In 2013, Raja Rajamannar, chief marketing officer of Mastercard, wanted to elevate the marketing division and give it a more strategic role. At that time, Mastercard was already a well‐known brand. Rajamannar saw that marketing efforts had been successful in raising brand awareness. However, they hadn't led to increased revenue.

Rajamannar also observed that the CFO did not work directly with the CMO, even though marketing expenses were among the top three expenses listed in the income statement. To change course, Rajamannar asked the CFO to work with him and integrate the departments.

For this integration to work, Rajamannar added a finance team member into his marketing team. He asked the newly formed group to use a formula to measure ROI for marketing activities. The goal was to set up a common knowledge to measure marketing's impact on the broader business goals.

As a B2B2C brand, Mastercard's strategic plans included engaging directly with the end customer. The company wanted the individual cardholder to recognize the brand. To achieve this, Rajamannar carried out experiential marketing executed by Mastercard in regional offices. He wanted every region to find the right way to communicate directly with the individual customers. He then asked the regional offices to measure the impact of the campaign using the ROI measurement. As a result, Mastercard's brand value rose from US$69 billion in 2013 to US$112 billion in 2021.¹

The Mastercard example shows that an integrated relationship between marketing and finance can significantly affect competitiveness and sustainability. In reality, there is often a lack of harmony between the two departments. For this reason, we listed it as a blind spot previously in this book.

In this chapter, we'll look at overcoming established barriers to unite marketing and finance. We'll explore the mutual benefits that can come from integrated departments. We'll also study how the two can be brought together through a step‐by‐step process (see Figure 14.1).

Historically Important but Separate Pillars

Despite being in one management ecosystem, traditionally the marketing and finance departments often are unconnected. The common practice among marketing leaders is to make decisions regarding budgets primarily based on current business strategy. Marketing leaders are less likely to determine their budget calculation based on the measurements of financial returns. This practice can potentially bring misunderstanding to both marketing and finance teams because apparently, although they both have the same goal―supporting the company's business strategy―they think differently.²

Usually, the finance team will measure the cost and return of marketing activity. However, according to marketing leaders, numeric formulas to measure marketing campaigns might not always be the right approach. Most of the marketing strategy aims for long‐term impact. In the short term, marketing activities can bring a quantitative return. However, for long‐term impact, marketing activities get more qualitative results, such as the brand image.³

Uniting the two provides an opportunity for better performance. Sarah Allred and Timothy Murphy, in an article published by Deloitte, revealed that a partnership between marketing and finance is needed for growth. Their research showed that executives at the highest growing companies are strongly aligned on measuring marketing's impact.

This alignment provides an essential basis for harnessing the strengths of CMOs and CFOs. Deloitte's research also found that trends are changing: there are indications that some CMOs and CFOs are finding ways to collaborate more effectively. A close and harmonious relationship between the CMO and CFO can significantly help business performance.⁴

Marketing and finance divisions can and should create value for each other. Finance gives a budget to fuel marketing activities, and marketing activities can bring valuable revenue or brand value. Both the marketing and finance divisions need a common language and agreeable way to report to each other. As two very decisive departments, both should work together in line with their company's mission to achieve its vision.⁵

Efficiency, Effectiveness, and Productivity Revisited

In Chapter 13, we discussed efficiency, effectiveness, and productivity using a balance sheet and income statement loop (see Figure 14.2). In general, if marketers want to know the efficiency level, they can review the income statement and calculate the return on sales (ROS) and net profit margin ratios. All of these reflect profitability.

Generally speaking, a “no‐margin‐for‐error” approach does matter to avoid losses due to inefficiency. By understanding the income statement up to operating income, we realize we must avoid any potential inefficiencies. These include unnecessary costs related to non‐value‐creating activities and errors that could be prevented.

