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FIGURE 1.4 The Commercial Processes That Create Firm Value. Source: 1) Brand Value as a Percentage of Marketing Capitalization. Applying the Brand Investment and Valuation Model. Analysis of Meier, Findley, Stewart. Marketing Accountability Standards Board. 2017; 2) Marketing’s Impact on Firm Value: Generalizations from a Meta Analysis, AMA, Alexander Edeling and Marc Fischer, Journal of Marketing Research 2016; 3) Empirical Generalizations About Marketing Impact, Hanssens, Marketing Science Institute; 4) the Marketing Accountability Standards Board CIR Initiative, 2018.
For example, growth assets like brand preference, customer loyalty, and perceptions of innovation are valuable because they make customers choose your product more and pay higher prices to buy it. That is certainly the case for Apple, which values its brand at more than $250 billion at the time of publication.108 But these business assets are hard to describe. They cannot be found on a financial ledger. There is no proven formula for creating, growing, protecting, and monetizing them. That's why most CEOs find it so difficult to fund smart long-term growth investments in many areas and don't understand how their marketing budgets create financial returns.
Growing a business involves managing a variety of commercial growth assets. Brand assets have traditionally been among the biggest growth assets. As buying has become more digital, data driven, and capital intensive over the last 30 years, an entire set of new assets have become critical cogs in the growth engine: customer data, advanced analytics, digital selling channels, and a growing portfolio of sales and marketing technologies.
The executives running marketing, sales, and service are the often unwitting caretakers of what may be their company's most valuable asset: its customer data. For example, customer data assets in the airline industry – which include revenue management, frequent flyer, and customer engagement databases – can account for 100% or more of an airline's profitability and value. Still, they do not show up on any balance sheet or management report. These databases are regarded as “intangibles” just like R&D, “process know-how,” and brand equity. Accountants don't measure, report, or manage these as closely as such physical assets as inventory or real estate, even though they are far larger and more strategic.
As evidence of this, both United Airlines and American Airlines recently secured multibillion-dollar loans by collateralizing their MileagePlus and AAdvantage customer loyalty programs, respectively. The third-party appraisals of their data suggest that they are worth two to three times more than the market value of the companies themselves. United's customer data was valued at $20 billion, while its market cap at the time was about $9 billion.62 Similarly, American's data was valued at a minimum of $19.5 billion and up to a jaw-dropping $31.5 billion, whereas its own market cap was hovering at less than $8 billion.160 Unfortunately, most CEOs, CXOs, CIOs and their CFO counterparts don't put a financial value on their customer data because nobody is responsible for the assets and accounting regulations, and insurers say they don't have to, according to Doug Laney, author of the book Infonomics.
Unfortunately, most businesses don't curate, connect, manage, or monetize these growth assets very well. So for the majority of businesses, their largest business assets are underperforming.
Customer engagement data like this has become a key strategic asset in every business because it creates the foundation of future growth, profitability, and competitive advantage. This data grows firm value by optimizing pricing, conversion, account priorities, and the allocation of growth resources in every business. Managers must recognize, measure, and manage them as a real asset – including insisting on a financially viable return on asset (ROA).
The rising importance of intangible assets as the foundation for growth and firm value is a big change. Managers and accountants are very comfortable managing, measuring, and extracting value from tangible assets. Tangible assets are physical; they include cash, inventory, vehicles, equipment, machines, buildings, and investments. In 1975 these tangible assets made up over 80% of the value of a firm.56
It's not 1975 anymore. As the economy moved into the information age over the last half century, intangible assets have emerged as the leading asset class. Intangible assets do not exist in physical form. They include things like accounts receivable, prepaid expenses, patents, and goodwill. Increasingly, they are made up of assets like brands, customer equity, and customer data. These assets sound ethereal but have real financial value. A number of academic and industry research studies have documented that, when properly measured and accounted for, these intangible assets represent in excess of 80% of the value of a business.7,55,56,57 The ability of revenue teams to deploy these assets to grow future revenues and profits by building customer preference, conversion, loyalty, and usage while commanding price premiums are the primary drivers of firm value. As evidence of this, over two-thirds (68.1%) of Private Equity firms are pushing their portfolio companies to grow at faster than 10% a year to justify the price premiums they have paid.58
This ambiguity and lack of stewardship applies to all the large and valuable growth assets in the business. In particular this applies to large capital investments in the sales and marketing technology portfolio and what we call the owned digital channel infrastructure (websites, digital marketing, mobile apps, and e-commerce). These are displacing paid media in the growth investment mix and have become essential to competitive differentiation in B2B selling.
The Challenges of Growth in the Twenty-First Century: Customers, Disruptions, and Fragmentation
Several factors have changed how we generate revenue growth in the past 30 years. Customer expectations have shifted as buyers have become more digital, better informed, and impatient. Traditional selling processes have been disrupted to become more capital intensive as more buying activity happens within the digital channel infrastructure and as sales personnel rely on analytics and automation to deliver against customers' demands. These challenges are being amplified by the growing appetite of owners, investors, and CEOs to replace episodic sales transactions and fragmented teams with reliable recurring revenues and aligned organizations (see Figure 1.5).
Here are some of the forces and megatrends that have changed the basis for generating revenue growth over the past 30 years:
Changing buyer behavior has elevated the customer experience and made it the primary goal. Business-to-business buying behavior has passed the tipping point where “new school” digital buying behavior becomes pervasive and forces organizations to adapt traditional selling models to meet customer expectations for faster cadence, complete answers, digital channel engagement, and relevant content. It's well known that digitally enabled customers armed with better information are pushing sellers to deliver a superior customer experience in the “moments that matter” across the entire revenue cycle. As buyers become more digital and demanding, those moments will ultimately become the only way to differentiate your business. Customers want more relevant information and complete answers faster. Recent research shows most buyers don't even want to talk to humans if they don't have to.FIGURE 1.5 The Megatrends That Changed the Growth FormulaFor decades, research and collaboration, and increasingly transactions have migrated to digital channels. Over 80% of customers now prefer to communicate via text, mobile, and online chat in service interactions according to the Salesforce.com “State of Service” report.21 These changes in buyer behavior were accelerated by the impact that the recent pandemic had on customer engagement – which doubled the percentage of sales that occur in digital channels, according to research