Try not to become a man of success, but rather a man of value.
– Albert Einstein, Nobel Prize winner
At the risk of sounding cliché, I wish to underscore the essence of marketing encapsulated in Einstein’s quote. When marketing becomes a holistic endeavor that permeates the entire organization, its pivotal role within the company, inclusive of the marketing director, becomes undeniable. Marketing carries the responsibility of cultivating value for both customers and the company’s stakeholders, thereby forming the bedrock for sales. Fortunately, marketing decision-makers need not fret; with proper execution, marketing’s impact on sales figures is assured.
To achieve this objective, we are here to support marketing decision-makers. Demonstrating the effectiveness of marketing can pose challenges; hence, we are poised to assist you in substantiating the advantages of embracing a comprehensive marketing approach to your management team and employer.
I trust that this review, grounded in scientific research, will aid you in articulating the overall significance and influence of marketing, as well as your specific role within the management team.
Best regards,
Markus Kivikangas
CEO & Founder, Steinheide Oy
markus.kivikangas@steinheide.com
WHAT IS MARKETING?
Expanding upon the research data explored in the previous review, it’s disheartening to see that the recognition and impact of marketing are in a fragile state. Unfortunately, the situation seems to be worsening. Various factors contribute to the precarious and deteriorating status of marketing. One significant factor is the challenge of attributing the outcomes of marketing efforts, especially their financial consequences, to the management team and the CEO. As long as marketing struggles to demonstrate its inherent value, it inadvertently reduces the importance and influence of both marketing and the marketing director within organizations. As a result, the role of marketing and its director face a crucial need to establish a way to validate their operational effectiveness.
However, prior to delving into scientific studies that validate the effectiveness of marketing, we establish a clear definition of what we mean by marketing. After all, demonstrating the effects necessitates a lucid comprehension of what actions are taken, how they are executed, and the intended outcomes. Our definition of marketing is as follows:
“Marketing is a collection of strategies that steer the entire company’s operations in a synchronized, integrated, and goal-driven manner. Its primary objective is to foster a forward-looking, foundational, and sustainable competitive advantage for the company. This is achieved by evoking cognitive and emotional responses in the company’s customers, aiming to tangibly boost demand and consequently enhance the company’s value.”
As per the initial segment of our definition, marketing constitutes a collection of guiding principles that holistically steer a company’s activities. This aspect is pivotal. In line with a prior quote from Albert Einstein, value takes precedence, and it doesn’t materialize through short-term sales promotions or “social media buzz”. Although the marketing director holds responsibility for marketing’s success, crafting marketing in alignment with the definition isn’t solely within their domain. The marketing culture permeates the entire organization, naturally aligning with marketing directives. This concept is known as market orientation. So, let’s commence with that. What insights does science provide about market orientation?
IMPACT OF MARKET ORIENTATION
Fortunately for the marketing director, extensive scientific research has been conducted on this subject, yielding highly favorable outcomes. Let’s initiate our exploration with a study that assessed the influence of market orientation on a company’s success. This study assimilated a comprehensive dataset comprising 61 scientific studies encompassing 479 research findings.
The primary outcome indicates a robust correlation between market orientation and a company’s triumph in terms of customer satisfaction (r = .49; >95% statistical significance), sales (r = .40; >95%), and profitability (r = .29; >95%). If the effect sizes referred to above by the “r” may not hold direct meaning, they can be juxtaposed with a few reference points in Figure 1. The outcomes are as compelling as many universally accepted phenomena or routinely employed medical methodologies. Therefore, just as you might trust that proximity to the equator entails warmer climates, or that men typically exhibit greater size and weight compared to women, or have faith in at-home pregnancy tests, the efficacy of Viagra, and the dentist’s X-ray assessment prior to dental procedures, you can equally have confidence that if your organization embraces and holistically executes the market orientation as defined by scientific research, customer satisfaction will flourish, revenues will surge, and profitability will make notable strides. Quite significantly indeed.
