Marketers are moving in the right direction. They're thinking about marketing contribution beyond the performance of emails and campaigns. However, marketers have remained focused on ROI and not on their greater contribution to the fiscal well-being of an organization. The best place to begin understanding marketing's contribution is the income statement.
The income statement is also known as the P& L statement, statement of earnings, and statement of operations. It summarizes revenues, expenses, and profit for a period of time. When reviewing the income statement marketers should consider a few questions.
For example, in your organization, does marketing technology count in depreciation calculations as shown on the income statement? Understanding this calculation will guide you in justifying expenses as well as determining from what budgets these expenses should be deducted from.
So let's explore a few lines of the income statement in more detail.
Marketing's Contribution to Revenue
What's important to recognize is that the income statement begins with sales, and sales (revenue) is always at the top of the income statement. Revenue on an income statement is referring to the product or services that were delivered during a period of time. It's not closed opportunities; it's what was actually delivered.
As a marketing organization, can you demonstrate how you speed up delivery of services? Have you implemented an onboarding program that reduced time-to-delivery from 8 weeks to 4 weeks? Have you developed material that allows the customer to execute pre-work resulting in faster implementation? Are you tracking purchasing behavior and buying signals to understand demand insight which contributes to inventory control and faster delivery of the product with minimal wait time?
When discussing revenue, marketers should recognize that "services" is an important word. As a marketing organization, do you provide services to customers through education and/or content that factor into the services delivered? Understand what that dollar amount equates to.
Marketing needs to understand their contribution to this "top-line growth".
Marketing's Role in Liabilities
Another line on the income statement is current liabilities. Current liabilities represent money owed to creditors and others that typically must be paid within a year. Long-term liabilities are usually bonds and mortgages; debts that the company is contractually obliged to repay over a period of time longer than a year. So how does this apply to marketing?
Well, let's say your organization is executing a major marketing campaign involving creative services, display advertising, print advertising, and content development. If the work is completed in January and totals close to $1 million you might determine the campaign will benefit the company for 12 months. You could advise the company to view this $1 million dollars as a prepaid asset and charge one-twelfth of the cost each month on the income statement.
But if the company is performing well financially then you may advise the company to "expense" the entire campaign and charge it all against January's revenue. Now marketing has a marketing program that's paid for, and profits in the months to come will be higher.
There are 2 variables at play; the financial health of the company and projected long-term benefit of the marketing program. Marketers must understand the company's financial wellness as well as provide a confident projection on the longevity of the marketing investment. If any of the creative or content development was executed internally, and cross-charged to an internal department, you'd also want o calculate the accrual. The accrual is the portion of an expense item that is recorded in a particular time span. Much like product development costs, these costs would be spread out over several periods so a portion of the cost would be accrued each month.
Taking this a step further would be positioning this marketing expense as ?% of sales; showing the magnitude of an expense number relative to revenue.
We've started identifying where marketing impacts different lines on the income statement. Next week we'll delve further into marketing's impact on profitability, profitability ratios, and some suggested fixes to low profitability.