When is CAGR important to marketing?
I am delivering a financial program to the marketing department for a client. The financial accountant wanted CAGR included in the program, which I did. While both the financial accountant and I can see the benefit of considering CAGR, I am not sure if it may have been a little too advanced for the target audience; given that partial had not been exposed to the profit and loss account. When do you think CAGR in necessary in Marketing?
In financial markets, the time value of money is always taken into account. It is assumed that if an investment provides a series of cash inflows, they can be re-invested to earn a positive return. Alternatively, an investment that does not have intermediate cash-flows, is assumed to grow at an annual rate each year, to be compounded every year to reach the final value. The compounded annual growth rate (CAGR) of an investment is the underlying compound interest rate that equates the end value of the investment with its beginning value.
Given the metric driven approach to measuring marketing success I think its important that the marketing team understands the concept of CAGR and how it relates to marketing expense and budgets. First, avoid discussing the CAGR calculation, unless you want to loss 90% of the room. Instead, focus on the concept of growth over time and how managing expenses during growth (via economies of scale and other efficiencies) leads to profit. Marketing is an expense and at a minimum needs to be discussed as part of the profit and loss of the company, whether or not they are directly responsible for P&L. Somewhere marketing expenditures rollup to someone's P&L.
Tracking marketing ROI metrics has improved drastically with the Internet. Therefore, its possible to measure the impact of marketing as a whole or drill into specific campaign successes. As such, marketing budget allotments can be correlated to growth outcomes - either by expanding or contracting the budget accordingly. CMOs (or any marketing head) should consider their expenses in light of profit, regardless of whether they are directly responsible for P&L. Marketing should be run as a profit center with a goal of netting ROI multiples against expenses.
1. CAGR is essential for marketing to know because marketing budgeting needs to be related to the growth rate of the industry and of the company since most businesses tie marketing budgeting as a percentage of revenue.
For example, if a company is say $7 million today but the growth goal is to be $20 million in 5 years. The marketing budget needs to be related to growing to that $20 million level not maintain the current $7 million.
2. CAGR is also important because the growth rate in the marketing budget should be tied to the CAGR. For example, if a company's marketing budget is say 10% of revenue today and the CAGR is 4%, then next year the budget should be 10.4%, 10.8% the following year and so on.
3. The marketing department needs to consider themselves as a profit center or a center to instill grow in the company. So if the company's goal is to have a CAGR 8%, it is essential for the marketing department understands this goal and how they can help to achieve that goal. However, all too often marketing is kept at the fringes and don't have a seat at the executive table.
Once the entire company is responsible for owning the P&L then the proper rollout of training needs to take place so all have a baseline. Until then people will not get involved and have no skin in the game.