When we asked over 300 marketing leaders in the U.S. to identify the activities they find most challenging, the number one thing they reported, by a wide margin, was “demonstrating the impact of marketing actions on financial outcomes.”
This is a longstanding challenge for marketers. They want to demonstrate financial impact so that they can show accountability for business results, gain the respect of other business leaders, and secure future investment — but the measurements of marketing are often less precise than the measurements of other business activities.
How can marketers overcome this challenge? We have consulted on both sides of this issue: with CMOs seeking to demonstrate their financial impact and with CFOs, COOs, and CEOs seeking to make effective decisions about marketing investments. Based on that dual perspective, we think these eight steps can help.
1. Start with business value. The task of demonstrating how marketing affects the bottom line often prompts visions of precise measurement, elaborate metrics dashboards, and irrefutable attribution of financial outcomes. But focusing only on what is most measurable underrepresents marketing’s full impact. We think CMOs should take a more comprehensive view of the business value they create.
CMOs often play multiple roles in creating business value within their function — as growth enablers, innovation catalysts, champions of customer-centricity, builders of new capabilities, and stewards of the corporate brand that serves as a magnet for talent. They also create business value beyond their function by collaborating with others in the C-suite to advance the enterprise’s strategy and the CEO’s agenda. Marketing leaders should frame their impact broadly, to include all the ways marketing benefits the organization. Judging its impact through metrics can then follow.
2. Understand what business value means to each function. Marketing leaders should translate the definitions of their value creation for the different functions they interact with. Sales might define business value as revenue growth; finance might think of it as volume, price, margin, and cost management; supply chain might call it the predictability of demand. Marketing leaders should tailor their demonstration of impact to the most relevant metrics for each function, and include other evidence that resonates, such as customer testimonials for sales, positive trends and variances for finance, and better forecasting and reduced stockouts for the supply chain. Of course, in some companies, there may be measures of business value that are shared across all functions (such as NPS/customer satisfaction), and marketing leaders can show the impact on those, too.
3. Know your own metrics. There’s more to demonstrate the impact of marketing activities on financial outcomes than metrics. However, at some point, you need metrics. Most marketing leaders have a set of KPIs they use to demonstrate impact on financial outcomes, and it’s critical to be thoroughly knowledgeable about them. That means having not just a spreadsheet to review at the senior management team meeting but also a deep understanding of how the metrics are constructed. For MROI, for example, what costs have been included as the investment — program costs, or staff costs as well? What has been counted in the return on that investment — profit increase, or just revenue lift? What baseline of financial outcomes (absent marketing activities) is being used? What time frame is being used to assess the impact? Why do those choices make sense?
4. Explain the inherent uncertainties of marketing measurements. Deep knowledge of the metrics can build your credibility when you’re discussing them with other executives, but it helps to explain marketing’s inherent uncertainties. Marketing’s environment is typically much “noisier” than the factory floor in terms of unknown, unpredictable, and uncontrollable factors confounding precise measurement. Marketing activities can also be subject to systems effects where the portfolio of marketing tactics work together to create an outcome — say, a digital campaign that works only because of a complementary TV presence.
Marketing actions may also work over multiple time frames. For example, while demand generation takes place in the current quarter, brand-building actions could take years to cumulate. Finally, it is often difficult to attribute financial outcomes solely to marketing, because businesses frequently take actions across functions that can drive results. For example, perhaps a change in the sales force enabled the success of a marketing intervention last quarter. These uncertainties should be explained to the top management team as being inherent to the task of marketing, not the result of a sloppy measurement system.
5. Emphasize validity over precision. To executives used to managing their businesses through the scrutiny of numbers, marketing’s uncertainties can be frustrating. As the saying goes, “What gets measured gets managed.” If marketing is hard to measure precisely, how can we manage it? The answer: Marketing does have valid metrics through which its activities can be assessed and managed. A/B testing and test markets can confirm or refute hypotheses to reasonable levels of confidence. Brand-building tactics can be assessed through surveys and focus groups. Many modern marketing tactics (especially digital) are very trackable.
CMOs should emphasize that their metrics are valid when evaluating whether marketing activities are working as expected and that the inherent imprecision in measuring marketing’s financial outcomes does not undermine their validity. Marketing leaders also need to protect against over-indexing the marketing mix toward the most trackable tactics merely because they offer more precision.
6. Have a budget story. One factor that sometimes undermines executives’ faith in marketing’s impact is the sense that the marketing budget is not administered rigorously. Other functions often think that marketers drive unnecessary costs. It, therefore, helps to demystify the marketing budget and demonstrate rigour in managing it. Provide visibility on total spend, show how to spend is aligned with business strategies and key priorities, and demonstrate how working spend has been optimized and non-working spend streamlined. These elements can be woven into a budget story that explains the logic behind the spending and establishes the credibility of marketing as a responsible steward of the organization’s resources.
8. Meet one-on-one. Marketing leaders usually attend monthly meetings of the senior management team or equivalent forums. Our observations suggest these are often poor environments for demonstrating the impact of marketing on the bottom line. The tone is typically set by the CFO and/or division presidents who are reviewing numbers. Precision is expected. Discrepancies or disappointments in the numbers are fiercely questioned. Credit and blame are sought and dodged, even if in unspoken terms. It can be difficult for a marketing leader to follow the advice above without risking the perception of making excuses. There is too little time given to marketing on the monthly agenda to give a comprehensive and nuanced view of marketing’s financial impact.
That work should happen one-on-one, with the CMO investing considerable time in educating their functional counterparts about these points above. Over time, the one-on-one efforts can make senior management meetings a more hospitable forum for marketing.
CMOs who master the steps above will be positioned to thrive in their role. And if they teach these steps to their teams, the stage will be set for a much deeper understanding of marketing to take hold across the enterprise. Over time, marketing can come to be seen as a strategic investment, one that is rigorously managed adapts to market uncertainties, and demonstrably moves the needle on financial outcomes.