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Marketing, Cash Flow and Shareholder Wealth

Marketers have traditionally been pretty poor at showing why marketing matters to shareholders. In my experience marketers often just assume that marketing is important. They then just expect everyone else to believe it. Instead we really need to consider marketing, cash flow and shareholder wealth and how these fit together.

Marketing Impact On The Firm

Ramesh Rao and Neeraj Bharadwaj created a model to show the effect of marketing on the firm. It shows how — assuming marketing impacts the distribution of revenues — that marketing will influence firm value. Their argument is that marketing isn’t just about increasing sales. Marketing also works by changing how sales are made. Interestingly, this is partly because different marketing plans influence the cash that must be held by the firm. (The idea is that riskier plans entail more cash having to be held unused in case it is needed to cope with a disastrous outcome).

As is the case in these sort of models they abstract away complexity to get to the key ideas. These include the fact that marketing impacts expected cash flows:

“…(a) directly, by determining the probability distribution of future sales revenues, and (b) indirectly, by determining the firm’s current working capital needs.”

Rao and Bharadwaj, (2008), page 19.

Marketing, Cash Flow and Shareholder Wealth

They also note how marketing impacts shareholder wealth. (Note that they make a distinction between cash flows and wealth. Cash flow and wealth connect to each other but are not the same).

“A marketing initiative can affect shareholders’ wealth in two ways: (a) by affecting their wealth as reflected in the stock price (the stock price effect) and (b) by affecting the wealth that investors can create outside the stock market with any freed-up working capital (the released working capital effect).

Rao and Bharadwaj, (2008), page 19

My favourite bit of the paper is where the authors suggest the shareholders can invest in other things with the released capital. The authors suggest investing in real estate, gold, and art. Sadly I have never been in the happy position of having so much cash released that I can get buy a Monet.

Effective Marketing Can Earn You Some Art. American 18th Century Boy with a Basket of Fruit c.1790, Open Access at the National Gallery of Art. (Apparently This Is ‘Naive Style’. I’d Prefer A Garfunkle)

The Boardroom Project To Improve Marketing Accountabiliity

The authors also note the importance of the Boardroom Project — the predecessor of MASB — in advocating for greater work on the marketing/finance interface. They are surely right, marketing needs even more work tracing the connection between its actions and financial outcomes.

For more on popular marketing metrics and showing the value of marketing see here.

Read: Ramesh Rao and Neeraj Bharadwaj (2008) Marketing Initiatives, Expected Cash Flows and Shareholders’ Wealth, Journal of Marketing, 72 (1) pages 16-26

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