I often discuss marketing assets. Specifically, I worry about that the way marketing assets are accounted for in financial reports. This does not help us understand marketing effectiveness. For example, see here and here and here. This results of financial accounting choices creat a significant problem in understanding what marketing does. It means we can’t easily see the long-term value that marketing creates. I also will note a connected but different problem. What is spent on marketing is usually a bit of a mystery to those outside the company because information is not shared. As as result to work out what is spent on marketing is basically impossible. To solve this challenges a popular way in academia is estimating marketing spending through SG&A
Accounting For Marketing Spending Is Poor
Dimitri Markovitch and his colleagues raise this problem in an article in the Journal of Business Research. I believe they are self-evidently correct in their argument. The outside observer cannot really understand what is happening in the company through good information. How do financial accountants treat marketing spend? They often just have a big bucket in the financial accounts. A bucket called sales and general administration (SG&A). It is easy to think of SG&A as everything the accountants putting the accounts together don’t care about that much. Lots of good information was in the early parts of the paper.
The authors then create estimates of marketing spending and link their estimates to firm performance. In order to get published the authors wanted to show a link of their work to firm performance. (I completely sympathize with this need). Unfortunately, their measures of firm performance are of dubious value. The financial accounting limitations they point to in respect of SG&A are exactly the same problems that undermine their performance metrics. They use Tobin’s q and ROA (Return on Assets) as performance metrics. They, in effect, compare a bunch of biased measures, with potentially similar biases, with each other.
Estimating Marketing Spending Through SG&A Is A Challenge
As I said, I appreciate why they had to do this to gain a publication. I find their initial work, however, estimating marketing spend to be more interesting and compelling. Outsiders often just do not know what is being spent on marketing. In doing so they make a valuable point. To my mind their key contribution is to draw attention to how little we really know about marketing expenditures. There is “…poor data availability on marketing decisions in firms and questionable surrogates commonly used in place of marketing expenditure” (Markovitch, Huang and Ye, 2020, page 222).
Marketers, I believe, have to work to improve our data. This might be through lobbying accountants or other methods. When we do that we will find it much easier to show effectiveness. Our estimates of marketing spending effectiveness are, quite frankly, pretty poor at the moment. We do not know what is being spent on marketing. Given this it is hard to argue about whether the spending is effective.
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Read: Dmitri G. Markovitch, Dongling Huang, and Pengfei Ye. “Marketing intensity and firm performance: Contrasting the insights based on actual marketing expenditure and its SG&A proxy.” Journal of Business Research 118 (2020): 223-239.