Net Present Value – The next big tool in Marketing!

“Master students in Marketing should have a minor in Finance”
Philip Kotler in a speech  in Oslo 2003 (Thanks to Håvard Hansen).

Well… maybe not when it comes to using it, but very important when it comes to understanding what it is.

And here you have it:

In plain word NPV is a formula for capital budgeting to analyze the profitability of an investment or project, and to evaluate different possible uses of capital.

I admit it is not normally used to evaluate a marketing spending against other use of the budget, to see what will be most profitable. But during the recent crises I have seen CFOs use this tool to do just that.

It is important to know your “enemy” and if you know some of the tools the financial departments uses when they are planning budgets it might help you to fight for your marketing budget (maybe even increase it).

And let’s be honest (we are, after all, marketers): If we manage to talk the CFO (the target customer in this case) language when defending our budget, it’s easier to achieve acceptance.

If you, together with this, can show what marketing brings to the table, you have come a long way in securing your budget.

HBR had several discussions and articles during the financial crisis about what marketing could “bring to the table” and why most marketing positions were not a part of the top management group.

One of their conclusions was that marketing was generally viewed as a cost, a necessary cost but still a cost, and that the result of marketing in many cases was quite “fussy” and intangible. And this is some reasons why marketing budgets get cuts during crisis.

For me it’s getting more and more evident that the best way to do this is using econometric modeling (sales modeling). Another well used tool in finance and statistics.

According to Marie Oldham, Chief Strategy Officer, MPG, one of the judges in the IPA Effectiveness Awards 2010, of the 68 entrants in the competition, a staggering 39 (close to 60%) of them used econometric modeling to prove their results.

My concern is that most marketers don’t have the necessary skills and background when it comes to statistics and finance to use these tools. It’s just in the later years that most Business schools marketing programs has incorporated more statistical and finance courses. And not without hurting the programs when it comes to students.

An example from my own school:  We used to have a 4 year bachelor/master program in marketing and in 2002 we had more than 400 applicants (just to set it in perspective 400 applicant for a program in a private Business School in Norway is very good…). Then we introduced more economic and finance courses into the program. By 2007 we had 71 applicants and in 2008 we terminated the program. Market Research showed us that the introduction of statistic and finance was the main reason.

So marketers; get back to school for those hardcore finance programs, or faster, and in many cases better, hire people into you marketing departments with that background.

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