Added value in business marketing strategies

Date of publication: June 15, 1992


Business Marketing decisions are said to be rational although the marketing input is generally non-rational, or worse, emotional. In this paper, a method of calculating the added value on business marketing decisions is discussed. The method is based on the Capital Asset Pricing Model, that is used to estimate the value of (a portfolio of) stocks. This method basically comes down to a relationship between the risk of a portfolio and the (minimum) return that is required. If the risk changes than the return changes. If a marketing decision has to be taken, a similar calculation can be made Take the marketing portfolio without the planned action and see what the return is, compared to the risks involved. Minimum risk is obtained at the point where your money is put on the bank (no marketing actions). This return is called the riskfree reward Now compare the marketing portfolio with the planned action and compare it with the above-mentioned risk-return relation. You will thus get a minimum return claim (as a percentage), which can be used as the discount factor in a normal net present value calculation. The resulting net present value is called the Strategic Added Value of the decision. Variations in risks come down to variations in the discount factor. Scenario's aim primarily at the valuations of risks, and not at the variation of cashflows. This, unfortunately, is advised too often. If the risk is known and the reward is high enough, the decision to go along with the marketing action depends on the risk awareness of the decision-maker. If he is risk-averse he most likely will not start the marketing activities, although the reward is high enough to take the risk. That's something for non-rational decision making. In this article, a simple net present value technique is discussed, followed by a more detailed description of the discount factor and the comparison with a standard scenario type of evaluation of strategic business marketing.

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