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Working Paper

Marketing's Impact on Firm Value: The Value-Sales Differential

Victor J. Cook, Jr., 2003 [03-109]

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CEOs typically view a marketspace as comprising a dynamic collection of companies that are their competitors for customers and capital. The firm’s operations in this marketspace are divided into a sales space (revenue) which is marketing’s domain and a value space (stock price) that belongs to finance. Capturing the interactions between the two domains has proved difficult.

Victor Cook proposes a risk-adjusted measure of the difference between a company’s share of the value space and its share of the sales space. This measure captures the interactions between capital and product markets in a single metric called the “value-sales differential,” based entirely on the financial statements of public companies.

In addition to marketing’s domain in the “sales space”, he suggests, marketing activities (including selling, advertising, promotion, management, and R&D) are the primary source of intangible value built into the price of a company’s stock. Thus, if marketing contributes significant information about variation in a firm’s value-sales differential, over and above the contribution of financial factors like total return and capital structure, it can be said to reflect marketing’s impact on the intangible value of a firm.

In an analysis of 100 firms in five markets, Cook investigates the properties of the risk-adjusted V¸S differential, and tests which marketing and financial factors provide significant information about variations in this metric.

Overall, he finds that share of sales revenue has little to do with earning sustained value-sales differential premiums. For example, from 1991-2000, Gillette Company created 78.4% of the market value in the personal products market space with 55% of the sales revenue. In addition, the variation in Gillette’s differentials was relatively small, suggesting it is likely to sustain an 11.5% risk-adjusted premium. Similarly, Campbell Soup created 13.1% of the value on just 7.1% of the revenue in the packaged foods space. Like Gillette, the variation in Campbell’s differentials over the decade was relatively small, suggesting it too is likely to sustain a 5.8% risk-adjusted premium. He also finds that share of sales revenues has little to do with sustained value-sales differential discounts.

Cook finds in all five markets that, on average, profit minus cost per market share point (calculated as 1/100 of a market share point) offers almost half as much information about variations in risk-adjusted V¸S differentials as does total return to shareholders. This suggests that marketing does indeed make a significant contribution to the intangible value of the firm.

Included in the following collections:
MSI Reports 2003

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