Profit growth is one of the primary drivers of a firm's stock price and therefore is a clear priority for managers. Yet little is known about how a firm's marketing capabilities may be linked with its profit growth. In this study, we use data from a cross-industry sample of 114 firms to investigate how market sensing, brand management, and customer relationship management (CRM) capabilities determine firms' revenue growth and margin growth—the two components of profit growth. Our results reveal that these marketing capabilities have direct and complementary effects on both revenue and margin growth rates. Critically, we find that brand management and CRM capabilities have opposing effects on revenue and margin growth rates, such that a failure to examine these two underlying components would mask the relationships between these marketing capabilities and ultimate profit growth rates.
Linking marketing activities and resource deployment with financial performance and firm value has become a clear priority among marketing scholars (Rust, Ambler, Carpenter, Kumar, & Srivastava, 2004). Firms expend significant resources on building, maintaining, and leveraging marketing capabilities, and recent research has greatly enhanced knowledge concerning the link between marketing capabilities and firm performance (e.g., Krasnikov and Jayachandran, 2008, Slotegraaf and Dickson, 2004 and Vorhies and Morgan, 2005). While researchers agree that firm performance is a complex multi-dimensional phenomenon, growth is clearly a top priority for managers (Day, Reibstein, & Shankar, 2009). Profit growth in particular is widely viewed as being of fundamental importance to investors and managers alike (e.g., Brealey et al., 2008 and Day and Fahey, 1988), not least because investors value firms on the basis of their expected future cash flows (Rappaport, 1997 and Srivastava et al., 1998). Despite this, profit growth is an infrequently used measure of firm performance in marketing, and we have limited knowledge concerning the link between marketing capabilities and a firm's profit growth.
In this research, we address this knowledge gap by examining how specific marketing capabilities can influence a firm's profit growth. Our study makes two contributions to the advancement of knowledge in this important domain. First, building on endogenous growth theory from economics as well as resource-based (RBV) and dynamic capabilities (DC) theories from strategic management, we develop a theoretical framework linking a firm's market sensing, brand management, and CRM capabilities with the two primary components of profit growth—revenue growth and margin growth. Using a data set comprised of both primary and secondary data, we show that a firm's CRM and brand management capabilities have significant but directionally different direct effects on its revenue and margin growth rates. Examining the interaction effects of these three marketing capabilities, we also find that market sensing is primarily important as a complementary capability in determining a firm's growth rate.
Second, we provide new insights into the nature and the marketing capability drivers of firm profit growth. Importantly, we show that the two primary components of profit growth rates—revenue and margin growth rates—tend to move in opposite directions. This suggests that in most circumstances, managers pursuing profit growth are forced to make trade-off decisions. This has important implications for managers seeking to grow their firms' profits in order to maximize their stock value. It also has critical implications for researchers seeking to examine relationships between marketing resources, capabilities, activities, and profit growth. In particular, we reveal that directionally different effects on revenue and margin growth rates mask the effects of a firm's CRM and brand management capabilities on its rate of profit growth.
This study is the first to examine the linkage between marketing capabilities and firms' revenue growth and margin growth performance. Our results clearly indicate that marketing capabilities can explain significant variance in these two components of firms' profit growth performance. Importantly, however, we find that revenue growth and margin growth rates are significantly negatively correlated. Our results further suggest that CRM and brand management capabilities have directionally opposing effects on revenue and margin growth rates, such that their direct effects on the rate of profit growth are masked. We also find that firms' market-sensing capabilities are primarily valuable in determining financial growth via their complementary effect on firms' CRM and brand management capabilities.
