Marketers being belted around the ears to produce a marketing budget before June 30 is disturbingly common.
It is a clear sign that the marketing group is acting as a co-ordinator of ad hoc activities, rather than being a disciplined, repeatable, and continuously improving process of revenue generation over the longer term.
Nevertheless, it is happening everywhere as you read this, as June 30, and a new financial year is looming.
A common approach to alleviate the belting is last year + 1.5%.
Not much use if last year was a bummer, especially if you are not sure why.
The other way is that the ‘boss’ starts at the bottom right hand corner of the P&L and works backwards
Revenue = X, Market share = Y, Therefore marketing budget = z.
Alternatively, some arbitrary percentage can be applied to projected sales as a marketing budget.
What a load of crap!!
The reality for a marketing budget is that to be productive, marketing needs to be way ahead of the tactical implementation that generates immediate revenue.
Marketing needs to be considering and implementing the strategies to generate revenue tomorrow and the next day, determining where that revenue is going to come from, which products, customers, geographies, and channels, and giving customers reasons to be committing their scarce dollars to whatever it is that you are selling.
Constructing a budget without all that strategic information clear and agreed is like taking off on a journey without deciding the destination: any road will get you there, and most of the time and money spent will be wasted.
As an alternative, start to see marketing as an investment.
That discipline of seeing marketing expenditure as an investment requires a longer term view. It also requires an acknowledgement that not everything works as expected, a capacity to learn from experience, and driving the processes is a cultural recognition that the organisation requires a return in its investments in marketing activity.
Calculating a return on marketing investment is not easy, and has rarely been attempted until recently, as the numbers were simply so rubbery (a technical accounting term for crappy and just plain unreliable). However, that is changing rapidly, so the best time to start developing a regime and capability of measuring and optimising the return on marketing investment is now, the beginning of the year, while in ‘budget mode’
It is a six step process driven by the four stages of strategy development:
- Have in place a ‘planning rhythm’ that starts with the long term strategic and cultural challenges and progressively becomes more detailed and tactical.
- Recognise the connection between marketing and the long term financial returns from the enterprise.
- Collect data on a routine basis that delivers the insights necessary to measure both efficiency and productivity of the investments, and the cause and effect chains that link an activity to an outcome.
- Develop the analytical means to generate the insights.
- Make the enterprise sufficiently agile to adjust in the light of the insights generated.
- Report marketing ROI as the operational people report the ROI on the investments made in equipment, so that the activities have the credibility and weight in the boardroom that the expenditure deserves.
Calculating the return on investment is essentially a simple equation.
Cost divided by value derived.
The challenge has always been to attach a value to the various outcomes of marketing expenditure, including the organisational costs and overheads. That task is becoming progressively easier with the digital and data analysis tools now available, and there is no longer any excuse not to at least start the process, and with time and effort improve it so that it is a reliable indicator and tool to determine the value of future investments.
As with any calculation, the result is determined by the input assumptions, parameters and values, so there is considerable opportunity for judgement and change.
Following are a few of the obvious ones;
- Time frame over which the return will be measured. Budgets are annual, while marketing investments tend to be cumulative over a long period, sometimes decades.
- The means by which you judge the revenue to be a result of marketing activity. The demarcation between marketing and sales is often an entertaining debate, which I tend to finish by removing all direct sales costs, particularly price discounting activity which is generally brand destructive, and counting everything else, but allocating a weighting.
- The components of the cost equation, such as product development costs, customer service, and logistics that are included, and their weighting, which is also a challenging debate. Standard accounting packages are poor at collecting and consolidating this information, it usually takes a tailored process to gather and record the data in an easily reportable format.
Reporting requires metrics that build a picture of the processes to which the activities all contribute. Every business will be different, but a few of the metrics that have served well for my clients are:
- Sales of new products across timeframes, 1,2 & 3 years, with some calculation of the losses from cannibalisation, although it is absolutely wrong to use this as an argument to not take an action. Better you cannibalise your sales than a competitor eat them for you.
- Value and number of prospects at each stage of the sales pipeline
- Velocity through the sales pipeline
- Conversion measures at each point in the sales pipeline
- Share of wallet, for individual customers, and various groups of customers
- Customer longevity and churn
- Market share
- Geographic measures
- Gross margin and GM ratios
- Sensitivity to competitive price promotion
- Customer satisfaction scores
- Net promoter scores
- Various social media measures (not likes)
It is also a mistake to measure everything, you will just drown in reports and minutiae. Report on the items that can be demonstrated to move the performance needle, where there is a demonstrable cause and effect chain in place that is connected to strategy as well as revenue.
Finally, make ROMI a core performance measure of the enterprise, everyone in an organisation has some influence on the outcomes that can be connected to marketing success. Expose those connections at every level and make people responsible and accountable.
Need some help with all this, find someone with the experience and wisdom to deliver.