The CFO (Chief Financial Officer) has a difficult but rather straightforward job. In most cases they need to recommend to their senior management how to best allocate resources across the business. Unless you can print money these resources are limited. The highest priority projects/tactics get funded, the rest are left on the table for another day when business conditions improve. The difficult and in many cases political process is how to prioritize one project over another.
The CMO (Chief Marketing Officer) is in charge of building the brands that will generate awareness, interest and sales of the company’s products and/or services. The CMO and marketing team put a plan together and then go through the process of convincing the CFO, the CEO and others in management to fund it.
The rest of management put together similar plans for the components they are responsible for. The CFO often asks that each requestor compute an ROI (return on investment) for each tactic. This analysis of dollars returned for each dollar invested provides a scale in which one project can be compared to another. A business development project with a 400% rate of return may be rated higher than a capital improvement project with a 200% ROI. There are many other factors that need to be considered such as the projected level of risk involved with each project and the time horizon to get to a payback however this is a way for dissimilar projects for be compared in a similar language.
A problem is that this method of evaluation works well for an “exact” science. If a company is considering a capital expansion the construction cost is known, the expected savings are estimated and an ROI can be calculated. If the company is considering developing a new product the research and development costs, development timing and the projected sales are estimated and an ROI computed. The same can be said for increasing the number of sales representatives, replacing a fleet of cars with newer ones, or lease vs. buy decisions on equipment or property. But how do you determine the value of a brand? How does increasing advertising spend or increasing the size of a sponsorship compare with the tactics mentioned above?
What many marketers will argue is that marketing is an “inexact” science. A quote often used “Half the money I spend on advertising is wasted, and the problem is I do not know which half” (Lord Leverhulme, British founder of Unilever and philanthropist). We all know that marketing is needed but many marketers are unable to compute the return on their marketing spend and communicate it to the decision makers in the company in a simple way. As a result others in the company may look at marketing spend as a cost of doing business rather than an investment in the growth of the company. When budgets need to be cut marketing initiatives may be at a disadvantage because the CMO has no way to document effect on sales.
I hear leaders of marketing organizations complain the CFO just doesn’t get it. It is not that simple. How do you quantify a relationship? We need to build our brand. They just need to trust me.
I hear CFOs complaining about marketing. What do we get for all the dollars we are spending? How do I know their programs are working? I’m supposed to believe that most of the sales will come in the last 25% of the sales cycle, how do I know it will happen? Are we on target? Why should I increase the budget?
It is like Mars and Venus. We need the CMO and the CFO to speak a common language.
So where do we start? Lewis Carroll wrote “If you don’t know where you are going any road will get you there.”
My suggestion is before you look at next year take a good look at the sales that you currently have. Ask yourself where are these sales coming from? Reorders from existing customers, referrals to others from existing customers (without you having to ask for them), direct sales from your sales force, calls into your customer service group, advertising campaigns (TV/radio/Internet), email, your website, trade shows and others? In many cases it could be a combination as leads may come in as a result of a one tactic, the lead is processed and nurtured by others, which after a period of time results in a sale.
Put a value on everything you do. If a sale was made for $50,000 that resulted in a $25,000 profit after the cost of manufacturing how much was spent by sales and marketing to get that sale? Where did the lead come from, how was it processed, how long did it take?
There will be a number of assumptions that need to be made. Marketing is not an exact science. The result will be a listing of your sales broken out by tactics used to acquire, nurture, close and service the business. My hunch is that you will see that some of the tactics are extremely profitable. A relationship with an existing client while relatively low in cost to service may result in huge gains in sales. On the flip side cold calling by sales representatives can be extremely expensive while sales uptake is slow.
Make a list top to bottom of all of your sales and marketing tactics and rank by return on investment. What tactics are working for you? What tactics are not? If you can shift some funds from the less effective tactics to the more effective ones how will that effect sales?
A quote attributed to Lord Kelvin is “If you can’t measure it, you can’t improve it.” Measure everything you do. Your method of measurement will improve as members of your team realize the new rules under which projects are evaluated and approved.
A story comes to mind of a man that asks a woman for a dollar. The woman hands the man a dollar and man gives the woman two dollars back. The man asks the woman for another dollar and the process continues for a while the women making a 200% return on her investment each time. Finally the woman says how much money can you make for me and the man replies how many dollars do you have? It is obviously not that easy but the man (in this case the CMO) did not have a hard time getting money from the woman (the CFO) as long as they both knew, understood and were comfortable with the expectation.
The man and the woman were talking the same language.
Now how does all the effect your business going forward? I’ll discuss this in a future post. I’ll leave you with two points:
- The advance in technology including Web 2.0 tools allows you the freedom to track in real time how successful your marketing tactics are, where your leads are coming from and how they are nurtured. Lord Leverhulme’s comment that half your advertising dollars are wasted is no longer the case! This means that throughout a campaign you have the tools to measure and take actions to expand what is working and change what is not. I will discuss what some are doing and how they are using it for their advantage.
- Steven Covey says “Begin with the end in mind.” Once you know where your sales are coming from plan for them by tactic in the future. How many leads will you need at the front end of the sales funnel to guarantee an outcome? How many leads will each tactic be expected to generate? That allows you to manage your sales at every part of the sales funnel rather than just at the end when you see the revenue. Another data point the CMO can use to help the CFO understand what he or she is doing.
Until next time – all the best!