Business Partnering: The CFO and the Marketing Chief

How much does a company spend on marketing activities, including advertising? It can be a lot, as CFOs know. Samsung Electronics, the Korean maker of Galaxy smartphones and tablet computers, spent around US$14 billion on marketing its products globally in 2013, around 8% of revenue.
 
And yet it is not clear whether all that money is actually giving a good return on investment. “No one can beat Samsung in terms of [ad] presence,” Moon Ji-hun, head of brand consultant Interbrand’s Korean operation, told the news agency Reuters. “I doubt whether keeping investing at this level is effective.”
 
Some in finance are wondering as well. “People will say that revenue will go up by x if you spend this much on marketing,” says Terry Ho, CFO of Chinese sportswear maker Xtep International Holdings. “But there’s no guarantee. How can you justify? Was it really due to marketing?”
 
His strategy is to keep marketing expenses stable at 11-13% of revenue, in part because that is also how much his local competitors are spending. (Ho estimates that Xtep’s foreign sportswear rivals in China, such as Adidas, spend closer to 20%.) “It’s better to be consistent,” he says. “Unless we want to sacrifice net margin, we will keep this major cost stable.”
 
Dynamic approach
But other finance chiefs are open to experimenting with a more dynamic approach. At Internet media company Travelzoo Asia Pacific, which packages discounted travel, meals and other deals and offers them to its online members, CFO Honnus Cheung works with marketers to expand or shrink spending almost in real time, depending on the circumstances.
 
“If I find that we may have some problem with short-term revenue and we need what has been allocated for marketing expense to make it up, then I will adjust,” she says. It helps that advertising for the online business is all on the Internet. “You can negotiate good contracts with Yahoo and Google, and also the discounts are flexible.”
 
Cheung makes a distinction between marketing expenses that is highly correlated to revenue, and spending where the outcome is more long term and intangible, such as branding and PR. For items in the second category, “you can do some deferring or cuts if you find that business is not that good,” she says. 
 
The problem is discovering which marketing spending is highly correlated with sales, a process that Datawatch Chief Marketing Officer (CMO) Ben Plummer describes as “the transformation of marketing dollars into actual revenue.”
 
That’s the biggest difference between marketing today and, say, 15 years ago, says the US-based CMO, who headed marketing at IBM Cognos, Applix and Outlooksoft before joining Datawatch in 2012. “Nowadays you have to show tangible results. You’ve got to have targets and you have to meet those targets. And they all have to be quantified.”
 
At Datawatch, which provides data discovery solutions involving information generated within and outside the organization, Plummer seeks to measure the outcome of even spending on PR activities. “If we have a press release about something happening in Asia, [you should] immediately see web traffic increase in all our Asia operations.”
 
Finance and marketing
Measuring the outcomes of marketing spending is nothing new, of course. The bigger companies traditionally invest in market research to assess the effectiveness of advertising campaigns, for example, and to quantify consumer perceptions about, and satisfaction with, the organization and its various brands.  
 
But the advent of Internet marketing and the automation of the marketing, sales and CRM functions is giving the CMO new tools to more accurately measure outcomes – and making finance potentially more effective in planning and budgeting.
 
It is also helping transform the relationship between finance and marketing in many organizations. “There used to be a lot of friction,” Plummer observes. “You say, ‘I’m going to spend this much.’ They will say, ‘No, you’re not.’ Now, it can be more of a planning process.”
 
“I find CFOs more of business people today than as bean-counters,” he continues. “They tend to be interested in how the company is perceived, not just the numbers. Believe it or not, I have my CFO tell me: You have to be spending more.”
 
The difference is that finance expects marketing to measure and track the outcomes of the spending. “A dollar spent in marketing you have to track all the way to whatever it generates in revenue,” says Plummer.
 
“You have to be able to say, ‘Marketing generated this many inquiries into the company; those inquiries generated this number of leads; these leads transformed into this number of sales.’ That whole process has become almost a science.”
 
‘Almost a science’ is the operative phrase. Plummer concedes that other factors aside from marketing could be the reason behind new sales. But measuring the outcomes at least establishes some benchmarks, he argues. “I know that if I’m going to spend 12% of company revenue on marketing, it has to lead-generate some targeted percentage of new business.”
 
Utilizing Datawatch’s own visual data discovery and other solutions, Plummer and his team correlate specific marketing campaigns with data on new customer acquisitions, increased customer spending, website traffic and other information.  
 
