Looking back at the Future of Marketing (The Future Mag)

I attended a seminar twenty-two years ago, when it was still safe to walk across Johannesburg to the President Hotel. The presenter was an old school American who had worked at AC Nielsen since 1926 and retired in 1969. His name was Jim Peckham and he had spent the years since retirement mulling over decades of Nielsen data and writing detailed notes. He came to SA in 1979 and his presentation was an eye opener.

His talk, which he had delivered around the world, was called “The Wheels of Marketing”. Actually the full title included the following;

“An analysis and Interpretation of what can generally be expected to happen to consumer sales of branded food, household needs, toiletries and proprietary drug products, when a series of marketing actions take place.”

That lengthy title was accompanied by a 96-page book which I have kept and have referred to ever since.

Imagine having at your disposal one of the largest databases in the world – created long before computers - which records the buying behaviour of millions of consumers. And of course because of the way Nielsen collect the data, they are able as well to correlate the movement of goods through the distribution channels with the marketing activities that comprise Peckham’s spokes of the wheel: personal selling, consumer price; store (trade) product improvement and advertising.

Sadly business managers do not always heed the words of the wise. For example at the very start of the text, Jim states in an indented paragraph:

“The inherent danger in making short term decisions … which do not reflect what the consumer is actually doing in the marketplace … “

This is the core of the message contained in his analyses. Managers should base their marketing decisions on the impact they will have on future sales and profit, and should not be driven by the demands of investors, shareholders and numbers-driver company management in seeking fast gains in profit and market share.

Of course we have not listened to people like Jim Peckham with over forty years of experience in observing marketing from the check out point. And we have paid a price in withered brand equity and consumers who are more loyal to price cuts and discounts than product quality and brand consistency.

Perhaps this is why marketing is represented on the board of fewer than 29% of South African companies (similar to the UK) and which drove British marketing academic, Tim Ambler, to comment that most financial managers think that most marketing managers are business amateurs.

The same Tim Ambler recently published a paper through the Marketing Science Institute (MSI) in Boston in which he reported his findings in a survey of how marketing is measured. He and his associate researchers found that companies view profitability, sales (by either value or volume), gross margin as the most important measures of marketing. Below these come awareness, market share, new products launched and more esoteric metrics such as share of voice, customer complaints and dissatisfaction and so on.

The paper makes a valiant effort to determine a set of measures that will best report the actions of marketing, but in the light of many years of non marketing people evaluating the role of marketing effectiveness, and taking account of Mr Pechams plea that stretches back to the early days of marketing, one has to be sceptical.

Marketing it seems will continue to be measured by its apparent contribution to the bottom line. Usually this means, at best, the quarterly financials and at worst monthly management reports.

Don’t get me wrong. I am a great believer in profit as the core measure of a company’s success. During those frantic days of 1999 and early 2000 when online fortunes were made through money gobbling dot.com start-ups and scorn was poured on anyone who suggested profit might be a good idea - even in the future - I often posed the question that perhaps a new business measure had been introduced that I had somehow missed. How things have changed (or returned to normality). My problem is with thinking that profit is the only, or even the best way to measure marketing.

That thought must be wrong. The marketing function is responsible for the development of new brands, the maintenance of existing ones, finding new customers, convincing committed customers to buy more or use more, and of gaining better, deeper and broader distribution. The end goal for each of these is to strengthen the position of the firm; to gain more sales and to make it more profitable. But that is also what human resource management is supposed to achieve. The technical director has similar objectives, as do operations and logistics. Each works in its own area in order to create a more efficient more profitable organisation.

You can trace the source of the problem to the way companies have traditionally measured assets. If the technical director wishes to buy a new machine, he has to justify the cost by estimating the expected life of the machine and the income stream that it will generate over that period. These days, in many cases, the marketing budget exceeds the amount invested in capital projects, but the board is asked to approve it by reference to non-financial metrics such as market share, or awareness and attitudes.

Imagine two scenarios.

In the first the marketing director needs an additional R5 million in order to open up a new marketing sector. Usually this would take a thick document and a painful process of explanation and misunderstanding. The decision would be taken in the marketing manager’s absence because marketing is not represented on the board. The fleet manager motivating a similar amount for the upgrading of the company’s transport vehicles, would use running cost efficiencies, resale value, reduced time off the road and concepts such as depreciation, disposal value and finance costs to demonstrate the economic viability of the investment. The projections would be reduced to a present value calculation which makes the decision easy for the board to evaluate and approve.

Given the ability to estimate, reliably, the net present value of the income stream that the additional marketing expenditure would generate, the marketing request would be just as easy a decision for the board to take.

The second scenario is a familiar situation for most marketing managers. It is half way through the year and the company is falling short of achieving its budgets. The board is under pressure to produce good results and the quick solution is to cut costs. Retrench a few staff, reduce inventories, and slice the marketing budget. After all how can a few cancelled TV spots, or a delayed research programme, harm anything? It is unlikely, although not unheard of, that the production director would be asked to cut the quality of the company’s main brand to save money on raw materials.

If the brand is recognised as an asset, from which a minimum return is expected, and its health is reported in the annual financial statements, the marketing manager would have less difficulty in explaining the damage that would be done to the company’s asset if the money spent on maintaining it were cut.

Recently I was involved in an exercise with a firm that markets well known fmcg brands. One was languishing for a number of reasons. It was suggested that an increase in the marketing budget from 3,5% to 5% of turnover would generate sufficient money to overcome the communications problems that research had shown were inhibiting sales.

This time the financial approach to supporting the request worked against marketing and in favour of the company’s shareholders. While the 1,5% increase seemed inconsequential from the income and expense point of, sustained into the future it hit hard the value of the brand. In fact when the increased expenditure was deducted from the present value of the expected improvement in future cash flows, a negative NPV was shown. The idea was dropped. The opposite would also apply.

Where we have failed in the past is to split the marketing decision making process in two. Targets have to be set for the mix elements to achieve. Consumer attitudes have to be changed or reinforced and awareness has to be built. Distribution must be gained and products extended. These are the micro goals that form the core of marketing strategy. The board has little interest in these just as they are not concerned about what grade of oil is used in the company fleet, or the size of office allocated to a middle manager.

The strict financial measures mentioned earlier are the macro level metrics. All marketing people have to do is learn how to measure brands and how to speak the language that comes with it.

Roger Sinclair is professor of marketing at Wits and MD of BrandMetrics.