Your Marketing Budget

In the more than twenty-five years we've been in the marketing world, we've been dedicated to understanding what makes our business world tick...and particularly the mysterious rite called "budgeting." We have learned that there are many ways people go about determining how much to spend on advertising and marketing. But we have to admit that most of them still don't make a lot of sense.

Before examining budgeting methods more closely, let's take a look at some "cultural issues" that seem to underlie all budget setting. Three are of particular interest.

Probably the most important is top management's attitude. A CEO who "doesn't believe in advertising" or who has no background in marketing is not likely to back an aggressive marketing and advertising budget. And, under this sort of leadership, at the slightest dip in the economy or business climate, whatever budget that does exist will likely be cut.

The second issue is top management's sensitivity to the company's stock price. Since many marketing expenditures come right off the top, any cost cutting that can be applied will surely enhance quarterly or year-end profits...and hence the stock options of the executive suite.

Maybe someday Wall Street will incorporate marketing planning criteria into its due diligence process and make it unprofitable to sell out the future in favor of short-term cash.

The third influence is perhaps the only one that we feel has any justifiable basis in today's world: economic conditions. There are indeed cases where more "advertising" will have no real beneficial effect on the sales of a company's products or services.

We suggest, however, that if a budget is set systematically as part of a well-thought-out marketing plan, monetary resources directed toward long-term objectives will be largely unaffected. And short-term advertising activities can be altered to meet changing conditions and new opportunities.

With these issues out of the way, let's get on to the methodology of budget setting. Here are some examples of the way people set (or rationalize their approach to) marketing and advertising budgets.

With no regard whatsoever for return on investment, companies simply recreate their spending parameters based on the previous year's level of activity...which was probably created by the same (or some other) irrational method.

The most accepted way of doing this is to take last year's sales and multiply by some percentage (usually 1.5% to 3% for industrial products, and by between 15 and 30% or more for some consumer products) to establish the level of spending for the coming year. This method probably doesn't take into consideration any special opportunities, market conditions or growth objectives.

Several budgeting approaches can be grouped under the "arbitrary" category. Some people rely on instinct or "gut feel." Others claim they spend what they "can afford." They all have at least one thing in common: not one claims any foundation in reality.

People who resort to the various arbitrary methods usually have no in-depth knowledge about (or respect for) the marketing discipline. Or, if they do, they are either too intimidated or too focused in some other area to devote the time and energy to budget correctly.

Most often, the arbitrary budget is set too low out of fear. This would seem to dispel any notions of divine guidance for this method. It also sets the stage for failure.

When making decisions is painful and setting budgets might result in performance evaluation, "avoidance" tactics can be used to postpone the process. They can go on indefinitely and lead to reactive and short-term spending. While "flexibility" is the justification most often used for not setting a formal budget, it's actually a cop out and rarely has a positive outcome. An organization that goes from one marketing project to the next with no long-term thinking has no strategy and is like a ship without a rudderlucky to get anywhere.

A member of the same family as Copycat Marketing, this approach has been honed to near perfection by the banking community. (Just check your mailbox for the latest credit card or insurance mailing.) Depending on how you look at it, this method is either a rational approach to a complex task or an excuse for avoiding the issue.

Some managers use "scientific methodology" in establishing their competitive guidelines. They find out what their competition is spending and run ratios to their sales. They apply this ratio to their own sales to come up with a comparable budget number. (Talk about voodoo math!)

But the really shrewd manager doesn't stop there. He or she then subtracts 10% in order to look more efficient than the competition!

Of course what the competition is spending and how they're spending it is an important factor in budget setting. But it's just that...one factor.

There's some logic to this method. At least it acknowledges a relationship between advertising and sales. However, it's rare that specific budget allocations have any relationship to specific advertising or marketing objectives. A general number applied against an entire product line (or worse, several) is not likely to provide any discipline.

Let's hold the thought, however, because it has seeds of the right idea.

Like the percentage of sales method, this approach holds some promise. Unfortunately, it is most often applied without careful assessment of the individual profit contributions of specific products. One product that, on first blush, contributes only 27% of sales to profit, may regularly lead to high repeat sales as well as cross-selling opportunities.

This leads us to the concept of customer value...something we feel should be the very cornerstone of budget setting.

Continued

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