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Accounting for Marketing’s Value

Accounting for marketing's valueOutside of marketing departments, marketing is often viewed as a cost rather than a value-generating activity, and current accounting norms reinforce this view. In their paper, “Accounting for Marketing Activities: Implications for Marketing Research and Practice,” Natalie Mizik and Doron Nissim advance a proposal to improve marketing accounting standards that argues for a radical change in how marketers regard the scope of their interests and activities.

“Marketers typically do not understand how accounting treats marketing activities and assets, and they tend to regard these issues as outside the scope of marketing,” the authors write. That attitude has contributed to the difficulty marketers have in assessing and communicating their contribution to financial performance and firm value.

While some have advocated for balance-sheet recognition of marketing assets, Mizik and Nissim point out that the majority of internally developed intangibles—including brands—do not qualify for balance-sheet recognition as they do not represent benefits that are considered sufficiently probable or measurable for general accounting purposes.

Instead, they suggest, marketers need standardized methods for (1) measuring assets and (2) reliably forecasting the contribution and dynamic impact of various marketing activities.

The authors call for expanding and formalizing marketing disclosures. Specifically, they propose that companies should be required to:

  1. Segregate their major categories of marketing spending by activities (such as customer acquisition, advertising, sponsorships, etc.) from other selling, general, and administrative expenses, and possibly by geographic area, operating segment, product or line of business, brand, or major customers;
  2. Segregate their revenues along the same dimensions (geographic area, product or line of business, etc.) and by their source: new versus existing customers, organic growth versus revenue stemming from structural changes (e.g., acquisitions);
  3. Report non-financial performance drivers.

While the first two recommendations are easier to implement and the necessary data are often readily available, the third recommendation—reporting nonfinancial performance drivers—is more difficult, but also potentially more beneficial.

Some marketing assets, such as customer-base and lifetime-customer metrics, have well-established measures and evidence of future performance impact. Other assets, such as customer loyalty, word-of-mouth, and distribution structure, require more research to achieve agreement on measurement and/or need more evidence of their performance impact. Buy-in from the firms and a careful consideration of concerns related to confidentiality of strategic and competitive processes are also needed.

“It is imperative for marketers to understand the implications of the marketing–accounting interface for marketing research and practice and to become active participants in ongoing discussions on how to improve financial reporting,” Mizik and Nissim conclude. The future of marketing hinges on its ability to provide evidence of its value to the firm and that means marketers must get involved in the financial reporting debate.

From
Accounting for Marketing Activities: Implications for Marketing Research and Practice
Natalie Mizik and Doron Nissim (2011)

Related links

Are Financial Analysts “Good Marketers”? Implications for Marketing and Investor Relations
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Value Implications of Corporate Branding in Mergers
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The Unappreciated Value of Marketing: The Moderating Role of Changes in Marketing and R&D Spending on Valuation of Earnings Reports
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Natalie Mizik (2009) [Report]

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