Q&A with Tim Ambler (London School of Business)

 

MarketingNPV (MNPV): You're no fan of return on marketing investment (ROMI) as a metric, are you?

Tim Ambler: It's arithmetically flawed. If you're looking at the return from marketing, you would normally look to things such as net cash flow or shareholder value, which all subtract costs from revenue. But what ROMI does is divide revenue or profits by costs, and when you start dividing rather than subtracting, you open the door for some erroneous conclusions. For example, if you spend $1 million and generate $500,000 net incremental profit, you have a 50% ROI. But if you spend $100,000 and generate $200,000 incremental, you get a 200% ROI. Which is better for the company? ROI doesn't give you the whole picture. Free cash flow can be so much more important to most companies.

Another concern is that marketers driven to increase ROMI can do so by cutting the "I," and that isn't generally an effective strategy for growth. ROI works when you have to make a choice between options which require the same amount of scarce capital and the choices are mutually exclusive. But DCF [discounted cash flow] would still be the preferred metric in such cases. Marketing is not a once-off capital sum (for which ROI was invented) but a continuous stream of expenditures that the company makes every year.

MNPV: So are you advocating more of an NPV or DCF approach?

Ambler: DCF is fine for measuring the future potential of any activity compared with another. Assuming you do DCF on a normal accounting basis, you are evaluating alternative marketing initiatives against each other on the basis of expected cash flows for the current year and for several years into the future. That's fine. But that is quite different from trying to evaluate the results of the marketing you've done up to the present time.

If you're looking at actual results, you want to know what has happened up until now. You don't want to confuse that with what might take place in the future. So you have to take the short-term profit you've achieved and see if your brand asset (I call it brand equity) has gone up, in which case you want to take even MORE credit for achieving both short-term profit and increase in brand assets. But if the brand assets have gone down, your short-term profits aren't viewed quite so positively. This is very important when looking at things like price promotions.

MNPV: Are you suggesting that organizations need to do a much better job of defining their objectives upfront?

Ambler: I think that's true but that's not what people do. The biggest predictor of what will be in this year's marketing plan is whatever was in last year's marketing plan, not some change in objectives.

MNPV: Short-term profit is fairly easy to benchmark against other investments the company might make. But how do you measure "brand equity," as you define it?

Ambler: This is difficult. In a perfect world, it would be nice to value brand equity at its present value because then you could express brand equity in short-term dollars. Unfortunately, you can't do that. You need to look at a dashboard of key brand equity measures and be broad-minded enough to accept multiple components of your assessment instead of a single financial number — with the idea that a dashboard gives you a better idea of what the state of your marketing activity is.

MNPV: That sounds like an approach intended to increase confidence in marketing's "accountability" vs. one intended to specifically measure return.

Ambler: Yes, and therein lies the challenge when it comes to explaining to non-marketing people, particularly financial people, how marketing really works. The financial people would like everything measured in dollars (as we all would), but it's just not practical. You would need to make too many assumptions along the way and the validity of your ultimate numbers would be suspect at best. Now I'm all for marketing people becoming as financially literate as possible, but the financial people must become more marketing literate as well. And it comes back to the point about setting objectives. If the financial people are involved in the marketing planning process, as they should be, then they will come to understand that the dashboard is really the only way to do it.

Read our review of Tim Ambler's book Marketing and the Bottom Line: The Marketing Metrics to Pump Up Cash Flow.