Marketing and the Bottom Line

by Tim Ambler

Tim Ambler (now retired) was a professor at the London Business School. He was unique in that he was a marketing professor who was also a Chartered Accountant. Ambler contends that boards of directors should devote more attention to marketing. He puts a particular emphasis on brand equity and innovation.

“The point is simple: if you want to know what your future cash flow will look like, investigate where it comes from—the market… Survival depends on basic wealth creation. And wealth creation depends on how healthy the marketing is… Securing customer preference opens up the main cash flow for every business.”

BRAND EQUITY

“Good marketing builds the firm’s intangible assets… ‘Brand equity’ is by far the most frequent term for this asset and it is adopted here.”

“Marketing, then, is first and foremost the building of brand equity. Do that right and profits will take care of themselves… The basic principle is that marketing decisions should be based on brand equity as well as profit considerations.”

From a consumer standpoint, “brand equity is what we carry around in our heads about the brand.”

“To an accountant, brand equity is the accumulated intangible asset from past marketing that has not yet been taken into profit… Brand equity may not feature on the balance sheet but it is an asset in exactly that sense: it is the storehouse of future profits that result from past marketing activities.”

“Differentiation is the first driver of brand equity. As the brand develops, the next aspect (metric) is relevance. Relevance and differentiation, taken together, form brand strength. While these will provide initial growth, long-term repeat business requires esteem, i.e. perceived quality, which, with greater product experience, will be supplemented by brand knowledge. These, taken together, are termed ‘brand stature.’ But while the higher-order aspects are being built the original differentiation may be allowed to decay. In that event, no matter how highly regarded it is, the brand will lose its identity and be prey to private label or other brands.”

“Top board metrics flag what directors really care about because management’s orientation is apparent from the numbers they ask to see. Nothing better demonstrates the market orientation of a business than the board requiring regular measures of brand equity.”

“Measuring brand equity and performance also gives marketing, finance, and other managers a shared language to debate their brands’ strategies and positioning, together with the drivers of success in the market.”

“The difficulty with brand equity is that it cannot be measured directly… So we have to use proxies of three kinds… [1] Inputs: the amount of advertising and communication (the prime driver of brand equity)… [2] Intermediate measures: Perceived quality and customer satisfaction provide fuzzy data needing care in interpretation even if collected to the highest standards… [3] Behavior: Sales are the most popular metric. Perhaps the next most useful are market share and relative price (share of market by value divided by share of market by volume).”

Ambler cautions that brand equity and brand valuation are not the same thing. It is analogous to conflating a house (an asset) with its market value. I think this is an important point. The key is to understand the importance of this intangible asset rather than obsess over the method used to quantify it—just be consistent. “A fuzzy sense of what matters is far more important than precise calculation of the irrelevant.”

“Brand equity is a tender plant. It is unhelpful to pull it up every week to see how the roots are doing. Most firms with regular brand equity systems measure on somewhere between a yearly and quarterly basis… For example, supermarket chain Tesco measure customer perceptions of Quality, Value, Service, and Trust quarterly. Customer perceptions of performance on 41 attributes are measured twice a year together with ad hoc research seeking customer insight.”

“Marketing performance, in essence, is given by short-term results adjusted by the gain or decrease in the marketing asset. No one can measure the future. Brand equity—or whatever term is used for the marketing asset—stands for the present value of future performance in so far as it has already been earned.”

INNOVATION

“The crux is the quality of innovation, not the quantity. Indeed, many large firms today suffer from an excess of innovation, or initiative overload. The three phases of innovation (creativity, development and implementation) require different skills. Culture (the way things are done) and process (what is done) are merely enablers, not drivers.”

“3M very successfully uses just a few simple metrics, such as the proportion of sales due to recent innovations.”

“Innovative companies, such as 3M, recognize the need for experimentation, which implies freedom for managers to explore areas beyond existing strategy. Indeed, by the time a corporate activity is officially enshrined in strategy, it is already middle-aged. Recognition that businesses are now in an era of constant change is hardly new. Yet we seek to install new systems, and align policies and people, as if the firm will never change again.”

“We have two choices. In one, metrics are perfectly aligned with strategy, and they identify the levers managers should operate to optimize results. The other is fuzzy: metrics are used for broad positioning rather than precision, and for illumination rather than control.”

“Alignment is another one of those upside-down U shapes where too little and too much are both sub-optimal. Some degree of misalignment is essential for experimentation and growth, but the company as a whole will only benefit if this, and the experiments, are widely understood.”

METRICS

“Metrics are essential for debriefing. Firms devote far more resources to planning, which may just reinforce behavior, than they do to debriefing, which may change it. US fighter pilots, for example, are trained more in the debriefing than in the preparation or in the flying… What matters is that the next mission learns from the one before.”

For many metrics, relative measures are more useful than absolute. “The question is not how satisfied the customer is, but how this compares with how satisfied the competitors’ customers are. They may be the same people. An 80% satisfaction level is great if it is 70% for the competition, but not so good if theirs is 90%.”

“Trends matter more than the metrics themselves… Serving metrics without comparisons is a messy as serving spaghetti without a plate.”

“The importance of metrics may lie less in control and more in the clear direction they imply for managers throughout the firm. The most important planning question is also the simplest: how will we recognize success when we see it? This is the box which should be added to every advertising creative brief in the world, along with board approval of any business or marketing plan.”

“Marketing metrics are marker posts along the company’s chosen strategic route. To suggest all companies should have the same…metrics is to suggest that all companies should have the same marketing strategy. Since differentiation lies at the heart of marketing, such an outcome would guarantee failure for them all. Metrics should be tailored to the company’s strategy, although some metrics, e.g. market share, should certainly be general and thus comparable.”

“Boards should be wary of calls for oversimplification. We are not dealing with a hygiene matter where boxes can quickly be ticked before moving on. Indeed, using marketing metrics in a mechanistic way denies their very purpose. Even if the metrics are the same, the sources of cash flow—the reasons why consumers buy and might buy more—are the discussions the metrics should trigger.”

For related reading, Tim Ambler and Northeastern University marketing professor Bruce Clark co-authored an article titled Managing the Marketing Metrics Portfolio, published in the August 2011 edition of Marketing Management.


Ambler, Tim. Marketing and the Bottom Line: The New Metrics of Corporate Wealth. Harlow, U.K.: Financial Times Prentice Hall, 2000. Buy from Amazon.com


Note: I have modified the spelling to appease my American spellchecker.
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