Marketing's Effect on Firm Value

Marketing AnalyticsEdeling, A.; Fischer, M. · 2016Journal of Marketing Research
Topicsfirm value elasticity·marketing finance·meta-analysis·marketing assets·advertising expenditure·brand equity·customer equity

Imagine your CFO wants a board case on firm value, the company's stock-market valuation. Marketing assets include brand equity and customer satisfaction. Should your case lead with advertising expenditure or marketing assets?

Firm value moves more with marketing assets than with advertising expenditure, and most with customer-related assets.

Data chart

Firm value moves more with marketing assets than with advertising

Average percent change in a company's stock-market value when advertising expenditure, or a brand or customer measure, rises by 1%.

All marketing assets average: .54%Customer-related assets.72%Brand-related assets.33%Advertising expenditure.04%
  • Customer-related assets have the strongest link to firm value, on average.

A 1% rise in marketing assets goes with a larger change in firm value than the same rise in advertising expenditure, and customer-related assets show the largest change on average.

Table 3, p. 526: mean firm-value responses per 1% input increase, pooled across studies. Exact values: customer-related assets .72, brand-related assets .33, advertising expenditure .04, all marketing assets .54. The reference pools brand and customer estimates; it is not their sum. These are averages, not investment returns.

Data chart

Most advertising estimates sit just above zero

Share of 296 advertising estimates, in percent, grouped by percent change in firm value for 1% higher advertising expenditure.

Fall greater than one tenth of apercent3%Fall from one tenth to one twentiethof a percent3%Fall from one twentieth of a percentto zero16%Rise from zero to one twentieth of apercent51%Rise from one twentieth to one tenthof a percent14%Rise from one tenth to fifteenhundredths of a percent5%Rise from fifteen hundredths to onefifth of a percent3%Rise greater than one fifth of apercent5%
  • About 23% of advertising estimates are below zero.

Advertising estimates vary widely, and negative estimates are consistent with overinvestment at some firms.

Figure 3, Panel A: exact shares in the ranges below -.1, -.1 to -.05, -.05 to 0, 0 to .05, .05 to .1, .1 to .15, .15 to .2, and above .2 are 3.4%, 3.4%, 16.2%, 50.7%, 13.9%, 5.1%, 2.7%, and 4.7%. The published shares total 100.1% because of rounding. The negative bins total 23% before rounding; displayed shares round independently.

Action guide

  1. Lead your board case with marketing assets.Give customer-related assets more weight than brand-related ones, and ask whether your assets have room for more investment.
  2. Keep near-zero advertising estimates out of automatic cut rules.Treat them as averages consistent with near-optimal spending. Learn from the budgeting tools of firms that manage advertising well.
  3. Build brand and customer assets in prosperous periods.Fund them when more money is available, since their persistence helps carry their benefits into recessions.
  4. Check advertising for overinvestment in concentrated categories.Account for advertising's weaker link to firm value there. Rival responses are a possible but untested explanation.
  5. Set advertising budgets by how they build marketing assets.Judge each proposal by what it adds to brand and customer assets. Apply the same test to product quality and distribution investment.

Evidence

  • A 1% increase in advertising expenditure is associated with about 0.04% higher firm value, versus about 0.54% for marketing assets. The asset average suggests brand and customer assets are generally below their optimal level.
  • A 1% increase in customer-related assets is associated with about 0.72% higher firm value, versus about 0.33% for brand-related assets. The gap widens over time in the studies.
  • After accounting for other differences between studies, marketing assets are more strongly linked to firm value in recessions. Recessions make no reliable difference for advertising expenditure.
  • For each 1% rise in advertising expenditure, firm value responds about 0.06 percentage points less in medium-to-high concentration industries than in low-concentration ones, after accounting for other differences between studies.
  • Advertising estimates vary widely, and about 23% are negative, so the averages are benchmarks, not forecasts for any one firm.
  • Firm value can itself shape advertising budgets, and some asset models leave out earnings. Corrected for both, the average change in firm value per 1% increase is about -0.01% for advertising expenditure and about 0.42% for marketing assets. The advertising figure is not reliably different from zero.

Key takeaway

Lead your board case with marketing assets, especially customer-related ones.

Limitations

These historical averages cover mostly U.S. and North American public firms and measure stock-market value, not sales or profit. They do not establish causal effects, firm-specific optimal budgets, or results for private firms.

Source

Edeling, A., & Fischer, M. (2016). Marketing's impact on firm value: Generalizations from a meta-analysis. Journal of Marketing Research, 53(4), 515–534. https://doi.org/10.1509/jmr.14.0046

https://doi.org/10.1509/jmr.14.0046

Exact values behind the rounded figures: the concentration difference is -.063; Figure 3 advertising-bin shares, in increasing response order, are 3.4%, 3.4%, 16.2%, 50.7%, 13.9%, 5.1%, 2.7%, and 4.7%.

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