The Case for Risk in Marketing
The CMO and the CFO are often at odds with how they view risk. Here's a mental model that can align them.
Let’s step back for a second and examine what marketing’s role really is. To drive pipeline? Brand awareness? Customers? Revenue? Yes. But let’s take another step back and think about the even larger goal. The real goal isn’t to generate revenue only. The real goal is to lead your market. To win. Markets have a funny way of evolving. While they can support lots of players for a while, most evolve to a winner-take-all or winner-take-most dynamic.1 There are plenty of great marketing teams, generating revenue, whose companies are still squeezed out in the end.2
But if marketing is going to be how you win, then the only way that happens is if marketing generates outsized returns. Put another way, you cannot gain a competitive advantage through marketing simply by following the same playbook as everyone else. By definition, you must do something different. Something untested.
When the CFO asks the CMO for the expected return of an untested idea (as they are wont to do), it’s problematic, because they are asking a question that cannot be answered. You can’t know the expected return of an untested idea a priori. You can only know by running the experiment and seeing what happens. The very thing you needed to try in pursuit of outsized marketing returns gets killed before it gets the chance to be tested.3
There’s a name for this approach that comes from the domain of corporate finance: Capital Budgeting Theory4. The idea is that by picking the projects with the highest expected rate of return, profits are maximized. That approach may work fine where returns are knowable. But when they are unknown, it’s the wrong framework, because the very kind of high-risk/high-return experiments you need to run in pursuit of outsized returns are tossed out of the consideration set.
Venture capitalists offer a good model for what to do instead. For the startups they invest in, they have no idea what the upside is going to be for a specific investment. There’s simply no way to know. But instead of eschewing such uncertainty, they embrace it by placing dozens or even hundreds of smaller bets. Most will return nothing. But if only a few pop, then the entire portfolio can provide an outsized return.5 Meanwhile, the Capital Budgeting Theory approach is like building a portfolio of stable government bonds. Sure, you know what the return will likely be ahead of time, but whatever portfolio you build, the returns will be low.
But does this logic apply only to marketing tactics?
My sense is no. It applies to strategic marketing bets as well. Your brand’s positioning, strategic narrative, point of view, and brand identity are all subject to the same math. Being different only at the edges from how competitors have oriented themselves won’t get you much in trouble. But pursuing only small, predictable will never put you in a position to come out ahead, either.
Anthropic may be the cleanest example of this mindset bearing fruit right now. When the market was hot for AGI, Anthropic took the stance that AI safety was a more pressing concern. It was unpopular at the time, and even made the company seem like a bit of a wet blanket.6 But that wasn’t all. The company also chose to focus on the enterprise market, and more specifically, software developers. It even lagged far behind on some of the more popular use cases for generative AI, like image and video generation. Meanwhile, OpenAI, with its strong consumer presence, seemed like it would emerge as the winner. Anthropic’s focus likely felt risky, and perhaps stifling, at the time. Surely there were some big AI trends they’d miss out on? Yet today, that bet is paying off.7 The race is far from over, but had Anthropic played the same hand as its rivals, we’d be talking about it in a much different light today.8
All of this might sound like I’m pitting the CFO and the CMO against each other.
Instead, I’m hoping to align the CFO and the CMO around the same mental model. Both roles have the same objective: to maximize the long-term value of the business and establish a defensible position in the market.9 It’s the same goal VCs have. And it’s the same goal your business should have. Remember: Coming out ahead in the long term requires you to deviate from the predictable in the near term.
John Rougeux is the founder of Flag & Frontier, a strategy consultancy that helps executive teams align around their strategy and narrative when the future is up for grabs.
Footnotes
See work by Paul Geroski, specifically his book, The Evolution of New Markets. In every industry he studied, he found that as markets evolve, they become dominated by a few players. I also have a related post on this here.
One relatively recent example is Drift, the company the created the “conversational marketing” category. It was often held up as an exemplar of what strong, bold marketing in B2B should look like. But over time, the product itself became somewhat commoditized as multiple competitors emerged. Drift was once valued at over $1B. It was sold to Salesloft for undisclosed terms and its functionality was folded into their platform.
Inspiration from this piece comes from this essay written by Blair Enns, called Embrace the Marketing Mess. His work, in turn was inspired by an interview Rory Sutherland did on the Undisputed Authority podcast. I recommend consuming both.
The foundation for Capital Budgeting Theory actually dates back to the early 20th century, through the work of an economist named Irving Fisher. His theories were first applied to practical business use in the 1950s.
This study is a good review of how returns in a VC fund tend to follow a power law distribution. In one study across 11,350 startups, about half lost money, but 121 (1.1%) returned the entire amount of the fund that invested in them.
Anthropic’s stance on safety drew criticisms that it wasn’t moving fast enough and that it was using the narrative to sway regulations in its favor.
A great breakdown of how Anthropic become the frontrunner can be found here.
Risk-seeking or contrarian approaches don’t guarantee success, either. Grok is one such example. The LLM has a much different point of view in terms of what’s acceptable in terms of political bias and what’s considered appropriate content, but it’s lags behind Claude and OpenAI.
This isn’t to say that executives don’t have other agendas: personal gain, pet projects, etc. But that’s a topic for another day.