What Gets Measured, Gets Managed.
As seen in January 6, 2005 Philadelphia Business Journal
There was a time not too many years ago when knowing that half of your marketing dollars were effectively spent was sufficient to justify substantial marketing expenditures. However, in today’s business world, greater productivity of every dollar of expenditure is required. Every company is seeking greater measurement and accountability for all expenditures and marketing, a large portion of many companies’ overall expenses, is not immune to these demands.
I’ve worked with many companies to help evaluate the effectiveness of their marketing efforts to better determine “which half” of their marketing budget is working. Corporations are understandably asking the questions:
–What’s the optimal marketing budget?
–What is the return on investment on our marketing efforts?
–Are our outside vendors and agencies really delivering value?
There are no easy answers, but there are methods to better determine the optimal marketing allocation. There are, however, many different theories about how marketing budgets should be derived. Theories differ based on the specific markets, specific categories, competition and on factors unique to each company.
What is universal, though, is that for the best and most successful marketers, an appropriate marketing budget should only be determined
once a marketing plan has been established in concert with an overall business plan. Furthermore, for successful marketers, marketing budgets should be tied to specific business and communications outcomes that are clearly defined and measured.
The axiom “what gets measured, gets watched” definitely applies to marketing effectiveness. However, I’ve been involved with too many companies over the years where goals were vague, unrealistic, not understood or just nonexistent. It’s a prescription for after-the-fact revisionist history. It’s also a prescription for failure.
Regardless, the issue every business faces is in determining the optimal marketing budget designed to produce the greatest return on investment.
There is no one budget allocation methodology appropriate to all circumstances. There are, however, four methodologies most frequently used alone, or in combination, in establishing appropriate marketing budget levels:
1. Percentage of sales — This methodology sets the marketing budget as a percentage of expected sales volume for the upcoming period. While this methodology links marketing to sales, it assumes that marketing is the result of sales rather than the reality that effective marketing creates sales. The formula in this method is easily calculable and tracked over time as a benchmark. But there is no agreement on the correct percentage. What’s clear is that marketing driven business should allocate a greater percentage of sales to marketing expenditures.
2. Arbitrary/available funds — This is hardly the ideal model. This method has a company allocating funds to other needs and leaving what’s left over to marketing. Obviously, this severely downplays the importance and value of marketing, and assumes a dollar spent in marketing is less valuable than a similar dollar spent in other company expenditures.
3. Competitive ratios/knowledge — The strategy behind this methodology is to establish budgets within a competitive framework within a specific category. This had been historically used to derive advertising budgets to achieve an estimated “share of voice,” which can then be weighted to market share. This method presents several concerns, including how to
best estimate competitor’s spending and which competitors to match, and whether the level of spending is too high or low in the absolute.
4. Objective and goal method — This is clearly the most scientific and managerial approach to marketing budgets. It forces the discussion of specific outcomes and goals and ties expenditures to these outcomes. It makes marketing accountable to achievement of specific goals and
ultimately can help build a case for more, not less, marketing expenditures once a more direct correlation between expenditures and sales can be measured.
The objective and goal method is the approach that is the Holy Grail for every serious marketer. While it is still difficult to totally measure the effectiveness of every marketing dollar, today’s technologies are providing for a better understanding of return on investment. Every marketer welcomes better measurement. But never forget that it’s often the power of the marketing idea, not just the amount of expenditures, which drives business success.