‘Is the marketing function in your organisation a cost centre or a profit centre?’
This is a question I’ve asked many times, both as a consultant and an investor. It is shorthand for ‘do you understand the role of your marketing function in driving growth?’ and ‘how mature is your marketing function?’
Often, the answer to this question will be ‘a cost centre’. This is normally the case for SMEs and especially those selling to other businesses (B2B). I’m going to explain why you should aspire to have a marketing ‘profit centre’, how to assess your starting point and how to get there.
Why should your marketing function be a profit centre?
From the CEO’s perspective, a marketing function that operates as a profit centre offers some level of predictability of outputs rather than just outputs; for example, ‘delivering 1,000 customers at a £50 Cost Per Acquisition (CPA)’ vs. ‘spending a £50,000 marketing budget’. There should be an established understanding of cause and effect, some level of marketing attribution. A CEO will value having another controllable growth lever at their disposal.
Being a profit centre means that the marketing function and Chief Marketing Officer (CMO) has both ownership and accountability for driving commercial outcomes. From the CEO’s perspective, this should lead to alignment between the marketing function and the overall business strategy, and between marketing spend and the overall financial objectives of the business. Together this should translate a higher chance of hitting collective goals than the alternative.
From the CMO’s perspective, having clear ownership of commercial outputs, as opposed to just inputs, elevates their role significantly. In fact, this can be one of the main differences between organisations where the most senior marketer is part of the C-Suite team rather than one or two levels below, and responsible for spending a budget but not for quantified and specific commercial outputs.
Being a profit centre also suggests that the organisation has collectively understood the value that a high performing and output-oriented marketing function can play in driving business growth, which should create more opportunities for career development for those in the marketing function and the CMO personally – for example being given responsibility for entering new international markets or taking ownership of broader strategic topics such as pricing or aspects of product and the overall customer journey.
Finally, directly embedding a profit-based marketing output metric such as Return on Investment (ROI), perhaps based on Customer Lifetime Value (CLV/LTV), to gauge marketing effectiveness can be very helpful for a CMO. It provides a framework for deciding what to spend and how to spend it, as well as making conversations with the finance team more strategic and growth focused.
How can you tell where you are starting from?
The easiest way to work out whether your marketing function is operating as a cost centre or profit centre is to consider the recent conversations you’ve had about marketing spend. If the focus has been mostly on the amount you are spending, you are probably working with a cost centre. If the focus has been on the quantified results and ROI that than marketing function is generating, you are probably working with a profit centre.
As a CMO, you could also try a simple exercise. If you went down the list of everything you spend on marketing, could you justify it based on a commercial return? Not just the presence of a particular channel but the specific amount being spent? Often when I’ve asked this, the main input to this year’s marketing budget is whatever last year’s budget was. You could also look at the KPIs used for the marketing function and the extent to which these are inputs vs outputs. Perhaps ask yourself my favourite question, "where would you spend your next £1"?
How can you transition from marketing as a cost centre to a profit centre?
There are five components which can help you move towards marketing as a profit centre over time:
Start measuring marketing effectiveness - ROI (perhaps on LTV basis) or even CPA based on some level of marketing attribution;
Use this understanding to start communicating internally who your most valuable customers are, and which marketing activities you would start/stop/continue with the aim of getting more of them;
In your next planning cycle, armed with your new measurement of marketing effectiveness, adopt a zero-based approach to planning your marketing spend. In other words, forget what you’ve spent in the past and plan from scratch with the objective of generating as many profitable customers as possible. Make sure to talk to your finance team about this first though, as they will need to support your approach;
In your internal conversations around this new approach to marketing planning, as well as more regular discussions of business performance, reframe conversations around ‘budget’ from talking about spend inputs to talking about commercial outputs; and
Hire for people in your marketing function and as CMO who talk about quantified commercial outputs in their CVs vs awards and amount of budget previously managed.
Some conclusions
Working out whether a marketing function was operating as a cost centre vs. a profit centre is an important question or me when I’m reviewing potential investments. I’m looking for a demonstrable a growth lever that a Management team understand and can control, that will help to underpin my investment case.
Of course, there are some situations when a marketing function may have something have a hybrid model. For example, I’ve worked with a restaurant operator where the marketing function operated as a ‘cost centre’ when it came to brand-level activity required to support each restaurant (e.g., creative content and point-of-sale material), but as a profit centre when operating the group’s well established and well-adopted customer loyalty programme.
Even if you aren’t sure where your organisation sits today, I think that asking the question I started this post with will invariably lead to an interesting conversation about the role of marketing in your organisation, and hopefully some tangible outcomes.
If you’d like to discuss the strategic role of the marketing function in your business, please Contact Me.
All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.