Another election over and as a bit of a political junkie, I’ve also quite enjoyed it. The downside is that it heralds the advent of my single most hated piece of political doublespeak – “investment”.
As in all elections, the participants demonstrated their unimpeachable virtue by stating their intention to “invest” in hospitals, “invest” in roads, “invest” in education. There is barely an element of government expenditure that politicians are willing to describe as what it is – spending. Nothing is described as a cost, unless it’s a popular policy proposed by one’s opponents.
Invest is a weasel word because it is an attempt to buy favourability from the electorate while wrapping it up in terms that convey fiscal responsibility. Although this means that we can all feel good about having been bought, it is largely nonsense.
Indeed, roughly half of UK government spending is what economists term Final Consumption Expenditure – the stuff that we want now from non-capital spending on health, education and welfare.
We should, however, be careful about defining people by their future economic contribution. That line of thinking leads to dark places. If expected economic activity were all that mattered then the government would “invest” in euthanasia clinics instead of pensions. It’s much safer and rational to call spending on these areas what it is – a cost.
The crucial observation, though, is that this is not a bad thing. It’s part of creating the type of society that we want. It is almost the essence of civilisation that a person who is not capable of making an economic contribution, either now or in the future, nevertheless has their basic needs met by the contributions of other members of that society.
It is apparently too much to expect of politicians that they explain that not everything that is good or necessary is an investment, and not every cost is bad or discretionary. However, there is another section of society just as prone to waxing lyrical about investment when what they really mean is spending – marketers.
It is an article of faith among marketers that marketing is an investment, not a cost. Yet, examined logically, that’s simply not true.
What is an investment? At a personal level, we might think of it as putting some money in the stock market or gold or property – something tangible that won’t vanish overnight. Further, although most of us have an idea that we should be saving for a pension or for a house, we can only do so after our essential needs are met, e.g., rent, electricity, food.
If we are fortunate enough to have money left over then we must decide how much we want to spend on ourselves today and how much we are prepared to sacrifice now in anticipation of a future benefit – the grown-up version of the Stanford marshmallow experiment. Personal investment is essentially discretionary. We also have little expectation of an immediate return, nor do we expect the investment to finance our current day-to-day spending.
Companies are different. For a manufacturing business, an investment might unlock a new area of growth through the creation of a new product range or by exploiting opportunities in other markets. Alternatively, it might involve bringing a previously subcontracted process in-house or making an existing process more efficient. As with a person, these types of investments are usually discretionary. The business may not prosper in the long-term if it fails to invest, but it is unlikely to fold overnight if a decision is delayed.
If the investment goes ahead, the benefits will likely accrue over a long period gradually repaying the cost. In the meantime, a proportion of the expenditure will be included on the balance sheet reflecting the tangible nature of that investment. After all, once purchased, a factory or machinery can be resold if necessary. Intellectual property arising from research and development can be sold or licensed to another company.
So, if we had to describe the defining criteria of an “investment” then we might come up with the following list:
- It is likely to involve the acquisition of a tangible asset
- The required short-term expenditure will only be recouped over a protracted period
- It is distinct from our essential day-to-day activities
- It is a discretionary expenditure
Marketing fails to meet every one of these criteria.
Following a period of marketing activity, there is nothing tangible that remains – once the money is spent, it is gone. As such, in accordance with accounting regulations, marketing appears in the profit and loss account as a cost, and certainly not on the balance sheet as an asset. This is something worth remembering the next time you try and convince your finance director that marketing is an investment – to an accountant you might as well be arguing that black is white.
The argument about whether marketing should be evaluated in the short or long term is one for another time. For now, given it is said 4% of advertising is remembered positively, 7% is remembered negatively, and 89% isn’t noticed or remembered at all, I would posit that the bulk of any incremental uplift on sales (if there is one) almost certainly occurs in the short-term.
But it’s the last two criteria which concern me most. Are we actually content for marketing to be viewed either as discretionary or as distinct from day-to-day operations? Because that’s the implication of our choice of language. It also leads to perverse decisions, not least the decision to try and build an industry on the deeply flawed metric of return on investment (ROI).
Imagine we viewed our own expenditure in the way that marketers view their budgets. If I buy a sandwich for lunch, it will help keep me alive. It is apparent that if I didn’t eat at all then my future economic contribution would be lost. Dividing these benefits by the cost of that sandwich results in a frankly colossal ROI which is why I’ll probably invest in lemon drizzle cake as well.
Maybe Ford should consider steel to be an investment. After all, if they didn’t buy any steel, then no cars would be made meaning that no-one will buy more Ford cars in the future. The entire future value of the business can be set against the relatively trivial cost of the steel and, once again, a truly remarkable ROI can be calculated on this basis.
Alternatively, we could recognise that what food is to us personally, and what steel is to a car company, is simply a fundamental cost of existing. In the same way, we should consider marketing as a fundamental cost of being in business, not discretionary and certainly not as a non-core activity.
By placing it in the correct context, we finally accept that yes, marketing is a cost, but we can also assert that it is a key driver of profit in the business.
As a position, it is entirely defensible. For any given product, there will be fixed costs incurred (including design, tooling, and a share of business overheads) and three key variable costs: the cost of the raw materials, the cost of transforming those materials into a product and, crucially, the cost of selling the product, i.e., marketing. These factors are interlinked and cannot be considered in isolation.
The role of marketing is twofold. First, higher sales. Selling more units distributes the fixed costs more widely while economies of scale allow raw materials to be bought more cheaply and factories to be run more efficiently. Each of these factors increases the realised profit per unit.
Secondly (and often strangely overlooked when evaluating effectiveness), marketing permits a higher selling price than a functionally identical, but unbranded product could command, further increasing the profit per unit.
By placing it in the correct context, we finally accept that yes, marketing is a cost, but we can also assert that it is a key driver of profit in the business. Even better, we get to stop the interminable bleating about marketing being an investment every time budget cuts are mentioned. Instead we can present a clear argument for increasing our budget in language that won’t simply cause the finance director to glaze over.
Just as with government spending, not everything good is an investment and not every cost is bad. Altogether now – say it loud: we’re a cost and we’re proud.
Andrew Willshire is the founder of analytics company Diametrical and formerly global director of advanced analytics at Maxus.