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How Accountants Bring Value to the Marketing Function
By David Fordham, Diane Riordan and Michael Riordan
Technology has ushered in a new marketing era. Thanks to tools like affordable data storage, real-time capture devices, satellite communications, and multidimensional databases, traditional mass marketing is giving way to newer strategies that market products or services to specific groups of customers. Using the information from these IT tools to make decisions and formulate action plans turns the data into business intelligence. Now management accountants can play an expanded role in their companies by mining business intelligence in order to plan and control the marketing function.
"Knowledge is power," says Debbie Bliss, project director for Fordham Consulting in Weyers Cave, VA. "Today's technology provides companies an unprecedented ability to gather information about their sales activity. Many firms don't know how to leverage this information. The real value comes from translating the stored data into intelligence and then applying that intelligence to develop a customer-based strategy."
The Customer-Based Approach
As consumers, we have all experienced customer-based strategies. Companies possessing data to support this approach are financial organizations, including your credit card company; supermarket chains with most-valued-customer card programs; airlines and hotels with frequent-user programs; car rental companies; telephone and telecommunication organizations; and catalog companies. Because of this data, a particular buying pattern can trigger an unsolicited call. An individual stream of coupons can be produced at the supermarket checkout counter. The use of a check issued by a credit card company can produce a wave of new blank checks from the original company, and competitors, as well as trigger a personal telephone call with additional credit products being offered.
In the traditional environment, mass marketing promotes a standardized product by blanketing the market with repeated messages. Volume goals are set in advance, and the management accountant's role is to allocate a portion of the budget to advertising rather than seeing advertising as an activity that might actually drive the business.
By contrast, promotions in the new marketing environment target specifically identified consumer needs. To do so, business intelligence systems record sales by individual purchaser, track individuals' buying habits over time, and compare their coupon redemption habits. Analysis of intelligence can identify patterns, signal trends, and ultimately increase overall profitability.
This customer-based approach can result in better decisions on where to invest marketing efforts. Marketing plans formulated under a customer-based approach usually begin with a business review, during which the environment is studied to gather business intelligence on both current and potential products and markets. Existing databases within the company or industry are instrumental in analyzing specific customer behavior. Examples of behavior include that of regular customers, occasional customers, and customers influenced by specific pricing techniques. The marketing plan may include an incentive or communication tactic to achieve the desired customer behavior, and it addresses questions like: Who's buying what, where, how, and why? How can the behavior be reinforced? What would be the cost of reinforcing this behavior? Who are the potential new customers? What would be the cost of attracting new business? Finally, which marketing behaviors are expected to produce a profit, and how does this profit compare to the expected returns to be generated by other marketing behaviors?
Management Accountant's Role
Management accountants and financial managers are the logical choice to assist the marketing function in moving to a customer-based approach because of four necessary—and sequential—activities. First, we can identify the information that's needed because we are familiar with the financial data being collected. Second, we can collect the information because, in many cases, we already operate huge multidimensional databases that provide, or can be tweaked to provide, the required data. Third, we can study the data by using advanced analytical techniques. Finally, we can use the information to make recommendations and formulate activity plans. These four activities transform information into business intelligence.
The financial professional may become involved as an information specialist in constructing or using (mining) the database, as a consultant to the marketing manager in comparing the costs of promotions to the benefits, or as a watchdog over the details of advertising agency reports. In this new role, management accountants will gain access to information stored in a database, so we must become sensitive to the privacy issues surrounding shared information. Congress has enacted the Financial Modernization Act and continues to consider additional bills to protect consumers' financial privacy.
Accountability for Marketing Dollars
Marketing plans today must pass the same cost-benefit muster required of other business projects. Viewing the advertising campaign as a capital budgeting decision, the management accountant can formally assess its outcome. In addition, advertising clients are requesting "post-buy" analyses to make sure intended audiences have been reached, and this demand for accountability allows financial professionals to play another important role in the new marketing environment.
Technology monitors the advertising campaign. Bar codes allow information specialists to track consumer behavior at the retail level. Computers measure sales from various media, such as direct, Web, and catalog sales; frequency of sales; and the pricing structure under which those sales are made. When the marketer understands what the customer is actually doing, buying, or using, he/she can evaluate, adjust, or reformulate marketing plans.
Here's how accounting tools can "mine" business intelligence in the marketing function. Profitability (net income divided by net sales) may be determined by running customer profiles. Behavior can be studied by age group, product line, industry segment, geographic area, distribution channel, type of marketing effort, market segment, and responsibility center (division, plant, department, and units within the department). The cost of the marketing effort (direct mail, cold call, e-commerce, television, newspaper) can be compared with the return.
One method you can use to compare profitability is contribution margin analysis (revenues minus variable costs). How much of the advertising budget went to advertising on the Internet? What was the cost of advertising per dollar of electronic sales generated? How does this margin compare to telephone, catalog, storefront, or kiosk sales?
Direct cost ratios may be computed to weigh the benefit of additional selling costs. Examples of these ratios are direct travel costs or computer usage or the labor rate divided by sales.
In addition, you can appraise salesperson effectiveness (e.g., income generated by person, cost per salesperson, call frequency, dollar value of order obtained per hour spent). These performance-measurement techniques are especially important in the telemarketing area. Is the technique itself producing revenue? Is an individual caller producing more revenue?
Sales can also be appraised by certain consumer behaviors. For example, you can compute average sales per customer and make comparisons between sales per existing customer and sales per new customer. Are new customers being attracted by the e-commerce efforts? Are old customers being retained?
To formally manage marketing costs, a post-completion review team will consider all the assumptions in the decision process, compare the actual resources consumed by the project and the outcome with the forecasts made, and review the procedures used to control the project and the project's conformance with company policy. It's therefore important to collect information about the project from its onset.
Financial managers can review the method for assessing the costs and benefits of the marketing or advertising project. Ironically, to the extent that management accountants and financial managers are involved in developing forecasts, analyzing the costs and benefits of the campaign, and controlling its costs, they can also expect to be monitored by the post-completion review process. Analyzing any deviations from what was expected for the project (costs, personnel performance) should contribute to better decisions in the future. Learning and organizational improvement are the goals of the post-completion review process.
Financial professionals in the new marketing environment may also add value to the marketing function by pursuing more qualitative (rather than quantitative) improvements between company and customer in connection with pricing, billing, and accounts receivable. A happy customer is likely to be a loyal one, and isn't that what most companies want to achieve?
David Forham and Diane Riordan are Professors of Accounting at James Madison University, Harrisonburg, VA. Michael Riordan is a professor of Economics and Business at Columbia University, New York, NY.
This article originally appeared in Strategic Finance, published by the Institute of Management Accountants (IMA(r)), Montvale, NJ www.imanet.org. (c)IMA; used with permission.
