The Marketing Plaza

In the business world, one would assume that the concept of profit and loss is basic and easy to understand. Not true. The idea of profit is laced with subtleties.

In marketing, you first come across this when you encounter one of the famous 5 P’s — namely Price. You’re taught about price points not in terms of profit, but in terms of consumer appeal — what price will the market bear?

Profit becomes muddied in the real marketing world when you start working with a motivated sales force — motivated to create commissions. This can include selling products at a loss, or selling products that don’t have the highest profit margins, meet current company goals, or match the true growth potential for the company. I have sat through many a sales meeting where reps received public accolades for sales that I knew had not yet helped the company turn a profit. I knew, because the sales revenue had not covered marketing costs or even taken them into consideration and those costs were high.

I’m now reading the book Free by Chris Anderson, a business writer well worth following from his original book The Long Tail to today’s best seller. In it, he writes: “People are making lots of money charging nothing.” How, you ask? Well, that is the paradox of free in today’s world. As he goes on to write while discussing an historical example: “Free didn’t mean profitless. It just meant that the route from product to revenue was indirect, something that would become enshrined in the retail playbook as the concept of “loss leader.”

The real problem with profit and loss is that we’ve relegated it to our accountants, who literally take a literal look at it. It’s one of the main reasons that marketing people have such a difficult “sell” with accountants, and a reason why businesses should be supported but never led by accountants. Profit and loss are not easy concepts, short-term concepts, or as obvious as black and white. Today’s loss is tomorrow’s potential best-seller — that is if the business has vision, goals, an understanding of the product and what it will take to bring it into the public conscious. And bringing a product into the public conscious — well, that’s true marketing!

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Marketing measurement now has its own acronym — ROMI, or Return on Marketing Investment. It has hit the big time with its own detailed explanation in Wikipedia.  The key to the Wikipedia definition is the differentiation between short and long-term measurements and this is also what separates the amateurs from the pros.

Short-term ROMI is exactly what you would expect — the ratio of  what  you spent on a single tactic versus the increased revenue.  It’s a bit more complicated, but that’s it in a nutshell.  But, if you’re good at marketing, you likely have a campaign running, not a single tactic, and you’ll need a more sophisticated method for measuring return. That’s what the pros are calling long-term ROMI.

Long-term gets into the issue of branding, brand awareness, and the ultimate marketing mix.  How can you decide if you’re in the pro leagues?  Here’s a simple test: Are you concerned with brand and market share or just chasing more sales?  There’s nothing wrong with more sales.  It’s the reason to be in business after all.  But, if you’re only measuring sales, you’re in the minor leagues. The pros are looking at brand equity and market share in order to build towards the future.

And, of course, even this academic discussion on Return-on-Marketing-Investment pre-dates the effects of social media on the marketing mix.  If you bother to check the Wikipedia bibliography on the term ROMI, you’ll see the most recent reference is from 2006.  It’s safe to say that the use of social media in branding is just beginning to hit its stride. Branding giants — from Kodak to Zappos — have embraced it. These companies don’t take marketing lightly and they wouldn’t be in it just for the fun of it.  There ’s no question that marketing’s future is in today’s social media — at least as one growing leg of the marketing mix stool.

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