514 The Marketing Book
marketing asset by improving specific attri-
butes of the asset, while maintenance expendi-
ture aims to keep these attributes at their
existing levels.
It has already been stated that really
valuable assets (i.e. those that represent a
sustainable competitive advantage) have a
finite economic life and this is equally true for
marketing assets. Thus, the mix of development
and maintenance marketing expenditure will
change over the life cycle. During the initial
launch period all the marketing expenditure
will be development activity, as it is aimed at
building the value of the asset; also, there are
no attributes to be maintained. Once the asset
starts to be established, the existing attributes
need some level of maintenance expenditure,
but the majority of marketing effort still goes to
developing the asset to its optimum level. Once
this is reached there is no longer a financial
justification for more development expendi-
ture, and all the current marketing activity
(which may be considerably lower than during
the development phase) should be targeted at
maintaining the asset’s current position and
strengths.
Eventually the marketing asset will
approach the end of its economic life and, at
this time, the business may reduce the market-
ing expenditure below the full level required
properly to maintain the asset. In other words,
the decline stage is managed so as to maximize
the cash flows received by the business. Indeed,
this is the critical financial performance meas-
ure for any marketing asset; the objective is to
maximize the super profits earned over the
economic life of the asset. Due to the long life
cycle of many of these assets, this has to be
expressed in terms of the net present values of
the cash flows expected to be generated over
this economic life.
Also, because the economic life can, in
certain cases, be extended, some marketing
expenditure may be targeted at extending the
economic life of the asset. An alternative
strategy may be to transfer the existing strong
asset attributes (such as from a brand) from a
declining product to a new growing product.
Even though doing so will accelerate the
decline of the current product, it may extend
the economic life of the ‘brand’ asset by
associating it with another appropriate
product.
This distinction between development and
maintenance expenditure is very important
because the timing of the returns from each
type is very different. Development expendi-
ture represents a long-term investment and the
returns may not be received until several years
later. Thus, the expenditure is incurred now but
the financial benefit is not felt this year. The
impact of maintenance expenditure is likely to
be much quicker because, as the attributes
decline, there is likely to be a corresponding
fall-off in sales revenues and profits. This
timing difference means that different financial
evaluation and control processes must be used
for each type of expenditure.
In many companies, the marketing budget
represents a very significant proportion of total
expenditure. When the company comes under
short-term profit pressure it is therefore very
common for the financial director to look to
marketing to make a substantial contribution to
any required reduction. Under the traditional
classification system, it is easy to predict where
most of these cuts in marketing expenditure are
likely to fall: on the long-term development
expenditures. This is because reducing these
development activities will have no negative
impacts on sales revenues in the short term,
whereas cutting maintenance activities would
probably reduce sales this year.
Unfortunately, the impact of reducing
development marketing expenditure will be
felt in the future because the asset will not be as
fully developed. At least by segmenting mar-
keting expenditure the consequences of this
short-term action will be more clearly high-
lighted and the future expectations for the
business can be appropriately modified. How-
ever, the best way of really focusing on these
issues is through a well-designed financial
planning and control process.