Classifying Marketing Investments

For this week and next I will look at an excellent book by Keith Ward — who has taught at Cranfield amongst other places — Marketing Finance. (There are later editions with new co-authors that I plan to read soon — but reading different editions of the same book too close to each other is a bit too dull even for me).

Ward’s book — my edition is 2004 — makes many of the key points that later work in this field addresses. He draws on some invaluable personal experience to discuss problems at the Marketing Finance interface and give advice on how to manage this. Some of the book is just a more financially literate take on well known marketing concepts. More interesting from my perspective is his strong focus on the practical problems of working with financial reporting systems. A key part of the book discusses the issues that come from classifying marketing investments as expenses. The consequences are highlighted: “..if marketing development expenditure is capitalized as an asset on the organisation’s balance sheet, rather than being expensed as it is incurred, the resulting accounting ROI would be significantly altered” (Ward, 2004, page 190). It is a theme that I return to on a number of occasions in my work. How the score is kept is critical for assessing the performance of marketing investments. If one doesn’t understand how the score is kept the results don’t really mean anything.

Beyond accounting’s challenges classifying marketing Ward notes the division of spending into ” ‘above the line’ (meaning mainly media advertising) and ‘below the line’ (meaning promotions for both trade and end customers, etc.)” is “also very unhelpful” (Ward, 2004, page 19). Ward is persuasive that these distinctions are largely meaningless to understanding marketing so why use this classification?

He also notes the challenge of dealing with promotions. Ward is worried about using a single financial evaluation to promotions of different types. A key issue is that you can’t just assess all promotions’ profitabilities within a single promotional period. Promotions effect other periods than the promotional period. For example, consumers seeing promotions start to wait for deals and stockpile during deals — basically the promotional period steals sales from other periods meaning even if it look profitable in that period it might not be actually profitable over the long term.

Ward isn’t just negative about working in marketing finance, he highlights critical success factors which I’ll turn to next week.

Read: Keith Ward (2004) Marketing Finance: Turning Marketing Strategies Into Shareholder Value, Elsevier