If that information isn’t sufficient, let’s delve into what the CMO and their team bring to the outcomes. When different marketing capabilities were excluded from market orientation, the impact of market orientation on customer loyalty witnessed a decline. For instance, it decreased from the previously mentioned value of .49 to a negative figure of -.04 (with the removal of the capability to comprehend competitors and customers from the overall market orientation) and .34 (with the elimination of the ability to excel in the marketing mix). In simpler terms, the responsibility of marketing is to steer the entire organization’s market orientation. Without marketing, the company would find itself considerably adrift.
Based on these numerous scientific discoveries, backed by statistical certainty exceeding 95%, if the CMO assumes the responsibility of establishing market orientation throughout the organization, the intended outcome becomes highly assured! Consequently, marketing should genuinely steer the activities of the entire company. The influence of market orientation on a company’s achievements is thus undeniably significant. Now, the intriguing question is: how can this result be effectively attained in practice?
WHAT BOOSTS COMPANY VALUE?
To understand how marketing can most effectively enhance a company’s value, it’s necessary to thoroughly examine 97 scientific studies. These studies have scrutinized a total of 488 connections between the growth of a company’s value and its marketing activities. The analysis uncovers the influence of customer equity, brand equity, pricing and pricing strategies, distribution methods, capabilities, advertising efforts, engagement on online/social media platforms, and the introduction of new products on company value. Essentially, the analysis encompasses the entire spectrum of the traditional marketing mix. Among the tools studied, some led to an increase in company value, some had no discernible impact, and a few even had a negative effect, resulting in a decrease in company value.
Based on the outcomes (statistical certainty >99%), the three most impactful marketing tools for enhancing company value are customer capital, marketing capability, and brand equity (refer to Figure 2). In case you’re not acquainted with the concept of elasticity, here’s a brief explanation: it quantifies the relationship between two variables by measuring the percentage change in one variable when the value of another variable changes by one percent. Put simply, a one-percentage-point rise in customer capital, capabilities, or brand equity elevates the company’s value by 0.72%, 0.55%, or 0.33%, respectively. Hence, augmenting brand equity by 5%—in accordance with the principles established by scientific findings—equates to a corresponding 1.65% surge in your company’s value.
Figure 2. The three most important marketing tools to increase business value.
Commencing with a study tracking 444 brands over a span of ten years, time series analyses were conducted employing a three-factor model. The findings of brand equity were correlated with total return on capital (ROA), market capitalization, sales, and operating profit. The primary conclusion was affirmative: scientifically substantiated brand equity significantly impacts the aforementioned variables. For instance, on average, a one-unit increase/decrease in brand equity corresponds to a 6.8% rise/drop in return on capital (statistical certainty 99%), and similarly, a 7.6% growth/reduction in return per share (statistical certainty 99%).
If these outcomes don’t suffice or if statistical presentations are unfamiliar to you, let’s explore the matter from a slightly different vantage point. A scientific study scrutinizing the achievements and setbacks of over 5,000 companies unearthed intriguing findings. Approximately 17% of companies do not weather periods of economic uncertainty, and a staggering 80% of those that do endure continue to grapple with challenges even three years after the turmoil subsides. In contrast, the same data divulged that 9% of companies emerge from a recession not just intact, but financially flourishing. They achieve elevated revenues and enhanced profits compared to their pre-recession standing, outperforming their rivals by a significant margin.
In the second category, comprised of companies with a lower likelihood of success, a contrasting response to recession emerged. These companies escalated their investment in marketing beyond the norm. However, it’s worth noting that while this approach yielded marginally better outcomes than the first group’s reaction, it still isn’t the most prudent strategy.
Merely by curbing the inclination to make sweeping cuts, particularly in marketing, and by pursuing cost efficiencies without sacrificing effectiveness, a company can elevate its chances of survival by more than threefold. Additionally, post-recession, companies adopting this approach experienced an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) that surpassed the average by six percentage points. Furthermore, their EBITDA outperformed companies that had reduced their marketing budgets and personnel by almost eight percentage points.
The adage holds true, even in the realm of marketing. A study encompassing three hundred companies and examining its influence on their sales and operating profit across an eight-year span reveals an intriguing trend. As the effects of the latest marketing insights become evident, other companies begin intensifying efforts to cultivate their own market orientation (Figure 3). Consequently, a company that achieves peak performance in year 1, striving for exceptional results, will find itself unable to sustain comparable processes and capabilities in a matter of a few years.
