Financial Marketing

I have always urged marketers to be strong in financial thinking. This is not a natural inclination of marketers. They are marketers because they are more interested in people than in numbers.

Yet few marketers will rise to the top of an organization unless they have a good grasp of financial thinking. They need to understand income statements, cash flow statements, balance sheets, and budgets.

Concepts such as asset turnover, return on investment (ROI), return on assets (ROA), free cash flow, economic value added (EVA), market capitalization, and cost of capital must be as familiar to them as sales, market share, and gross margins.

Companies today are focusing on shareholder value. The CEO is not satisfied when the marketing vice president shows that the recent marketing initiatives have resulted in increased customer awareness, knowledge, satisfaction, or retention. The CEO wants to know marketing’s impact on ROI and stock prices. Clearly marketers must start linking their marketing metrics to financial metrics.




Corporate cost cutters are now carefully scrutinizing marketing related costs. Marketers must now justify every item in their marketing budgets and be able to show how each contributes to shareholder value.

One useful step is for companies to appoint marketing controllers. These are skilled financial people who understand the marketing process and what it takes to win. They know that advertising, sales promotion, and other marketing initiatives are necessary. Their task is to make sure that the money is spent well.

You can improve marketing’s financial returns in two basic ways:

• Increase your marketing efficiency. Marketing efficiency involves reducing the costs of activities that the company must carry out. Suppose the company needs point-of-purchase displays and goes to only one display firm and orders them. Had the company invited competitive bids, it might have found a lower price for the same or better quality. Or a company might perform its own marketing research for X dollars, only to find that equivalent or even better quality research might have been outsourced to a marketing research firm for fewer dollars. Other examples: hunting down excessive communication and transportation expenses, closing unproductive sales offices, cutting back on unproven promotional programs and tactics, and putting advertising agencies on a pay-for-performance basis.
• Increase your marketing effectiveness. Marketing effectiveness represents the company’s search for a more productive marketing mix. A company might increase its marketing effectiveness by replacing higher cost channels with lower cost channels, shifting advertising money into public relations, adding or subtracting product features, or adopting technology that improves the company’s information and communication effectiveness.

The aim of marketing is to maximize not just your sales but your long-term profits. While salespeople focus on sales, marketers must focus on profits. Show me a top marketer, and you will be showing me a person who is financially well-versed.

Focusing and Niching

Wise companies focus. An old saying is that if you chase two monkeys, both will escape.

The mass market is made up of many niches. The problem of being a mass marketer is that you will attract nichers who will take better aim at specific customer groups and meet their needs better. As these groups are pulled away, the mass marketer’s market shrinks.

Your choice therefore is whether to be a “gorilla” or a “guerrilla.”—to be niched or be a nicher. I would argue that there are riches in niches. The customers in a niche are happy that someone is paying attention to their needs.

And if your company serves them well, you will own the niche. Although the volume is low in a niche, the margin is high. Competitors will keep out because the niche is too small to support two players.


What does a successful nicher do for a second act? What the nicher should not do is become a generalist and go after the mass market. There are three sound strategies:

1. Sell more products and services to the same niche. USAA, the giant insurance company, originally sold only auto insurance to military officers. Then it added life insurance, credit cards, mutual funds, and other financial products to sell to military officers.
2. Look for latent or adjacent members in the niche. USAA recognized that it would eventually run out of enough military officers to sell to. So it decided to extend its target market to include all members of the military.
3. Look for additional niches. Every niche is vulnerable to attack or decay. The best defense against the vulnerability of a single niche is to own two or more niches. In this way, the company not only enjoys a high margin from its good service to the niche, but it also enjoys high volume through owning a portfolio of niches. A good example is Johnson & Johnson, which aside from being a strong force in a few mass consumer markets, is the technical or market leader in hundreds of specialized business-to-business markets.

Nichers are not necessarily small companies. Professor Hermann Simon, in his Hidden Champions, lists scores of midsize German companies that enjoy over 50 percent market shares in well-defined global niches.

Examples include Steiner Optical with 80 percent of the world’s military field glasses market; Tetra Food making 80 percent of the food for feeding tropical fish; and Becher producing 50 percent of the world’s oversized umbrellas. These and other companies pursue well-defined niches in the global marketplace, and although they are less visible to the public, they are highly profitable.

Forecasting and the Future

The company that doesn’t see trouble ahead is headed for real trouble. That’s why it hires economists, consultants, and futurists.

Yet people must be cautious about predicting the future. Ben Franklin said, “It is easy to see; hard to foresee.” An old saying is that those who live by the crystal ball will eat ground glass.

So many eminent observers have made wildly erroneous predictions.

• Thomas Edison opined that “the phonograph is of no commercial value.”
• Irving Fisher, eminent Yale economics professor, said in September 1929, just before the Wall Street crash, “Stock prices have reached what looks like a permanently high plateau.”
• Thomas J. Watson of IBM said in 1947: “I think there is a world market for about five computers.”
• Ken Olson, former CEO of Digital Equipment Corporation, said in 1977, “There is no reason for any individual to have a computer in their home.”
• Jack Welch, the retired chairman of GE, admitted to three forecasting errors during his career. When U.S. inflation was running at 20 percent, he forecasted that inflation would remain in the double digits. When oil hit $35 a barrel, he predicted that oil’s price would rise to $100. When Japan was in its prime, he predicted that the Japanese would continue to take over more American industries.

All of these show the weakness of using today’s situation to predict tomorrow’s situation. The story is told about an auto company that increased its production of green cars after noticing a spike in their sales. The company didn’t realize that dealers were slashing prices to get rid of green cars.

John R. Pierce of Bell Labs beautifully explained why so many predictions fail: “The trouble with the future is that there are so many of them.”

The inimitable Yogi Berra said that “prediction is very hard, especially of the future.” He also despaired: “The future ain’t what it used to be.”

The most truthful prediction is that business will be either better or worse. The same can be said for the economy.

Woody Allen commented on how to handle bad times: “More than anytime in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly.”

Businesses have relied on economists to predict the future. There are two types of economists: those who can’t predict the future and know it, and those who can’t predict the future and don’t know it.

After asking different economists for an opinion, Harry Truman finally gave up and requested a one-handed economist. He did not want to hear the words: “On the other hand.” Basically, economists exist to make astrologers look good.

In spite of this, in order to be in front your business needs to forecast where customers and the economy are moving. Wayne Gretzky, the brilliant hockey star, when asked how he is always in the right position, said: “It isn’t where the puck is; it’s where the puck will be.” Yet watch out for experts who give a forecast in the form of a number or a date, but not both.

The truth is that the future is already here; it has already happened. The task is to find and study what the small percentage of future-defining customers want. The future is already here but is unevenly distributed in different companies, industries, and countries.

Dennis Gabor, the business strategist, is less concerned with predicting the future. He believes: “The best way to predict the future is to invent it.” Your company faces an infinite number of futures and must decide on which one it wants.