There may be no more important function within a brand-centric company than marketing to influence future financial (cash flow) success. Financial results are routinely explained by four drivers: volume, price, mix, and cost. Marketing’s effect on volume and price is well understood. Expressed most simply in economic terms, effective marketing increases brand preference, pushing the demand curve upward and to the right. The brand owner can then choose to capture this improvement as an increase in volume, an increase in price (and thus margins), or a combination of the two at any point along the improved demand curve.
Mix is the degree to which various brand alternatives can be established and sustained, frequently with differentiated price points. Marketing, as an expenditure in and of itself, clearly has a direct effect on costs and also influences other non-marketing costs. No one would question that, all other things equal, extremely effective marketing increases sales volume (and possibly vice versa). Most observers of the beer industry would certainly highlight Constellation Brands as a winner in the industry’s high-stakes marketing battle. Constellation’s management clearly is acting as if they see something that is closer to causation than random correlation.
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Another important impact of effective marketing is its influence on consumer purchasing behavior in terms of price. This beneficial influence may manifest itself either in the purchaser’s willingness to pay more or the purchaser’s acceptance to pay a non-promoted price versus a discounted price. Both work in favor of the successful marketer. A robust Financial Value of Brands methodology arguably could foretell a loss in pricing power before it materializes in deteriorating margins on the income statement.
Mix is often misunderstood at best, or ignored at worst, in terms of how marketing can drive financial results. Within a beer company with a broad portfolio, imagine the financial leverage from shifting a consumer from low-priced Keystone Light to mainstream-priced Coors Light. How about from Fairfield Inn & Suites to JW Marriott? Or from store-brand pot pies to Banquet or Marie Callender’s branded offerings? These impacts, typically flowing through the revenue line of an enterprise, cannot be overlooked or overstated.
Marketing can influence non-marketing costs in many ways. A packaging design or graphics decision that has a consumer-demand impact (i.e. volume) may increase or decrease cost of goods. Effective marketing may, over time, reduce research and development costs or market research activities. Effective marketing of strong brands can build positive sentiment among lenders and investors, thereby reducing the cost of capital. Marketing can even inspire employee pride, reducing turnover, increasing recruitment efficiency, and improving other human resources outcomes. In a broader context, aggregate marketing improvements across an economy also have a macroeconomic benefit, expanding the “size of the pie.”
Marketing undoubtedly impacts the four traditional financial drivers — volume, price, mix, and cost — and then adds in a fifth, longer-term, and very powerful element: optionality.
The Fifth Driver – Optionality
What about this mysterious fifth driver, called optionality? It is defined as “opportunities to leverage investments in a marketing asset, such as a brand name, customer franchise, or distribution network… In the case of a brand, it is the use of the brand name beyond the initial covered products through a brand or line extension.” Broader than simple line extensions, the concept of optionality includes all brand extensions that monetize growth opportunities outside the brand’s initial manifestation.
An example brings this to life. Frozen, a full-length animated film adaptation of the fairy tale The Snow Queen by Hans Christian Andersen, was released by Disney in The film itself was a spectacular success, achieving international revenues estimated in excess of $1.3 billion, but it was Disney’s subsequent activities that leveraged the optionality of Frozen. Apart from multiple video and audio releases, including the feature-length sequel Frozen 2 in 2019, Disney monetized the franchise through merchandise, a traveling ice show, and a Broadway stage musical adaptation. Legendary investor Charlie Munger described Disney as the equivalent of “an oil company that can put the oil back in the ground after it is done drilling so it can drill it again.”
Finally, consider the value creation from optionality generated by Constellation in expanding Corona — first with Corona Light, then Corona Premier and Corona Familiar, and most recently Corona Hard Seltzer. While this brand extension example does not branch out to entirely different platforms like Frozen, successful line extensions are nonetheless another manifestation of the financial power of optionality.
Collectively, we call volume, price, mix, cost, and optionality the five financial value drivers of marketing. These five drivers allow us to clearly see and explain the connectivity from successful marketing activities to brand preference, leading to profitable growth, increased cash flows, and higher enterprise value.
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To close with somewhat of a provocation:
If you asked most people who the Chief Asset Steward is at a public company, the most frequent response would likely be the Chief Financial Officer. Based on what we have discussed, could it be that the Chief Marketing Officer is really the Chief Asset Steward at a brand-centric company?
Even if only partly true, it calls into question the board compositions of many companies, which tend to have few if any marketing experts, and the pervasive lack of CMO participation in quarterly earnings calls.
Contributed to Branding Strategy Insights by Jim Meier, retired Finance executive of Molson Coors Beverage Company, Trustee of the Marketing Accountability Standards Board (MASB), Co-Author, The Financial Value of Brands Imperative.
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive and valuable at pivotal moments of change. Please email us to learn how we can help you compete differently.
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