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?
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Jan 25, 2021
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.
Feb 12, 2015
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.
Feb 12, 2015
I disagree with Brent. Marketing is not an expense. It's an investment. That is what gets more businesses into trouble is when they view marketing as a line item expense.
Industrial companies have the biggest problem with this aspect. This quote is very poignant. "Marketing budgets are the most unloved of all budgets at most industrial companies,” per IndustryWeek.
Feb 12, 2015
If it costs a dollar it's an expense on the balance sheet. Theoretically very expense within a company should be considered an investment in growth or else it isn't warranted.
Feb 13, 2015
That is where many companies get into trouble. They see IT or another function as an investment but marketing as a line item expense. Part of that reason has been, and in some cases continues to be, the inability of the marketing department to calculate and communicate their value to the company's top and bottom lines. Whose fault is it? In some cases it's the company's fault because of the mentality, management structure, or the lack of providing funds and personnel. In some cases it's the marketing department's fault because of the lack of communication with IT/IS and sales departments to name a few. It takes structure and a closed-loop system to properly manage the success of marketing and communicate its attributions, but all too often even in the Internet-era companies are flying by the seat of their pants and slinging mud to see what sticks and what doesn't.
Feb 13, 2015
I'm not equating cost with value. First, I'm a marketing professional, so I'm not reducing the role and responsibilities of marketing to a line item. But as a marketer my "value add" should be a multiple of what my compensation costs are and the associated costs of my marketing campaigns. You've already pointed this out in your original post - "... the marketing department needs to consider themselves as a profit center." A "profit center" is driven by P&L So I think we are aligned that marketing needs to generate more money than it costs. Or else, it's a poor "investment" of capital.
Feb 12, 2015
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.
Feb 12, 2015
Thank you Jeff. Love your examples. Like the idea of getting across to Marketing that they are a profit/growth centre. Appeals to their ego as well as points the way to how/where they can contribute.
Feb 12, 2015
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.
Feb 12, 2015
Amen to that Steve. What I find with some multinationals I deal with, is that departments can operate in silos and think that the P&L is Finance's responsibility.
Thanks Brent. Very well put. Like the idea of concentrating on the future growth, rather than focusing on the past results. Yes, mention the past, but as Marketers are more future oriented, play to their strengths with questions like "How can this be improved/achieved?" With sales and marketing personnel I take the P&L to COP/EBITDA