As seen in Chapter 13, marketers can calculate the asset turnover ratio to see how effectively they are running as a team and business. If the company's assets are growing but there is not an adequate increase in sales, it could be due to using the incorrect assets. Or vice versa. Perhaps the company has the right assets, but the problem lies in sales efforts. There could also be other fundamental mistakes, such as targeting the wrong segments, inappropriate positioning, commoditization of value propositions (as manifested in products and prices), weak marketing communications, or a misaligned sales strategy.

Combining efficiency and effectiveness leads to a measure of productivity, as reflected in the return on assets (ROA) ratio. If there is an issue with productivity, the source can be investigated. Low productivity could be caused by the following:

• Marketing and sales operations are inefficient even when they have the suitable assets.
• Marketing and sales operations are efficient, but they don't have the right assets.
• There is inefficient marketing and sales operations as well as ineffective assets.

Standard Financial Statements Are Not Enough

A handful of marketing metrics are relevant to financial calculations. These include marketing ROI, cost per action (CPA), customer acquisition cost (CAC), customer lifetime value (CLV), and revenue attribution. Although critical, not all marketers or companies use these key performance indicators (KPIs). Let's review each:

• ROI. In a marketing perspective, this is a way to calculate the effectiveness of any marketing activity. ROI is calculated by subtracting marketing cost and sales growth and dividing it by the marketing cost. The result is a percentage of ROI. For example, if the ROI of any marketing activity is 20%, it means the investment of the marketing activity creates 20% of the profit.⁶
• CPA. As the total cost of the campaign divided by the number of converted customers, the figure describes how much money we have to spend to get one new customer coming from a marketing campaign activity. The lower the CPA, the more efficient a marketing campaign is.⁷
• CAC. This refers to how much it costs to persuade one customer to purchase a product or service. It is found by taking the sales and marketing expenses and dividing them by the number of new customers.
• CLV. The formula calculates the total income a company can expect to receive from a typical customer as long as that individual purchases from the company. It is a measure of customer value and loyalty throughout the relationship.
• Revenue attribution. This term involves matching customer sales to a specific advertisement to see where the revenue is coming from. It is often used when deciding how to calculate future advertising budgets.

Some of these metrics are vital for measuring marketing performance. However, they are not usually included in standard mandatory financial statements. The financial statements are not typically marketing specific.

There are also marketing‐specific nonfinancial metrics to evaluate marketing performance. These provide insight into strategic and tactical decision‐making processes. Many of the common ones are listed in Table 14.1.

These metrics are not always shared with non‐marketing divisions because they are often viewed as insignificant. Sometimes, the performance looks optimal based on these metrics. Unfortunately, with no or few financial results, they are deemed irrelevant. The difficulty in converting those nonfinancial results into financial results often raises skepticism from other departments, especially finance. Metrics that look solid but do not have meaning attached to them are often referred to as vanity metrics.

Marketing‐specific financial metrics are essential and should be presented in meetings, especially with the C‐suite. Despite their usefulness, many of the financial metrics in Table 14.2 are not used. If they do exist within a company, they are usually not part of the standard mandatory financial statement (with the exception of common ones such as sales and costs of goods sold).

It is ideal for entrepreneurial marketing organizations to combine finance and marketing teams and set agreeable metrics to interpret marketing activities financially. Without a good analysis and interpretation of these metrics, marketing decisions perhaps will be based on best guess, estimates, or assumptions. If we refer only to the standard mandatory financial statements, which are not marketing‐specific, our marketing decisions will be misleading and ineffective.

Using marketing‐specific financial and nonfinancial metrics that have been approved by finance counterparts, marketers can increase accuracy in measuring the efficiency, effectiveness, and productivity of their efforts. Teams should measure their marketing activities in all stages, from creating awareness to maintaining customer loyalty. It is important to select the appropriate marketing‐specific metrics based on the specific marketing objective.

Stages of Unification

There are five stages that can be used to indicate the relationship between marketing and finance. They range from two separate groups to full integration (see Figure 14.3). We'll look at each stage next.

