. By contrast, we treat marketing investments, and particularly those made in various forms of communication, as discretionary items recorded in the profit and loss account as an expense.
Why do we make this distinction?
Both forms of investment have as their motivator, the generation of future cash flow. Just because it is a bit harder to calculate the return on marketing investment than it is to calculate the return on an investment in capital equipment, or financial instruments, should not be a deterrent to the effort.
Nothing is more critical to the long term commercial health of an enterprise than the investment in marketing. What could be more important than identifying, communicating, creating transactions and building relationships with customers, that generate future revenue and cash flow?.
There are 3 basic strategies considered by financial investors
Index investment.
This is a passive, low cost, average but relatively safe return strategy, sticking to stocks that reflect the particular index against which the performance measures will be applied. The most usual are the S&P and ASX 200 indices.
Arbitrage investment.
Essentially this is a short term strategy that assumes the investor is smarter than the market, able to recognise mispricing before anyone else, and their IT programs. It involves a lot of buying and selling of stocks, and often commodity contracts, essentially bets on the short term movement of price. Over the long term, there is plenty of research around that indicates that the performance is around the major stock indices. This is also a high cost strategy, in that the constant trading incurs transaction fees, usually not included in the published performance metrics.
Value investment.
Investing for value is a strategy that involves taking a long term view of the businesses in which you invest. This means you engage deeply, not just with the numbers, but with the management and culture, as well as taking a view of the marketplace in which they compete. It is a ‘filtering’ strategy, one where a lot of research boils down the potential targets to a very few, in which you take a significant position. It is a focussing of resources at the specific points where you see there is long term returns available, and are prepared to accept the vagaries of the short term focussed market gyrations.
If you apply a similar frame to the manner in which businesses make investments in marketing, there is a remarkable similarity.
Index marketing.
Doing what everyone else is doing, being average, a follower, and risk minimiser. It also ensures you do not stand out from the crowd, which in a cut-throat marketing world means nobody notices or cares about you, so perhaps you should save your money.
Arbitrage marketing.
Those following this strategy are just applying tactical actions to situations they see, there is no underpinning strategy, just advertising and promotion, usually driven by a budget that has to be spent, and KPI’s that measure the activity, rather than the harder to measure outcomes of the activity. The driving word is ‘campaign’. A string of tactical activities will be seen as a campaign, and usually there is little flow from one campaign to another. This tendency has been accelerated to stupid proportions by digital, where the cycle time of a campaign, limited as they have been, has reduced from months to days. No longer are we looking for the strategic ‘big idea’ that will engage and motivate customers over a long period, we are looking for 10 ideas for the Facebook and Instagram posts in the next 24 hours.
Value marketing.
Successful marketing requires a solid strategy, well executed with a long term perspective. Over time, you will fiddle with the details as you become more familiar with the minutiae involved, and you fine tune the application of funds as you learn, but it is a multi-year commitment, not a 6 month campaign, and certainly not a few ‘cat photos’ on Instagram. Such ‘cat photos’ may be a tiny part of the tactical execution, but are never a component of the strategy. This takes time, resources, and most importantly, a laser focus on what is important to the selected group of primary customers. Over time, you communicate your value proposition that defines why they should do business with you, rather than someone else, and do so at a price that delivers you a premium return, while delivering them premium value. Then you retain their business, increasing your share of wallet, innovating, reducing customer churn, all of which delivers sustainable cash flow.
If any of the above arguments holds true, then it must be that the measures we use to make decisions about our financial selves should be able to be adapted to the investments we make in marketing.
Step one is to see it as a long term investment in prosperity, and not a short term expense to be reported and forgotten, hidden in a monthly P&L.
Step two is to have a robust, well thought out strategy, that is able to optimise tactically in real time.
Step three is to implement and learn relentlessly, seeking the elusive cause and effect chains that must exist between marketing activity and cash flow.
Cartoon credit: Scott Adams and Dilbert reflecting on investment strategies.