Thus, as elucidated above, a resolute understanding now resides with us: marketing exerts an unequivocal and compelling impact on a company’s revenue and profitability. Parallel to this, physicians, guided by comparable—even more subtle—statistical correlations, constantly navigate decisions pertaining to the well-being and therapeutic needs of all individuals, including yourself (Figure 1).
Edellä kuvatun mukaisesti meillä on nyt selvä ymmärrys siitä, että markkinoinnilla on selkeä ja vastaansanomaton vaikutus yrityksen liikevaihtoon ja kannattavuuteen. Täysin vastaavien, jopa heikompienkin tilastollisten yhteyksien perusteella esimerkiksi lääkärit tekevät jatkuvasti meidän kaikkien, sinunkin, terveyteen ja hoitotarpeeseen liittyviä päätöksiä (kuva 1).
Considering the outcomes of the “Marketing Director and diminishing decision-making authority” assessment, the status of marketing as a function appears to lack substantial recognition. In a parallel vein, the position of the function’s leader—the Chief Marketing Officer (CMO)—also faces a rather dim outlook within companies. In light of these circumstances, a pertinent question arises: why retain a CMO if their responsibilities are progressively delegated to others? Should marketing’s role be limited to advertising procurement and social media management, wouldn’t the function of the CMO become essentially redundant, particularly when a strategic marketing perspective is not imperative? The query may adopt a provocative tone, but it is undeniably valid. If the CMO fails to contribute tangible value to a company’s operations, leading to diminished valuation, truncated tenures, and recurrent clashes with the CEO, the rationale for reserving a strategic seat for them becomes tenuous.
The analysis rigorously controlled for various confounding variables that could potentially distort the findings. These variables included strategic focal points (innovation, differentiation, brand, or diversification), CEO tenure length, external recruitment of the CEO, market concentration, workforce size, COO influence, return on capital, and sales growth. The assessment of the CMO’s influence on company performance was conducted using Tobin’s Q. This choice was deliberate as Tobin’s Q, unlike retrospective accounting-oriented metrics (e.g., sales growth), encompasses future revenues as well and isn’t solely anchored in time-bound revenue. After all, by definition, marketing is a long-term endeavor that places significant reliance on the future, unlike historical accounting values. The selection of Tobin’s Q is also substantiated by the diverse short-term objectives of companies (such as earnings or growth), the array of accounting methodologies, and Tobin’s Q’s integration of an appropriate risk-adjusted discount rate.
This outcome was similarly replicated when evaluating a company’s financial success based on share returns (Jensen α). It’s also worth noting that the CMO’s influence on a company’s financial success through management team collaboration did not yield statistically significant results when gauged solely through the lens of short-term sales growth. In other words, marketing isn’t immediately reflected in short-term cash flow from sales; instead, it represents a long-term effort to augment the brand’s asset value, which eventually translates into cash flow over a more extended period (further elaboration on this will be provided in subsequent reviews).
The primary outcomes of the analysis revealed that among the scrutinized management team members, solely the presence of the CMO exhibited a positive and statistically significant correlation with company value augmentation (r = .20, >99.6%). Conversely, the presence of the sales director and the chief technology officer displayed no discernible connection with company value growth (r = -.04, N.S. and r = -.001, N.S.). Meanwhile, the involvement of the production, purchasing, or supply chain director within the management team marginally decreased the company’s value (r = -.09, >95%).
Despite these explicit outcomes accentuating the utility and even indispensability of marketing, merely asserting that “positive marketing action and the marketing director’s role at the strategic table enhance sales and profitability” proves insufficient in practicality. We require more tangible insights regarding what this notion encompasses and the practical strategies that can be employed to attain such affirmative influence. Drawing from the aforementioned 488 scientific findings, the most potent marketing techniques for amplifying company value encompass brand equity (elasticity 0.33), marketing capabilities (elasticity 0.55), and customer equity (elasticity 0.72). Further elaboration on these subjects will be provided in the ensuing discussions.