Stage 1: Basic Communication

In this phase, the relationship between the marketing and finance departments is still separated but has opened meaningful and essential communication lines. Information interaction has also begun. The information shared is not usually regarded as valuable. Each department functions strategically on its own.

Similar to the previous stage, each person in the two departments still focuses on their respective goals based on the KPIs of their given department. While maintaining their routines, they have begun paying attention to the agenda of one another. They recognize that these could have implications for other functions. Both departments have shown signs of coexistence but don't collaborate to solve internal problems.

Differences of views are evident between the two departments, especially regarding budget allocations, how to use them, and what they want to achieve. However, both departments intend to adjust to enhance suitability in operational matters. Financial professionals do not fully believe most assumptions that marketers use when submitting the marketing budgets. Yet the finance team has started to share information with marketing about their expectations regarding the budget allocation. Marketers have started to consider the financial team's concerns in using this budget.

The Finance–Marketing Loop

The finance–marketing looping runs flawlessly in a fully integrated condition. With the support of technology, it will strengthen the marketing and finance integration platform. Figure 14.4 relates this relationship.

The looping process begins when the two departments set goals and strategies to achieve these goals before the budget allocation. In addition, the two departments outline and agree on technical or operational matters to ensure a smooth execution stage. Both departments do all their work through an integrated offline and online platform.

The marketing department will allocate the budget for marketing operational activities and investment on at least three elements: customer, product, and brand (see Table 14.3).

The marketing team must deliver to the finance department a demonstrable result from these operational and investment activities. First, the marketing department will achieve several nonfinancial goals by creating product or brand awareness in the eyes of prospective customers or their specific target market. If the market sees a clear value proposition, non‐overpromised positioning, strong differentiation, and the chance to receive real solutions, this will create a strong appeal for the product or brand and ultimately generate customer loyalty.

Later, the sales team will convert these nonfinancial achievements into financial results, step‐by‐step from a preference to an interest in buying, and finally, purchase. Purchases in cash will immediately generate cash inflows for the finance department, whereas noncash purchases will result in account receivables that will become cash and will be received by the finance department. If the nonfinancial KPIs achieved are strong enough, but the financial results are not satisfactory, it will be concluded that something is awry. Both departments will work to find the root cause and solve it quickly.

With tangible results in the form of returns, trust will be built between the finance and marketing departments. This accelerates the finance–marketing loop cycle. In essence, the marketing department must always link its efforts with actual value creation as reflected in both nonfinancial and financial metrics.

Marketing investments, usually in intangible assets such as brands, sales networks, loyal customers, and product differentiation, cannot be recorded in a balance sheet. However, these intangible assets have value at a certain range of prices, as indicated by the variance between book value and market value. If we find that the market value is higher than the book value, then the value of intangible assets, including those created through marketing investments, will have a higher value. The high value of intangible assets can be used as an indicator to show that the company's future financial performance is promising.¹⁰

Based on these explanations, marketing teams should not be lulled by the view that only marketing is everyone's job. Now finance is also everyone's job, especially for marketing people themselves. As such, marketers can understand and master the language of finance. With those tools in hand, the department can better communicate with other functions and show up at C‐suite meetings, ready to carry its own weight in strategic conversations.

Therefore, it is necessary to develop a focused finance course for marketers. This could be offered through educational institutions as well as in‐house training programs at companies. The lessons could demonstrate the key ratios to know, explain how to communicate with finance, and lay out the process to integrate both functions.

Key Takeaways

• A partnership between marketing and finance can reduce friction, lead to integration, and propel the company toward growth.
• The relationship between marketing and finance can be identified as five stages on a spectrum, ranging from both departments operating as separate groups to being fully integrated. These stages are: entirely separated (stage 0), basic communication (stage 1), limited coordination (stage 2), comprehensive alignment (stage 3), and fully integrated (stage 4).
• When fully integrated, there is a loop that runs flawlessly between finance and marketing; it can be continually strengthened and upleveled.
• Both marketing and finance knowledge are needed throughout an organization. To raise awareness, companies can hold internal training sessions to teach basics.