This is a mistake, though one supported by accounting rules which require marketing spend to be treated as a short-term expense rather than – as with investments in physical capital and R&D - something to be written off over time.
This routine neglect of the long-term value of marketing spend means businesses are not acknowledging the lasting value of acquiring a customer.
Wal-Mart, the low-cost mass retailer, and BMW, the high-end car brand, are said to be two exceptions. In the case of BMW, by actually calculating the long-term value of its customers, it can justify a significant amount of investment to attract a new customer. And Wal-Mart, through its online arm, uses web-based tracking tools to work out the likelihood of return purchases and builds that into the calculation of the value of its advertising spend.
That most companies fail to make use of available tools to measure the long-term value of customers may reflect lack of understanding and interaction between their finance and marketing departments.
The long-term value of customer acquisition costs can be assessed by calculating lifetime value - the present value of all a customer’s future profits. This involves a relatively straightforward formula incorporating customer retention rate, acquisition costs, profit margin and discount rate – and which can highlight the disproportionate benefit of a small increase in retention.
PepsiCo, for example, took this on board when deciding recently to direct its marketing dollars at Diet Pepsi rather than the regular version. Diet drinkers are much more loyal, which means more long-term sales and therefore a longer-term customer value.
Likewise, a brand’s value can be measured by conjoint analysis – a statistical tool that helps determine the incremental price a company can charge for a product as a result of the brand and the added market share that can be captured through that brand.
Use of such tools should help bring out the true value of marketing spending and put the investment in perspective for chief executives and CFOs. Who knows, it may even lead to increased marketing budgets.
Source: Marketing for the bottom line
Special Report: CFOs at work: viewing business strategies through a finance lens
Review by Steve Lodge