Feb 4, 2026 | Analytics
‘How much is my business worth’ is a common question I get.
There are as many ways to value a business as there are consultants willing to charge you for a calculation. Sensible people use a range of tools, all of which in one way or another, seek to quantify future cash flow. That is the only reason someone would buy a business: they can extract more value from the capital deployed buying it, than deploying it in other ways.
Tobin’s Q ratio is one of those common tools that will deliver a number that is worth consideration, along with the many others.
It is a financial metric that compares the market value of a company to the replacement cost of the assets of the company. It helps investors figure out if a company is overvalued, undervalued, or fairly priced.
In a time when the value of a business is significantly influenced by the valuation of intangibles, all those items that deliver value to a buyer, but which do not make their way into the financial statements, you also need to consider how these will be valued, which is an entirely separate exercise, and by far, the most contentious.
The simplest way of thinking about the Q ratio is to consider:
- Market value is what investors think the company is worth—this is the company’s stock price multiplied by the number of shares. That applies for a publicly traded business. It is much harder to calculate when there is nowhere that shares can be traded easily. In that case, the judgement becomes more subjective, taking the place of the sentiments of the market that determines the value of a publicly traded share.
- Replacement cost is what it would cost to replace the company’s assets. How much it would take to rebuild or replace everything the company owns, including the intangibles. It is relatively easy to get a valuation of the physical assets, but much harder to calculate the value of a brand, the experience in your employees heads, the strategic position in a market you hold, and the list of customers you have.
A ‘Q value’ greater than 1 means that the company’s market value is higher than the cost of replacing its assets. This could mean investors are optimistic about the company’s future growth, or the company might be overvalued.
A ‘Q value’ less than one means the company’s value is lower than the replacement cost of its assets. This could mean the company is undervalued, or investors don’t think the company will perform well in the future.
Obviously, when the Q value is 1, the market value is in balance with the replacement cost of the assets, including intangibles.
The really challenging bit is putting a value on the intangibles. For that you need deep marketing experience, domain knowledge, and wisdom.
Jan 15, 2026 | Analytics, Governance
Many of those who run SME’s turn off when their accountant starts mumbling about ROE and ROA at the annual $500/hour financial roundup.
Understanding the difference is important to the long term health of the enterprise. They reflect how effectively a company’s management team is doing its job of managing the capital entrusted to it.
The primary differentiator between ROE and ROA is the amount of debt compared to equity is being used. Together they are a measure of the efficiency of the enterprises efforts to generate profit.
The difference is that ROA takes into account debt, while ROE does not.
Return on equity (ROE) is net income divided by shareholder equity. It measures profitability by relating how well a company generates profit from money invested by shareholders.
Return on assets (ROA) is net income divided by total assets. It’s an efficiency measure of how well a company is using its assets.
The difference is important for several reasons.
- ROE is focusses on the return generated on the shareholders’ equity. The easy analogy is the interest you receive on the balance in your bank account.
- ROA is focussed on the return generated on the total assets of the company, including debt.
In the absence of debt, ROE and ROA would be the same.
Viable businesses are able to make choices about the financial leverage they apply to their operations. The mix of debt and equity they employ.
A business that no longer has that option, in other words, investors have better options to generate a return on their funds, they will be withdrawn. At that point it often becomes difficult to borrow to replace the withdrawn equity, so the business becomes progressively unable to fund operations. At that point, it requires a ‘restructure’, or goes into liquidation.
Leverage works both ways.
ROE is used by investors to assess the profitability relative to their investment.
ROA is used to assess management’s efficiency in using all the enterprises assets, both debt and equity to generate profits.
Dec 15, 2025 | Analytics, Governance, Marketing
Marketers must understand the jargon of the boardroom if they are to contribute meaningfully to the critical strategic conversation. Too often they are sidelined by lack of this understanding, resulting in dumb choices being made by those who think strategy development and the deployment of these strategies is some form of hocus pocus.
Return on Assets (ROA) and Return on Equity (ROE) tell different stories about the quality of the management choices being made.
ROA is a measure of how effectively the enterprise is using the assets it has to generate a profit. It is the ratio of net income divided by total assets.
ROE is a measure of how effectively the enterprise is leveraging the use of the equity, capital supplied by the owners, to generate profits. It is the ratio of profits divided by equity.
Together they measure how well a management is doing at managing the enterprise on behalf of the owners. The major difference is the financial leverage delivered by the debt the enterprise uses to generate profits. The greater the distance between these two ratios the greater is the reliance on debt to fund activities. Conversely the closer they are, the less debt is on the balance sheet. In the absence of debt, the ROA and the ROE would be the same.
