The relationship between marketing and finance is famously strained with each accusing the other of failing to understand how value is created.

Finance claims that the cost discipline that it imposes is the reason why the business earns an adequate return on every pound of revenue. Marketing rightly responds that every pound of revenue comes from a customer with whom a relationship was established and nurtured before the sales transaction occurred.

Both views are correct, but neither is sufficient in isolation.  The magic comes when the realities of marketing and finance are aligned.

The first step in this process is to define marketing’s role as the sowing and harvesting of cash flow.

The second step in the process is to acknowledge that the period between the sowing and the harvesting differs enormously. It may be a matter of minutes for marketers responsible for a B2C ecommerce site. But in many industrial and B2B markets, the time between investing in the trade show, following up on the contacts, qualifying the prospects, getting on the selection list of the purchasing team, and eventually winning the request for proposal (RFP) is more usually measured in months or years.

How to talk to your CFO about creativity

Finance people regard time and uncertainty as the enemy of value creation for two reasons. The first is mathematical – the present value of future cash flow declines in proportion to the length of time it takes for the cash to arrive and the uncertainty of it doing so. The second reason is operational – it is impossible for the finance team to optimise the cost structure of the business if they do not have confidence about the size of its revenues.

In the world of physics or mechanics, there are two different ways to look at the world. The Newtonian view focuses on the rules that govern large, observable objects such as how a ball would fall to the ground or how planets move. These rules are predictable and deterministic. Quantum physics, on the other hand, describes the behaviour of very small things like atoms and subatomic particles. This behaviour is often probabilistic and unpredictable.

Finance lives in a Newtonian world where it wants a stable, predictable relationship between inputs and outputs.

Much of the work of marketing exists in the untidy worlds of possibility and potential.

Marketing lives in a Quantum world where outcomes are probabilistic, not deterministic. Consumer preferences, competitor activity, unanticipated weather events, distribution bottlenecks or tariffs all conspire to make it impossible for marketers to comply with the demand from finance about what future revenue will be.  At best, marketers will respond with what future revenue could be.

It is therefore not surprising that finance people looked favourably on the concept of “performance marketing” and its promise to transform the messiness and uncertainty of marketing into a disciplined system of demand generation. But companies like Nike and Starbucks (and Adidas and Airbnb before them) learned the hard way that this programmatic approach to marketing is only effective with a certain type of buyer.

How can marketers diffuse this tension? By using 4Ps. Not the time-honoured 4Ps of product, place, price and promotion but rather a different set of 4Ps that describe the levels of confidence that marketers can provide around future revenue – predictability, probability, possibility, and potential.

Stop selling creative disruption and start selling risk reduction

Finance lives in the world of prediction and probability. It wants the certainty that an investment will generate a predictable level of return. The next best thing for finance is an investment for which the returns can be calculated with a high level of probability to generate a risk-adjusted Net Present Value (which measures an investment’s profitability by adding the present value of its future cash flows and subtracting the initial investment). Both these scenarios enable the business to have a high level of confidence about its future revenues and to optimise its cost structure accordingly.

Much of the work of marketing exists in the untidy worlds of possibility and potential. These are worlds in which profitable revenue is the outcome of numerous, compounding factors over the duration of the time it takes to move the customer from initial contact to signed contract.

Marketers can use the 4Ps of prediction, probability, possibility and potential to describe to their finance colleagues how marketing budget is being allocated across activities that offer differing levels of revenue certainty and potential:

• Prediction – Activities that are essential for supporting the core, recurring revenue of the business
• Probability – Activities that prior experience shows to be effective in attracting new customers with a high level of certainty
• Possibility – Activities that unlock new revenue opportunities for the business through incremental innovation in the product, its distribution, its pricing, or its market positioning
• Potential – Activities that are stretch goals (maybe even “moon shots”) for the organisation but which offer the potential to introduce a revolutionary innovation that disrupts the category or even creates a new one.

The Brand Value Chain, as originally developed by Professors Keller and Lehmann, is a powerful model to illustrate that the marketing budget is allocated to a range of activities with different “time to value” and risk/return characteristics:

The Brand Value Chain allows the CMO to describe the marketing budget as a combination of the OpEx (operating expenses, referring to businesses’ day to day costs) necessary to deliver the predictable and probable revenues over the short-term and the intangible CapEx (capital expenditure, investment into long-term assets) necessary to realize the possible and potential revenues over the longer-term.

By acknowledging that marketing’s role is the sowing and harvesting of cash flow, marketers will reassure their finance colleagues that they are living in the same universe. By using the alternative 4Ps marketers can explain how Newtonian and Quantum principles both apply in this universe – and how the probabilistic reality of marketing can be aligned with the deterministic preferences of finance.