Managing the marketing mix 293
cash flows that result from their decisions, i.e.
net present value (NPV):
NPV=
iCFi
(1 +r)i(11.1)
where CFis free cash flow and ris the discount
rate or opportunity cost of capital for share-
holders. Clearly, analysts or investors cannot
forecast cash flow decades ahead. Instead, the
time period is split between a feasible forecast
period, typically of 5–7 years, and a continuing
valuerepresenting the value of the business at
the end of the forecast period (for a compre-
hensive discussion, see Brearley and Myers,
1999). For a high performing business the
forecast period can be called the differential
advantage period. It is the number of years the
business expects to maintain a market advan-
tage over competitors allowing it to earn super-
normal profits (i.e. above the cost of capital).
However, for virtually all companies, competi-
tion, the changing environment and new tech-
nologies mean that eventually profitability
erodes. It is relatively rare for this differential
advantage period to exceed 6 or 7 years
(Rappaport and Mauboussin, 2001). After that,
companies are fortunate to earn normal
profits.
In summary, we can rewrite the value of a
company (Equation 11.1) as:
NPV=
Present value of cash flow during
differential advantage period
+
Present value of cash flow after
differential advantage period
(11.2)There are a number of ways of calculating
the latter term representing the continuing
value of the business at the end of the forecast
period (Copeland et al., 2001, pp. 285–331). The
most common one is the perpetuity method
that assumes the business just maintains a
return on investment equal to its cost of capital.
This is calculated by dividing the company’s
net operating profit after tax (NOPAT) by the
cost of capital:Continuing value =NOPAT
r(11.3)
To calculate the present value of the con-
tinuing value, this figure has to be discounted
back the appropriate number of years. For
example, if the net operating profit at the end of
a 7-year differential period is £8 million and the
cost of capital is 10 per cent, then the continuing
value is £80 million and the present value is £80
million divided by (1 + 0.1)^7 or £41 million
(for a complete discussion, see Doyle, 2000,
pp. 32–66).Uses of value-based marketing
Value-based marketing – the philosophy that
the task of marketing management is to maxi-
mize the financial value of the business for
shareholders – transforms almost every aspect
of marketing strategy. Here are some examples
of where it can be used: Developing the marketing mix. A value-based
approach leads to quite different decisions
about products, price, promotion and
distribution. For example, as is illustrated
below, the price that maximizes shareholder
value is invariably higher than that which
maximizes customer satisfaction and lower
than that which maximizes short-term profits.
A value-based approach offers managers a
more rational method of decision-making and
one which is more consistent with the goals of
the board of directors.
Evaluating alternative marketing strategies. Top
managers commonly have to choose between
major options. Should they focus on being a
premium brand or go for a mass market?
Should they diversify the product range or
‘stick to the knitting’? Value-based marketing
provides a rigorous approach to analysing
these alternatives. The right strategy is one