Every enterprise faces the choice of funding sources: debt or equity. If they choose to take on debt, or ‘financial leverage’ its ROE would be higher than its ROA only if the company earns more on the borrowed funds than the cost of borrowing.
You will often hear the term ‘financial engineering’. In its simplest form, it is the management of the balance between debt and equity, usually in response to interest rates, and expectations of those rates, and the expectations of dividends to be returned to shareholders out of profits.
I found the following example contained in an explanation of the ‘DuPont Identity’
Imagine a fictional company ABC with the following financials:
- Net Income = $1,000,000
- Average Total Assets = $4,000,000
- Average Shareholders’ Equity = $2,000,000
ROA = Net Income / Average Total Assets = $1,000,000 / $4,000,000 = 25%
ROE = Net Income / Average Shareholders’ Equity = $1,000,000 / $2,000,000 = 50%
In this example, ABC generates $0.25 in profit for each dollar of assets and $0.50 in profit for each dollar of shareholders’ equity. ROE is higher than ROA in this example, as it does not account for all assets, including debt. If total assets were equal to shareholder equity, then ROA and ROE would provide the same result.
As noted, while it may sound like accounting jargon, marketers simply must understand the terminology if they are to avoid being sidelined when it really counts.
Oct 8, 2025 | Analytics, Leadership, Operations
We have learned over time, led by Toyota, that ‘root cause analysis’ thereby seeing the root cause of problems is the road to continuous improvement.
At any time when there is a problem, do not let it get papered over, do not let the symptoms be treated, dig and dig until you understand the root cause and then fix it.
Often this is a challenging task, root causes by their nature are usually well hidden, and often ambiguous until there is a forensic examination. However, they are always there and rooting them out enables a compounding of improvements over time.
That analysis requires a cultural context in which to work, as it takes time, consumes resources, and is never completed, as there is always another problem to be analysed. That is the nature of problems, root out one bottleneck, and the blockage just moves to the next spot, previously hidden by the former one.
However, we also seem to look at a process from its beginning, setting out to define a hidden problem occurring inside the process.
Should we reverse the order, and look at the causes of success?
Why and how has Toyota managed to remake themselves from the crappy stuff carrying the lousy quality implications of ‘made in Japan’ from my childhood to an icon of quality, and in the process, driven change through manufacturing globally?
What is the root cause of their success?
My contention is that the root cause is a simple piece of rope.
The Andon cord.
Toyota put Andon cords through their factories, so that any person on the line could stop the line at any time when they saw a fault.
Not only were they empowered to stop the line, they were expected to do so any time a problem occurred that could not be fixed in the time allowed at that station in the line. When the line was stopped by a worker, the supervisor immediately went to the stoppage point with two objectives:
- Solve the problem to ensure it would not be repeated, and that the problem got not one step closer to a customer.
- To congratulate the worker for stopping the line so the problem could be fixed. This ensured there was not any reluctance to address a problem by such radical means as stopping a whole factory.
This is an extreme example of empowering the front line, making those who can see problems as they face them all the time, responsible for fixing them.
When introduced, this must have caused headaches, as the productivity would have plummeted. The number of cars produced dropped off a cliff, but those that got through would be as good as they could be, and slowly, as problems were solved, productivity rose, quality rose, as over time Toyota became the benchmark for motor vehicle quality around the world.
All from a simple piece of rope, and the surrounding culture that delivered to those at the coal face, the responsibility to exercise their right to pull it.
What is the equivalent of the Toyota Andon cord in your business?
Sep 1, 2025 | Analytics, Marketing
Goodhart’s law tells us that when a measure becomes a KPI, it ceases to be a good measure. The full text of his observation appeared in the footnotes of his presentation at a conference in 1970 held by the Reserve Bank of Australia: “Whenever a government seeks to rely on previously observed statistical regularity for control purposes that regularity will collapse’
That observation is as relevant to every enterprise as it is to government.
Every dashboard produced by CRM systems I have seen makes the mistake of trashing Dr. Goodhardt’s insight.
Customers are subjected to all sorts of profiling as marketers do another iteration of their ‘ideal customers’ and ‘customer Journey’ maps using a different set of assumptions.
One set rarely used, at least rarely in my experience is the ‘inert’ customer.
Most analyses of customers I have seen use some variation of the pareto distribution. A few customers are deemed heavy users, with a decreasing level of usage down to light and occasional. The only alternative to one of these descriptions is ‘Lost’.
Any examination of ‘lost’ customers will reveal that a significant percentage of them are those that simply went ‘inert’ following a failure of customer service to meet their expectations.
For some, the expectations are unrealistic, for others, it is more like a metaphorical shrug of the shoulders. These customers are not lost, they may be just inert, and possibly able to be reactivated by a demonstration of the customer service they expected being available.
