The path from marketing investments to organizational performance to lock the CMO door
The Marketing-Finance Interface: Lock the CMO’s Revolving Door
By Lova Randrianasolo, PhD
Marketing and finance are like two siblings that love each other yet can never seem to get along. In fact, they’re more like fraternal twins that each desperately seek to establish their own identities, paths, and priorities. Where one has solidified their identity in ensuring the organization’s internal financial health, the other looks outward to seek legitimacy and support from consumers and other external constituents. Unfortunately, in recent times, the marketing twin has been experiencing an identity crisis, as more CEOs seek tangible returns on marketing investments evidenced in financial metrics, which happens to be the finance twin’s specialty. As a result of this crisis, CMOs are experiencing some of the shortest tenures at their organizations, indicating a revolving door for this post. As the rift between CEOs and CMOs continues to widen, I suggest 3 steps for CMOs to lock that revolving door, rooted in creating synergy between the fraternal twins and enriching the marketing-finance interface.
Step 1: Adopt the Same Performance Outcomes
How does a marketer measure success? Some may say click-through-rates, conversion rates, brand equity, or brand awareness. Though these metrics may certainly reflect key performance indicators for campaigns or initiatives, they serve merely as mediators between marketing investments and organizational performance. Take the following example: A marketing director seeks to decrease shopping-cart abandonment in their organization’s online mobile retail app by investing in a direct marketing e-mail campaign to offer consumers free shipping if they log into their app and complete their purchases. In this instance, the success of the campaign can be measured in how much shopping cart abandonment decreases over a specified period. The key performance indicator for the campaign is shopping cart abandonment, however, the performance of the organization relies on financial metrics such as profit, return on assets, return on sales, return on equity, or market capitalization. Marketers should therefore treat their marketing activities’ performance as mediators rather than the terminal performance measure. Good marketers know that successful marketing not only entails successful campaigns and activities, but ultimately how such campaigns and activities influence wider organizational goals. Though it may be evident to many that good marketing performance leads to good organizational performance, CMOs need to be more explicit about this link, as is evident in the disconnect between many CEOs/CFOs and their CMOs. To make this link more explicit, I suggest that CMOs adopt the same performance measures as their CFOs and CEOs such as increases in market capitalization/stock prices, return on sales/assets/equity, or profit.
The advantages of CMOs adopting the same performance measures as CFOs are two-fold. First, it creates synergy between the twins. Having the same performance outcome measures allows CFOs and CMOs to speak the same language and ride the same wavelength when working towards achieving organizational goals. Specifically, when finance and marketing have the same goals and explicitly strive to reach the same performance outcomes, the marketing-finance interface has a chance to foster collaborations, innovations, and harmony between the two functions. Second, it allows CEOs and CFOs to better understand the fruits of marketing investments. The alarmingly short tenures of CMOs at their organizations indicates that CEOs struggle in understanding the returns on marketing investments and activities, thus having common performance outcome measures allows CEOs and CFOs to better realize the links between marketing and organizational performance, which may have previously been abstract or unclear.
Though there are many metrics for organizational performance that CMOs and CFOS could commonly adopt (e.g., sales revenue, return on equity, return on assets, net income, etc.), I suggest focusing heavily on 2 metrics: market capitalization for firms on the stock market, and return on sales. These two metrics reflect an external and an internal measure of performance. Market capitalization is the external measure that indicates the market’s reception of the firm. Admittedly, this is relevant only for companies traded on the stock market, however, if CMOs can empirically link marketing performance to market capitalization, CEOs and CFOs would be better able to realize the value of marketing investments. Return on sales is the internal measure of performance that displays how efficiently the company generates profits from sales. It may seem as if this measure should be reserved for COOs and CFOs to examine since it concerns mainly operational efficiency, but marketing innovations and activities can boost organizational efficiency, and highlighting this may be the key to locking the CMO’s revolving door.
Step 2: Provide Empirical Evidence for Marketing’s Impact on Shared Performance Outcomes
Once common performance measures are adopted by the twins, the challenge for CMOs is to provide sound empirical analyses to display the link between marketing investments and performance. To achieve this, marketing leaders require the development of two components: in-depth knowledge of each marketing investment/activity’s influence on the adopted performance measures and an understanding of the statistical methods needed to display this link. Regarding the first component, CMOs must understand that each marketing investment or activity is unique in its special way of contributing to performance. Though CMOs may clearly see how marketing investments help the firm achieve its goals, a tangible path between investment and organizational performance, rather than just marketing performance, must be made clear. Let’s take advertising investments as an example. Advertising is the most visible and many times the most impactful function for marketers. We know that investments in advertising influence performance, but the nature in which this investment influences performance should be better understood. Specifically, advertising intensity typically requires at least a one-year time lag to have a statistically significant influence on performance. Thus, if a CMO increases advertising intensity in the 3rd quarter of year 1, the effect on performance may not be realized until the 3rd quarter of year 2 (assuming the advertising campaigns are effective). A CEO reviewing the effectiveness of advertising investments in the 4th quarter of year 1 may not see significant or worthwhile returns on advertising investments made in the 3rd quarter of year 1. It is therefore the responsibility of the CMO to not only understand when advertising returns should be examined, but also relay this understanding to the CEO. The CMO should have in-depth knowledge of each marketing investment’s influence on common performance goals.
Regarding understanding statistical methods to display the link between marketing investments and organizational performance, CMOs must advance the mantra that marketing can and should be quantified. Under this mantra, it becomes imperative to know that each marketing investment requires different measurements and analyses. For example, where the influence of advertising investments on performance can be quantified in dollars invested versus increases in return on sales can be analyzed with simple regression analyses, other investments such as marketing campaigns to increase innovation reputation may require surveys and structural models to be properly quantified and analyzed. Marketing is sometimes perceived as a field where we don’t have to do math like those finance guys, but marketers can absolutely be leaders in data-driven decision-making. Again, providing clear links between marketing investments, marketing performance, and organizational performance not only increases synergy between marketing and finance, but also provides clarity to CEOs regarding the returns of marketing investments.
Step 3: Foster Empathy for CEOs and CFOs
So often, marketers are tasked to develop and foster empathy for their consumers. This makes sense since we are tasked to understand customer journeys, consumer decision processes, and customer perceptions, which requires a great deal of empathy when done correctly. However, as marketers, we should remember that our roles are unique in that we not only have to understand constituents in the external market, but we also must create and communicate value within our organizations. Stewards of marketing can more effectively execute the internal component by having empathy for internal constituents of marketing such as CEOs and CFOs. Developing empathy requires entering the perceptual realities of others and adopting their frame of reference. Thus, marketers should adopt their CEOs and CFOs frames of references. CFOs are concerned with financial risk management and efficiency, so with empathy for that perceptual reality, marketers would be better able to communicate and display how marketing investments influence returns and efficiency. Similarly, by having empathy for CEOs’ task of ensuring the growth and health of the larger organization, marketers can be better able to display how marketing investments contribute to the health of the company, thus instilling confidence in marketing as a tangible contributor to organizational success.
Final thoughts
As fraternal twins within organizations, marketing and finance must enhance their interface to boost synergy, foster innovation, and speak in similar languages. Marketing’s role is undeniably important within every organization, but it is constantly changing. Some companies have opted to have chief growth officers in lieu of CMOs, others opt to solidify the position of chief customer officer. No matter what you call the top marketing person, they should have the ability to display how their activities influence common organizational goals. The tangibility of the path from marketing investments to organizational performance is the key to locking the revolving CMO door.
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Author: Lova Randrianasolo, PhD