“I test based on [campaigns] done in the past and that’s how I plan and budget year to year now,” he says. The more rigorous approach is helpful to finance when it comes time to allocate resources and assess return on investment.      
 
What finance can do
What does all this tell CFOs? That it is increasingly possible, in the age of business process automation, analytics and the Internet, to be more rigorous in planning and allocating marketing spend. Among the steps finance can take:
 
Distinguish between what is required and what is nice to have. At Travelzoo, CFO Cheung’s cost-cutting discussions with the marketing department focus on initiatives that have indirect impact on revenue. As much as possible, finance avoids taking the knife to marketing campaigns that are highly correlated with sales. “It is the nice-to-have that I will cut in some critical situations,” she says.
 
Ask marketing to find free or more cost-effective ways for brand building. Cheung encourages marketing to look at organic ways to raise brand awareness, rather than rely exclusively on paid programs. For example, she and other senior executives are open to speaking at conferences and granting media interviews to raise the company’s profile.
 
Other approaches include writing opinion or informative articles for business periodicals and websites, and search engine optimization, where the words, images and other content in the company’s websites are carefully chosen so search engines rank the sites high up in returning search results.
 
Sometimes, companies may not need to pay ruinous fees to be associated with a prestigious event. A Sky Suite at the Singapore Grand Prix costs upwards of US$6,200 per person. For a fraction of that price, one company books rooms at the Stamford Hotel Singapore that overlook the racetrack, to serve as hospitality suite for clients and associates.
 
Help correlate marketing spend with outcomes. Marketers are not always the most number-literate and data-driven people, so they may need finance to help with access to financial information and the use of analytics. Finance’s FP&A specialists can be deployed to analyze historical data to find patterns that suggest the optimum level of marketing spend as a percentage of revenue, for example.
 
Agree with marketing on the appropriate metrics. The CFO can work with the CMO on what, realistically, the outcomes should be for the marketing dollars spent. How many inquiries? How many leads? What is the minimum conversion rate to actual sales? How much increase in website traffic? 
 
Pricing is also part of marketing’s function and here, too, finance can be of assistance. At Xtep, for example, analysis has shown that shoes and sportswear priced between RMB100 to RMB300 find many buyers online. Purchase interest wanes beyond that price point.
 
The key is for the CFO to work with the CMO, to become a business partner, rather than for finance to mandate KPIs. The best way to do that is to establish metrics that are based on data, both internal and, if it can be managed, from peers and the industry as a whole.  
 
It is also important for marketing and finance to work with the sales function on tracking marketing spend all the way to the topline. If marketing spent US$6,200 per person on a hospitality suite at the Singapore Grand Prix, how much revenue was generated from that investment? From the point of view of sales, did the event at least contribute to closing a deal?    
 
Explore new ways of measuring and tracking marketing spend outcomes. As marketing increasingly moves to the Internet, finance should be open to the marketing function establishing new metrics for measuring online outcomes – or nudge marketing into doing so. These measurements include open rates for EDM (electronic direct marketing) campaigns, number of website registrations and clicks on online ads, which correlate with online sales.
 
New measurement tools are being developed all the time, putting the onus on marketing and finance to assess and add the most appropriate metrics to their arsenal. For example, Google is reportedly testing a program that matches clicks on online ads with the physical purchases of those clickers, as compiled by third-party providers that have access to in-store sales information.
 
The data is stripped of identifiers to comply with data privacy regulations, but the anonymized and aggregated information, in theory, can indicate whether or not online ads are having an impact on store purchases and can measure the magnitude of click-to-purchase conversion. 
 
Business partners
What distinguishes Datawatch and Travelzoo from Xtep is their greater reliance on the online part of the business, and increasingly on mobile as well. But it may be only a matter of time before e-commerce and m-commerce become a more significant part of brick-and-mortar companies like Xtep as well.
 
Xtep says it is looking to “ride the wave of China’s online surge” to complement its network of 28 distributors that own or franchise more than 7,000 brick-and-mortar shops across China. Already, the company has more than 800 authorized dealers that sell online-only products on shopping websites such as tmall.com, taoxie.com and taobao.com.
 
Many other companies are looking to do the same, particularly those in services, retail, banking and other business-to-consumer and business-to-business enterprises. When they do, the strategy of deciding how much to spend on marketing by simply mandating that it be kept at a set percentage of revenue may no longer be appropriate.
 
As they do now in technology companies like Datawatch and Travelzoo, the CFO and CMO will need to work increasingly as business partners to dynamically allocate and re-allocate marketing spend.
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation. 
 
Photo credit: Shutterstock 

 

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