Question

Summarize the article and how does it relate to time value of money

The finance department and CFOs are getting closer and closer to the marketing department, and for once, it’s not because marketing is asking for more budget. Here’s why your CFO peers are shifting into digital strategy, how they’re interacting with the marketing department and what your organization can do to increase alignment.

The Time Value Of Money

Investing, at its very core, is about patience. You put money into a concept, like a business or a retirement fund, and you wait. The longer you wait, the more your money grows through compounding interest. Once you take money out, you prevent future returns from ever materializing. Your money becomes more valuable the longer you leave it in your investment.

According to Investopedia, "The time value of money (TVM) is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity."

CFOs focus on current revenue to project future value of the organization. Marketing works in the same way. Company growth focuses on sales and innovation.

The Time Value Of Marketing

Allow me to introduce a new concept: the time value of marketing. It says that a consumer level of engagement/attention or conversion available at the present cost of acquisition is worth more now than the same amount in the future. There are more choices today for capturing attention than yesterday. And the cost of the attention was less expensive yesterday than it is today.

Marketing has a remarkable resemblance to investment portfolios. For example, you need time to develop relevance and trust scores in paid search campaigns, to develop history and links for search engine optimization, to develop social audiences that engage with you enough to make a purchase, to develop a remarketing pool and on and on. Marketing develops a rolling tide of future customers that, when nurtured consistently, eventually mature into customers.

If marketing loses its budget and can’t nurture leads, then it's essentially the equivalent of taking money out of your IRA prematurely -- you’ll never be able to realize the results. Cut the investment, and marketing can’t nurture those leads into revenue.

Investment Theory Vs. Marketing Reality

Unfortunately, CMOs rarely have the luxury of patience. In my experience, the CEO -- and, yes, even the CFO -- typically tend to treat marketing more like a gumball machine than an investment portfolio. There’s a misleading vocabulary around marketing efforts, such as whether a campaign “worked” or calculating return on investment (ROI) strictly as revenue made this month vs. monthly marketing spend. The budget gets cut, the CMO gets scolded or fired and results (most often meaning “immediate cash flow”) are still expected.

Is that how you would manage your investment portfolio? The stock market takes a downturn, you tell your hedge fund manager to shape up, sell off your shares and still expect the same investment yield? Of course, the idea is absurd.

Traditionally, marketing ROI was calculated through a simple equation: ROI = (Gain from Investment - Cost of Investment) / Cost of Investment. In the past, organizations took this calculation to each medium: the ROI of print, digital, TV, billboards, etc. This created a false narrative and duplication.

As digital evolved, marketers adapted innovative ways to derive ROI with the introduction of attribution models, such as first-click, last-click, multitouch, weighted average, etc. They’re all designed to prove the value of the channel or the people responsible for the channel.

How To Create Alignment Between Marketing, Finance And The C-Suite

Leads cost more to generate today than they did yesterday. Every time marketing’s budget fluctuates, the entire company loses momentum from the lost investment. Ramping up marketing efforts is as hard as it sounds: you’re fighting an uphill battle until the investment starts to have a yield. That often takes more time than the C-suite is often willing to give it.

In other words, the more you dial up and down marketing budget, the more money you lose -- now and in the future.

Now that you know why CFOs would want to defend marketing’s budget and work, here’s how to get the rest of the C-suite on board:

Show the CMO how to build a core portfolio from a finance perspective.

Not all investments pan out. Not all marketing tactics are dead ringers, either. But if your CMO wants to hang onto any budget, they have to identify their core tactics, what those tactics are yielding and how much budget they require to maintain performance.

Help the C-suite value audience growth.

Marketers used to be able to close deals by shouting louder than everyone else. Put out enough billboards, radio ads, print ads and TV commercials, and you’d net something. That’s not the world we live in anymore.

Marketers have to cultivate an audience and nurture each person until they are ready to make a purchase. When marketing spend yields more newsletter signups and social media interactions, that’s valuable -- at least, as long as you are able to track the timeframe and conversion rate to get those interactions down the funnel to purchase.

Implement measurement tools.

Everyone wants a scorecard. Establish universally agreed-upon key performance indicators and measure them accurately. The budget discussion should be quick and obvious, and that’s a win for everyone.

CFOs are uniquely positioned to help CMOs tell the story of long-term value of marketing in your organization. The marketing team is constantly investing in the long-term. With the CFO at their side, marketers can demonstrate the concept of the time value of marketing.

Answer 1

This article primarily tries to establish a link between Marketing spend and Time value of Money. Traditionally, Marketing spend had to be justified with the corresponding return on the said spend.It was never looked at from future point of view. The marketing spend and return would be in sync in the same period of time and can be out rightly compared was the way to look at it which was one of the biggest flaw to justify the budget or the spend.

In principal, Time Value of money in simple term means that a dollar today is worth more than a dollar tomorrow. For example, If given a choice that I give you $100 dollar today ,or a $100 a year later, any logical person will demand the money today itself or demand more than $100 as he/she will be sacrificing present consumption and also there will be inflation which will reduce the purchasing power of money. Hence, if I invest money,then longer I stay invested, more return I should get due to power of compounding.

This concept can be applied in marketing also.In the article,marketing spend has been equated to like making an Investment. If you pull out money from investment, then you will lose out on future returns as you are not letting compounding principle work for you. Similarly, marketing is future oriented. The spend you make today to acquire a client will yield results in future.

The article also goes on to talk how marketing has evolved over time from the traditional marketing days where in you would just use different mediums such as billboards, radio ads, print ads and TV commercials and you’d get hold of some prospective client through these mediums. But in today’s digital world , the criterias have changed. Each customer has to be taken into confidence ,nurtured and develop a relation before the customer actually shells out money. Newsletter signups and social media interactions justifies the marketing spend.However, there has to be a mechanism to track the conversion rate in a defined time frame.The CFO’s should make the CMOs understand the cooncept of future long term benefits from the budget they have been allocated for marketing purpose but at the same time there should be a scorecard to track the key performance indicator and measure them against some benchmark.The CMO should be taught on building a core portfolio of spend and return from a finance perspective.

So in nutshell, marketing is not just about spending today and getting the results today itself. Those at the top should be patient and understand that it is more of an investment rather than just a spend and it takes time to yield results. But at the same time, unjustifiable spend has to be kept in check with a proper key performance indicators in place and measure them accurately.

I hope I have explained the article in a simple term. If you are still not able to understand , then do comment. I will try and explain more elaborately. If you liked my interpretation, do hit like :)