292 The Marketing Book
today’s knowledge-intensive businesses,
satisfying the interests of the knowledge
workers is essential for the business’ long-run
health. No company can ignore the needs of
customers if it is interested in retaining
long-term cash flows. Conversely, all
stakeholders – workers, customers, suppliers
and the community – become vulnerable if the
business fails to generate shareholder value.
Ultimately, the needs of all the stakeholders
depend upon the firm’s ability to generate
sufficient cash to meet them.
4 Focus on long-term performance. Marketing
people often think of the shareholder value
orientation as creating a short-term focus,
discouraging long-term investments in brands
and market development. Nothing could be
further from the truth. As we shall see,
short-term movements in profits have little
impact on shareholder value. The first 5 years
of profits and cash flow rarely account for
more than one-third of a company’s value. The
shareholder value approach encourages a
long-term perspective about marketing mix
decisions – as long as these investments
promise to generate a return above the cost
of capital.
5 Strong intellectual rational. The key reason why
marketing management has failed to develop as
an intellectual discipline is its lack of a clear
objective. Without a rational goal it is
impossible to develop a framework for
optimizing marketing mix decisions. As we have
noted, maximizing market share or customer
satisfaction makes no sense. Nor is a focus on
maximizing profits or return on investment any
better. Optimizing shareholder value, a
framework that lies at the heart of modern
finance, offers the basis for redefining
marketing in a precise and rational manner. It
provides a powerful tool for optimizing the
marketing mix.
Key principles
Value-based marketing is based on the belief
that management should evaluate marketing
mix options in the same way that shareholders
do. Shareholders assess companies on their
potential to create shareholder value. The com-
pany’s share price reflects investors’ evalu-
ations of how much value management’s
current strategy will create. We need to review
how investors estimate value and evaluate
value-creating strategies.
The concept of value is founded on four
financial principles. First, cash flowis the basis
of value – it is the amount left over for
shareholders after all the bills have been paid.
Without the expectation of free cash flow
passing into investors’ hands, an asset cannot
have value. Most of the dot.com companies
founded in the 1990s collapsed because invest-
ors could not see how free cash flow was going
to be created. The amount being spent looked
to permanently exceed the revenues coming in.
Next, cash flow has a time value: money today is
worth more than money coming in the future.
This is because investors can earn a return on
cash they get today. Typically, £1000 received in
10 years time is ‘worth’ only about £385 today
(£1000/(1 + r)^10 , where ris the discount rate;
here ris taken to be 10 per cent). Third, the
opportunity cost of capitalis the return investors
could obtain if they invested elsewhere in
companies of similar risk. Essentially this
means that investors will find risky marketing
strategies appealing only if the expected
rewards are greater. Finally, the net present value
concept brings these principles together. It
shows that the value of an asset (e.g. a
company) is the total of all the future free cash
flows that asset generates after discounting
these future sums by the appropriate opportu-
nity cost of capital. The task of marketing – and
managers generally – is to put in place strate-
gies that maximize the net present value of the
business. The optimal marketing mix is that
combination of product, price, promotion and
distribution that maximizes the net present
value.
To calculate the value of an asset, or to
assess whether a strategy is likely to create
value, management has to forecast the future