Figuring out who in your lost customers list is really just inert may just require asking. This is always far cheaper, and in my experience, more effective than hunting for new customers.
A former client had an extensive list of what they deemed ‘lost’ opportunities. They sold (and still do) a complex product that did a specific job much better than the alternative standard product. When they interrogated that ‘Lost’ data base they discovered that a sizeable proportion had not bought elsewhere. They had gone ‘inert.’ Some were just waiting for a ‘nudge’ which was often just the information and reassurance that the product they initially enquired about was the most appropriate for the job that they had put on the back burner.
Header: Charles Goodhardt speaking to a large audience.
Aug 22, 2025 | Analytics, Branding, Marketing, Uncategorized
The Pareto principle, the 80/20 rule with variation in the numbers, works in every situation I have ever seen.
Almost.
It is the exception that makes the rule.
Marketers use it extensively to allocate marketing budgets across competing arenas. Define your ideal customer, understand purchase cycles and habits, recognise different behaviours in different channels and circumstances, and allocate accordingly.
It always seemed to both make sense and work well.
Until it did not.
Research done by Andrew Ehrenberg, Gerald Goodhardt, and Chris Chatfield in 1984 produced a statistical model called the ‘Dirichlet Model‘. It is a statistical reflection of how consumers actually behave across FMCG categories. The model showed that rather than repetitive brand loyalty, most consumers buy from a small repertoire of acceptable options.
The model reveals that many people purchase a brand only now and then, yet collectively they represent a huge share of total sales. This counters the popular pareto model that assumes 80% of profit comes from the top 20% of buyers.
Hovering around supermarket shelves in the eighties, observing consumer behaviour, and interacting where possible, the truth of this counter intuitive behaviour was clear. However, the pull of Pareto was powerful, so we often had a foot in both camps.
It is the mid 1980s, and yogurt is the new category growth star. Ski and Yoplait dominate store shelves. Shoppers have their personal preferences, some lean strongly toward Ski, others swear by Yoplait, and many have their flavour favourite across both. (they prefer Ski Strawberry to Yoplait, but the Yoplait apricot to Ski) A few smaller regional players also vie for attention, but if there’s a promotion, most consumers happily mix it up.
As the marketing manager that included Ski in the brand portfolio of responsibility during these heady growth days, it was easy to assume the Pareto principle held: 80% of profits come from 20% of devoted buyers. Focus on those heavy consumers, turn the moderate fans into loyalists, and watch the profits roll in, right?
The Dirichlet model exposed the paradox, although at the time I had not heard of it. However, the numbers coming from store sales data and simple observation of consumer behaviour in stores confirmed the consumers disassociation from the theory of Wilfredo Pareto.
So, how does the Dirichlet model suggest fast moving consumer marketers build their brands against competitive brands and the power of retailer ‘pirate’ brands?
Acknowledge Mixed Brand Buying.
Even if you’re proud of your loyal fans, don’t be blinded by them. Ski-lovers might switch to Yoplait for a flavour your brand doesn’t offer, or vice versa. The data shows people happily shop around, even if they have a ‘Favorite.’ Acknowlede that behaviour while creatively giving consumers reasons to buy yours in preference to others.
Look for Wider Reach.
Heavy users are part of the story, but broad availability is often the bigger deal. If your products aren’t visible, buyers won’t remember you at that decisive moment.
Keep Things Distinctive.
You’re not just building brand awareness, you’re building mental availability. That’s how you stay top-of-mind when the shopper sees a new promotion or wants a unique flavour. Whether through catchy ads, recognizable packaging, or fun limited-edition variants, it’s all about creating mental triggers.
Rotate and Refresh.
Both leading yoghurt brands tested new flavours and replaced underperformers regularly. This strategy not only sparked interest among loyal buyers but also tempted the light or occasional buyer who came for the novelty, and might just pick you again next time. It also pleased retailers to have a supplier that explicitly had a ‘one in one out’ brand policy.
Ultimately, the Dirichlet model teaches us that brand loyalty isn’t an all-or-nothing affair. Even with strong preferences, people jump around.
Consider that next time you’re rethinking a marketing campaign. It might feel odd to invest in those who buy you only once in a while, but that large group can deliver a collective boost that keeps you on top.
Header by AI
Pareto killed by Dirichlet in blogs
The pareto principle holds in every domain I have ever seen, except one.
To build a brand, you must keep existing customers, increase their preference for your brand, and attract new customers.
A pareto allocation of marketing funds would imply that most of your budget should be aimed at the 20% of customers that produce 80% of your profit.
That allocation would work against you.
Truly loyal customers are less likely to go elsewhere than light or occasional buyers, and such an allocation does nothing to attract new users.
In this case, Pareto was wrong.
