The best marketing organizations have answers to the following questions: What is your efficiency/effectiveness in Marketing? What is your CAC/CLTV ratio? What is your payback period? What percentage of expenses is acceptable to spend on Sales & Marketing? Should Marketing answer these questions; it should. But can it? It can, when it is supported by Finance. As most of the reported numbers should come through their standardized reporting methods (accounting). Having a better understanding of the impact of marketing on financial metrics will help marketers spend more predictably, protect profitability goals, drive incremental revenue, protect their budgets in downturns, deliver more customer equity & value, etc.
“His company does $250M+ yearly in sales and has 5M followers on TikTok.”
– Well-known investor
What is the most useful financial metric in this quote? Understanding how marketing effectiveness relates to financial performance is crucial. But how do you develop a better understanding and can you help drive financial stewardship as a marketer?
“*A full 45 percent of CFOs we surveyed said the reason marketing proposals have been declined or not fully funded in the past is because they didn’t demonstrate a clear line to value.“
– McKinsey – Why is collaboration key to CMO success?
Marketing has a history of not being very data-driven, with many CMOs not reporting directly to their board or participating in earnings calls (a post on this will follow later this year). Connecting marketing to business performance is crucial. Yet, only possible if you have the proper Finance support & guidance. A couple of years ago, when I attended the CMO Bootcamp, Mike Linton, and Gary Briggs gave a talk on the concept of the Marketing CFO. A role intended to bridge the gap between both departments and one highly proficient in Marketing Analytics/Research + FP&A. This role helps bridge the gap by acting as a liaison between both departments and helping provide insights on both ends.
Understanding Finance & Accounting as a Marketer
Understanding how finance evaluates marketing performance starts by marketing leaders expanding their T-shaped skillset beyond their own function and into Finance. Understanding the lingo & dynamics of the accounting standards & materials that they put is a crucial part of this.
Learning Opportunities
- Board Decks & Meetings; Are you an (active) contributor to the board decks of your company? Besides providing relevant insights into marketing’s performance it should also include financial performance. The meetings itself are also a great place to advocate for Marketing’s role (not necessarily promote it because I think your job should be to promote what’s best for the company, which is often not more to just marketing). You can only get there though if you can understand (and talk) the same language as your board.
- Profit & Loss Statements; In the article (Learnings from Sales & Marketing Spend of Public Consumer Companies) from earlier this year about marketing & sales spend we learned that the twenty companies covered spend up to 52% (Tripadvisor/Expedia) of their total operating expenses on marketing. This information was digested from their P&L statements included in annual SEC filings.
- Balance Sheet + P&L; The two most important financial documents that indicate how a company is doing quarterly or yearly, and where the company’s value is. Understanding what the financial status is of a company helps provide insights for marketers to make better decisions on where to invest and its impact.
- Want to start at the basics? Read the @OnlyCFO articles on Balance Sheets, Cashflow Statements and P&L/Income Statements.
- Investor Relations; The S-1 prospect for companies wanting to list, 10K annual filings for the SEC of existing public companies, earnings calls from public companies. They’re all examples of information that is often available through investor relations portals. This tweet, by Gokul Rajaram, hit the nail on its head, they provide a ton of context for both analysts as well as other players in the industry. Learning what matters, helps move the needle.
- Contracts; Have you ever wondered why Finance teams care so much about the payment terms (in both directions)? The longer the Accounts Payable terms are the longer you can converse cashflow. In Marketing, we often deal with contracts for media buys, agencies, vendors, partnerships, etc. Understanding the levers helps not just you but the whole company.
Frequently asked questions that require a partnership
- Q: What is your LTV / CAC ratio? How can you improve it? What does it cost to retain a customer?
- A: How efficiently are you acquiring new customers versus retaining them.
- Q: How are you allocating spend?
- A: Brand versus non brand investments, direct impact or long term bets, acquiring new customer or retaining existing ones. These are just three examples of variables that play a massive role in the budget plans of a marketing strategy. As they all impact the bottom line of a company, short and long-term (hello customer equity!).
- Q: Where to invest the next dollar? How much money could you spend up to and remain efficient?
- A: Cashflow, Seasonality & Funding: While you might be able to answer the question on where to invest. Do you have the funds readily available (cashflow)?
- Q: What resources do I need to add: budget, headcount, agencies, campaign budget?
- A: Where do you see the most impact on your financials, what type of expense is this (long, short. operational, capital).
- Q: How are you comparing to industry standards/trends?
- A: Are you staying ahead of the curve? If competitors behave differently or if the public market opinion is shifting can you adapt and steer your financial outlook to positively reflect these trends.
How does Marketing prove performance? Spending versus Return
You can show progress in a variety of ways. Because not every company has the same marketing analytics, or finance capabilities. Being able to marketing activity, call it a social media campaign, or paid acquisition strategy to visits > conversion rate > transactions is however often something that is most often established. If not, stop reading here and go fix that before you dive deeper into this whole topic.
- Revenue > EPS: For public companies, revenue is a direct indicator. The street (+ analysts) can be harsh based on expected earnings and the actual earnings per share.
- Customer Acquisition Cost / Customer Lifetime Value: What does it cost to acquire a customer? What is the value of a customer over its lifetime? The ratio between the two will tell you a lot about the efficiency.
- Marketing Spend $ and %: How much money can you actually spend until you hit the breakeven point after which customers aren’t profitable anymore?
- ROI and ROAS: Is your investment yielding a positive return in itself or by just looking at the advertising spend?
- Payback Period: How long does it take to make back the money you invested? You can have a great CAC/CLTV ratio but if it takes 5 years to get there can you actually grow sustainably long-term if investments slow down.
Many of my posts are a collection of my own thoughts about a topic at a certain point in time. Going forward this blog post might be updated with additional learnings or chapters that share more of the learnings. The topic of Marketing & Finance is so broad that this is just focusing on one angle.