At the end of the day, what good is marketing if it doesn’t turn a profit? Financial analysis in marketing allows marketers to understand the impact of their strategic decisions on the financial results of the company.
Marketers familiar with financial terminology and concepts such as return on investment (ROI) have a better chance of getting the budget they want. They are good at demonstrating what value they bring the company, and financial analysts have an easier time working with them.
This article:
- Defines financial analysis in marketing, and
- Shows how financial analysts and marketing teams work together.
Definition: Financial Analysis in Marketing
Financial analysis in marketing consists of a profitability breakdown between the income and costs associated with marketing activities.
From a financial analysis perspective, the marketing department is unique. Other than sales, marketing is the only department in direct contact with paying customers. That is — the only direct revenue generator. This means marketing has both costs and revenues, whereas most departments only have costs.
Financial analysis is thus relevant at a department level in marketing, whereas it’s usually only relevant at a company level.
Financial Analysis in a Marketing Plan
Download Financial Model for Marketing to follow along!
One of the most important synergies between marketing and financial teams is the marketing plan. As a governing document, the marketing plan outlines the strategy, goals, and tactics that a company will implement. It is sometimes included in the company’s business plan.
A core element of the marketing plan is financial impact of the activities. This is where the synergies are. Marketing teams depend on financial analysts to model and project future results based on historicals and assumptions.
In most cases, financial analysts use available data from marketing and accounting to build this projection. To determine results, analysts need revenues and costs. While data varies by industry, typical costs include variable and fixed costs. Fixed costs are expenses the department incurs regardless of advertising purchases; they include items such as rent, utilities, employee salaries, and office equipment.
Variable costs, on the other hand, are the actual cost of production — the cost of advertising itself. Variables costs include:
- Cost of advertising by medium,
- Cost of public relations placements,
- Travel expenses,
- Cost of ambassadors (influencers, celebrities).
- Cost of external public relations.
Revenues are a little more difficult than costs because it’s rare to see a direct purchase as a result of an advertising view. With that said, the data-based nature of digital marketing allows marketers to analyze click-through rates and track users with cookies — which makes “revenue as a result of ads” more accurate.
Let’s take a look at how revenues and costs can be calculated in a financial model.
Financial Model within the Marketing Plan
Financial analysts help marketers by building a financial model of department revenues and costs. To understand this, an example is best. Imagine you run a marketing department for a wholesale watch company called Batch Watch.
You have three channels of advertising and marketing. The first is social media and search engine advertising. The second is an external PR company. The third is a TV and billboard ads.
In general, social media and search engine advertising generate $1 per view, and costs $0.25 per view. In addition, the PR company’s estimate contribution to revenues is $100,000, since this has been a steady increase in company revenues since you began using the company 3 years ago. They cost $75,000 per year. Finally, you noticed a $20,000 increase in revenues in the local town when you placed the billboard least year. It costs $9,500 per year.
Your team consists of 5 employees, including you. The total salaries are $200,000/year. Your team takes up 5% of the office space at Batch Watch, whose monthly rental cost is $10,000. Other than space, your team only consumes water and lighting.
Here’s a sample financial model for to show all of this information in a way that the management can understand:
You can download the Excel model I made to create it here:
Download Financial Model for Marketing to follow along!
As you can see, we know that after all costs are taken into account, the financial result of the marketing department is $59,750. This means the department is profitable, and generates enough revenue to fund other departments. In other words, the return on investment or ROI in one year is $59,750/$360,350 or 17%.
Financial Analysis in Marketing Research
Financial analysis in marketing research is an analytical process that examines how customers’ financial situations influence their behavioral response to new marketing products and advertisements.
To understand what this means, you need to know what marketing research is. Marketing research uses first-hand research to identify how customers might behave in response to new marketing products and techniques. A key influencer of customer behavior is pricing. Financial analysis for marketing research, thus, uses financial modeling to understand where customers are financially and how they might respond to new prices.
For example, a marketer might use a focus group to ask questions about a product, or show a sample advertisement to gauge customer opinion and engagement — and all of this with the use of questions. S/he might also use this time to ask questions about pricing to understand what potential customers’ knee-jerk reaction is to price ranges for various products/ads.
Why We Need Customer Feedback and Financial Analysis
However, question-based research has its limits. That’s why financial analysts step in to perform analytics that can be used in combination with customer responses to draw specific and general conclusions.
The reason we need both direct customer feedback and analytics is that people don’t always know what they want. In fact, in many cases they don’t know at all, or what they say does not reflect the reality.
An easy example of this is utility value. On a Friday night in your home town, you would never spend $20 on a cocktail. However, when you’re on vacation, you would spend it. Many people, though, asked if they would spend $20 on a cocktail, say “never!” This phenomenon is common. What we say is often very different from what we do because we have a hard time imagining all possibilities when asked about our own behavior. Thus the need for analytics.
The Analyst’s Part in Marketing Research
A financial analyst’s job in marketing research is to look at loads of financial and non-financial data to see how people behave in the aggregate — a view of all possible situations. S/he would look at economic drivers such as average discretional spending, spending habits of target groups, the economic elasticity of a product, and the utility value of the product.
For example, imagine you run the Batch Watch company and want to know how customers might respond to a new product — a rosy pink watch called Titanis. It targets successful business women. Up to this point, you haven’t performed any marketing research because your watches have all been traditional metal and leather models. For this niche products, you want a focus group and financial analysis to understand the opportunity.
You gather a representative sample of Americans by demographics to see how they might respond to several ads for the Titanis. You ask questions like “is this a product you would purchase?” and “what would be the occassion?”
At the same time, you ask a financial analyst to look at typical spending patterns and demographics for your standard watches, as well as how this new watch might compare. You also ask her to find out if there are any macroeconomic reasons to consider when deciding on the launch season.
To do so, the financial analyst will look at historical purchasing data, as well as data from US government entities, in order to answer your questions. I won’t go into details on how this analysis would look, but you can learn more about macroeconomic analysis and other finance topics under the Financial Analyst Resources page.
Financial Analysis for Marketing Decisions
Financial analysis for marketing decisions is the combination of ROI calculations and analysis within marketing research. It adds to the information base on which decision makers base their choices.
At the end of the day, marketing decisions have to be made using a combination of ROI calculations, qualitative marketing research (focus groups), and financial analytics in market research. It’s often difficult to say which factor is most important.
For example, if the ROI for a product looks small in the short term, does that mean you should ignore high interest from customers, and economic analysis suggesting it’s the perfect time to launch?
Marketing decision makers face this dilemma on a daily basis, but the good news is that financial contributions to the information base bring an alternate view, which is held in high esteem in most corporate and startup contexts alike.
Ask yourself: if you have to make a choice, wouldn’t you prefer to have more information, even if some of it is conflictual, rather than base your decisions on a hunch? Moreover, isn’t it better to know how your efforts bring value to the company as a whole with ROI calculations? Won’t you be able to better communicate to company leaders why you deserve more budget, and that you will help the company reach its goals? This is made possible by financial analysis in marketing.
