Posts Tagged "The Effect of Marketing on Company Profitability"

The Effect of Marketing on Company Profitability

The Effect of Marketing on Company Profitability

Marketing is misunderstood. Marketers are thought of as spenders, rather than profit generators. Many are skeptical that marketing dollars spent will increase incremental revenue. These misunderstandings are a result of a number of factors, including the lack of exposure to research on the subject. In this post, I’ll do my best to clear up these misunderstandings by: Discussing the question “What is the purpose of a firm?” and providing common responses. Exploring the effect of a market orientation on company profitability. Examining marketing budget processes. Analyzing the measurement of marketing effectiveness. Addressing the dichotomy of interests between marketing and finance, and proposing methods for reconciling differences to increase company profitability. What is the purpose of a firm? A compelling and much-debated question is “What is the purpose of a firm?” Traditional economic theory calls for a single, simple goal: the maximization of shareholder value. In other words, increase the wealth of the owners. Most organizations focus on maximizing profits, which may or may not increase shareholder value. Other organizations shun economic theory and choose a different strategic objective—increase market share. They assume that beating the competition will lead to increased profitability. Honored as one of the world’s leading marketing thinkers, Philip Kotler is the S. C. Johnson Distinguished Professor of International Marketing at the Kellogg School of Management. He argues against a strategy focused solely on profit: “Private firms should not aim for profits as such, but rather to achieve profits as a consequence of creating superior customer value.” At the core of this perspective—from a marketing expert—is the customer. Creating customer value involves 3 steps: Use targeted market research to identify customer needs and wants. Develop and enhance your product or service to fulfill those needs and wants. Execute an integrated marketing plan that focuses on the customer experience. The company profits through customer satisfaction. Focusing solely on profits or shareholder wealth—instead of creating customer value—has its problems. Such a strategy neglects the long-term financial health of the organization. A company that lives and dies by the quarterly profit numbers can certainly boost its share price—in the short term. Over time, companies must adapt to the changing market and current financial conditions to remain successful. From the finance perspective, corporate goals are much more complex than profit maximization. Goals must incorporate proper rate discounting and adjustments for future risk. And, there is no definitive proof that increasing market share always leads to increased profits. The effect of a market orientation on company profitability While there are disagreements as to the purpose of a firm, the purpose of marketing is clear: create customer value. By concentrating on the customer and satisfying their needs and wants, marketing can achieve the ultimate goal of profit maximization. Many studies have connected marketing to the profitability of a firm. The academic research of John Narver and Stanley Slater serves as the foundation. They use the term “market orientation” to illustrate the importance of this connection. Market orientation consists of three behavioral components: Customer orientation is a sufficient understanding of target buyers to be able to continuously create superior value for them. Competitor orientation refers to understanding the short-term strengths and weaknesses and long-term capabilities and strategies of both the key current and key potential competitors. Inter-functional coordination is the coordinated utilization of company resources to create superior value for target customers. Narver and Slater maintain, “For a business to maximize its long-run profits, it must continuously create superior value for its target customers. To create continuous superior value for customer, a business must be customer-oriented, competitor-oriented, and inter-functionally coordinated.” As a result of...

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