How To Avoid A 'Holey War' Of Spending

My friend and business partner, Dave Reibstein of Wharton School, writes an advice column called Ask Dave, where former students write in with questions on marketing metrics and he offers some sage advice. This recent correspondence caught my attention for its relevance and timeliness, with the new fiscal year beginning soon:

 

Dear Dave:

I'm a finance manager in a large industrial manufacturer. I often sit in the meetings where marketing comes in and shows us how low our marketing spend is compared to our competitors, and then asks for more money.

Maybe I'm wrong, but I don't see that matching competitor spend is a path to success, is it? How should I coach our marketing team about what a better analysis would look like, and what information they should bring to the table?

Sincerely -

Geoff D. in Chicago.

 

Dear Geoff:

The right amount of spend is indeed a relative thing. Our product appeal, our pricing, our packaging, and just about every aspect of our value proposition are only important RELATIVE to the alternatives the customer has. Likewise, our spending is also, in part, only effective RELATIVE to what others are spending. But, there are huge risks tied to making that relative spend the center of any strategy, as we are often following moves that deserved no response. For example:

·       A while back, there was a "hoely war" between laundry iron manufacturers.  One first put holes on the bottom of their iron, allowing for steaming of linens as they were being ironed.  The competitor responded by adding more holes to their own model. Then the race was on to see who could add more and more holes, until the number of holes was well beyond what the customer cared about. 

·       Pepsi chased Coke into the low-carb soft drink market (half the calories and half the carbs of normal colas).  Hundreds of millions were spent before anyone realized that consumers who cared about their carb intake wanted ZERO carbs and calories, not half of the original cola. 

·       P&G chased after Kimberly Clark in the introduction of moistened toilet tissue.  Both were greeted with failure in this market. 

In each case, it was easier to approve the budgets for these programs once it was learned that competition was going to be moving there too. Fear of falling behind is a powerful motivator.  The aversion to loss is much greater than the attraction of gain (see Prospect Theory).  Marketing managers who use competitive spending as a primary justification for their own spending are (most often unknowingly) playing to this loss-aversion instinct. 

But when we measure success on a relative basis (e.g. "share of voice" or "market share"), our behavior is only intended to keep up with competition.  Also, the notion that we shouldn't spend on something until we witness our competition doing so implies that competition knows more about the right action than we do, which is very often not true.  So, it results in the unwise being led by the same. Even worse, it results in never taking the steps to actually get ahead of the competition. 

The proven path to success is careful analysis of what makes a difference.  Rigorous testing of historical data, or experimentation with spending levels to see what really does work, will allow for progressive acts without having to wait for the competition to move ahead. Smarter companies seem to gauge success on the absolute impact marketing has on the financial goals of the firm.

It all comes down to what your mother always told you: "Have a mind of your own."

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2 comments about "How To Avoid A 'Holey War' Of Spending".
  1. David Rak , February 3, 2010 at 10:53 a.m.

    Good stuff, and nice way to keep one's head out of the clouds. It's all about function/results, not form and grandeur. Thanks.

  2. Paula Lynn from Who Else Unlimited , February 3, 2010 at 11 a.m.

    One other addition to help the CFO. Learn the business from the bottom up and you will be able to experience what the asking is for and whether it is dollars or execution or ideas or better training or which of the combination that is truely needed.