Controlling marketing and the measurement of marketing effectiveness 507
million on a national advertising campaign
which is designed to increase brand awareness
from 30 to 40 per cent within the target market
group of consumers. The brand awareness both
before and after the campaign could be tested in
order to see if the marketing objective was
achieved and the efficiency with which the £5
million expenditure was spent could be mon-
itored. However, the money has not necessarily
been effectively spent, unless the benefit of
increasing awareness by 10 per cent has been
financially evaluated as being significantly
greater than the £5 million cost which is to be
incurred. Clearly, to be of any value as a financial
control, this financial evaluation must be under-
taken prior to the expenditure being committed,
i.e. the advertising being booked. Even more
clearly, such an evaluation, which relies on
estimates of the increased future sales revenues
which are expected to result ultimately from
increased brand awareness, cannot be con-
ducted by the finance function in isolation. It
requires an integrated approach from both
marketing and finance, as does the ongoing
control as the expenditure is committed. This is
necessary as it may be possible to reduce the
related risk by phasing the advertising expendi-
ture in order to check that it is generating the
increased awareness required (e.g. by doing a
regional test first).
Against this backdrop of an integrated, co-
ordinated approach to trying to control market-
ing effectiveness rather than just efficiency, this
chapter considers a range of marketing strate-
gies and the consequences for the required
financial control system.
A market-focused mission
The most common financial objective of com-
mercially oriented organizations is to create
shareholder value. Consequently, the differ-
entiating elements within mission statements
and long-term corporate objectives relate to the
ways (i.e. the ‘hows’) in which this shareholder
value is to be created on a sustainable basis.
Shareholder value is only created when
shareholders achieve a total return (which can
only be generated by dividend yield and/or an
increase in the value of their investment) which
is greater than the return which they require
from that investment. This definition empha-
sizes that shareholder value is not automati-
cally created when a company makes a profit.
The level of this profit must be placed in the
context of the rate of return required by the
shareholders, and this required rate of return is
determined by the level of risk perceived by the
shareholders with regard to this investment.
As shown in Figure 20.1, shareholders
naturally dislike risk in that they demand
increasing rates of return for increasing risk
perceptions. However, what is often forgotten,
even by finance professionals, is that the
upward sloping ‘risk-adjusted required rate of
return line’ in Figure 20.1 is, in reality, the
shareholders’ indifference line. In other words,
moving from one point on the line to any other
point on the line merely compensates the
investor for a change in their risk perception; it
does not create shareholder value.
Shareholder value is only created when
total returns are greater than required returns,
and this relationship should be used by the
company to assess any investment proposal.
Investment decisions will only create real
shareholder value when the expected return
from the investment is greater than the share-
holders’required rate of return. This is encapsu-
lated in Table 20.1 and should be applied to all
marketing investments, as is discussed in the
next sections of this chapter.
This relationship can also be explained by
reference to our risk/return graph (Figure 20.2).
As previously stated, moving along the share-
holders’ risk/return line neither creates nor
destroys shareholder value. Shareholder value
is only created by implementing a strategy
which enables the business to move ‘above the
line’, as shown in Figure 20.2.
As can be seen from the diagram, the
company can move in one of three possible