The Marketing Book 5th Edition

Level of return

required by

investors in

Investment Y Risk adjusted

required rate

of return line

Specific risk of

Investment Y

Zero risk

rate of

return

Risk profile of investment

Rate of return required

508 The Marketing Book

‘value-adding’ directions. It can decide to try to
increase return, even though it accepts that
such a strategy will increase its risk profile as
well; the shareholder value created comes from
increasing the expected return proportionately
more than the risk perception increases. Many
marketing-led growth strategies could fall into
this category, including launching existing
products into new markets, developing new
products for existing customers and, partic-
ularly, trying to increase market share in a
mature, non-growing, highly competitive,
existing market. It is vitally important that the
financial evaluation, which is carried out prior
to these marketing initiatives, considers not

only the projected increased future returns, but

also the increases in the risk profile of the

business. (These issues are considered in detail

later in the chapter.)

A second value-creating option is deliber-

ately to reduce the expected rate of return in the

future, but to do so in a way which will reduce

the associated risk to an even greater extent. This

more than proportionate reduction in risk

perception makes the slightly lower expected

return more valuable to the shareholders than

the previous higher, but more risky, rate of

return. There are several marketing strategies

which seek to create shareholder value through

this route, and these include long-term discount

arrangements designed to create customer loy-

alty. These more loyal customers should gen-

erate more consistent, less volatile rates of return

in the future and volatility in the level of

financial return is a key indicator of risk.

However, the most attractive value-adding,

strategic direction is obviously to increase the

expected rate of return while, at the same time,

reducing the risk perception. This reducing risk

perception can result in a reduction in the

required rate of return, so that the shareholder

Figure 20.1 Risk-adjusted required rate of return

Table 20.1 Shareholder value

creation

Real shareholder value creation requires that:

Expected/actual Required

returns > returns