The specific contributions of marketing to the success of an organization are rarely found on balance sheets or income statements. Thus, it is easy to overlook or discount the role of marketing as the foundation of a flourishing business. Yet, read the CEO’s letter to shareholders in most annual reports and two marketing driven outcomes are almost always represent: growth and cash flow. Put growth together with cash and the result is incremental cash flow. The ultimate measure of marketing’s contribution to the success of a firm is its ability to generate incremental cash flow, that is, cash flow over and above what would be generated without marketing activities. By implication, this also means that the contribution of any particular marketing expenditure or activity should be measured by its incremental cash flow.
Three Ways Marketing Generates Cash Flow
Businesses generate cash flow from operations in only three ways, and all involve marketing. Cash flow is increased by acquiring new customers while retaining existing customers. This is the typical expectation of the marketing function. Unfortunately, marketers and others often stop with counts of customers or revenues rather than carry the measurement of marketing’s contribution to something the firm reports, incremental cash flow. Marketing also generates cash by increasing sales volume, either by taking share from competitors or by increasing the size of the market by increasing the frequency of product or service use among existing customers by suggesting new uses or new use occasions. Marketers routinely report market share and closely monitor changes in market share, but rarely are such changes in share or usage frequency translated into incremental cash flow. In many businesses, marketing grows cashflow by selling more, different products and/or services to existing customers (increasing “share of wallet”) through cross-selling to customers who have already been identified a willing to do business with the firm. Marketers report number of customers, number of sales per customer or similar measures of successful outcomes. But, again, rarely are these outcomes translated into what firms must ultimately report, cash flow.
Why Marketers Miss The Most Important Metric
Marketers often focus on numbers of customers, market share, or revenue because these measures are relatively easy to obtain, have a clear meaning, and are relatively difficult to distort when reported honestly. These also tend to be measures over which marketers have a degree of control, and they are useful measures. They are simply incomplete and do not represent what a firm must provide as part of its reporting requirements. It is also completely natural to focus on that over which one has a degree of control. Cashflow is a function of costs as well as revenue. Marketers often have less knowledge of and control over costs, and it is often difficult, but not impossible, to link specific marketing expenditures (costs) to the revenues they produce. Some marketing actions have long term effects as well as short-term effects and, some marketing activities manifest themselves in customers’ willingness to pay a price premium as well as in the occurrence of a sale.
So, getting to cashflow requires a bit of effort and is perhaps not as much fun as developing the next advertising campaign, but it is possible. Until marketers are able and willing to put the outcomes of their efforts in terms of cashflow, or more specifically, incremental cash flow, marketing will continue to be regarded as a cost, as a tactical function, and disconnected from the important financial performance metrics that firms are required to report. Marketing’s contribution to growth and cash flow will be ignored until marketing takes responsibility for telling the story of how its expenditures and activities fuel growth and cashflow. This would constitute the effective marketing of marketing.
Contributed to Branding Strategy Insider by: David Stewart, President’s Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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