Budgeting For ROI

Before the recession, about one-quarter of CMOs suspected there was waste within their budgets. But at least one-third of CMOs said they had insufficient resources to meet agreed-upon goals.

With the recession, CFOs have been cutting, most indiscriminately (removing flesh and bone along with fat) but some scientifically; very few have maintained or increased marketing budgets to take advantage of market or competitive opportunities.

Here are some ideas to get off the cost-cutting treadmill and ensure your marketing budget is realistic and accountable.

The inputs

Most marketing budgets are ultimately based on last year's, with some cosmetic changes. Adding macro industry data and marketplace perceptions to the internal financials yields a bigger picture and puts the marketing task in perspective. The process developed by Strategic Planning Institute includes metrics known to drive ROI:

Market size & real growth - long-term, not just the current recession crater



End users - numbers of customers and SKU's, average purchase size, purchase segments (loyal, repeat, churn, etc.)

Purchase concentration - ranking your channels or direct customers, how many account for 50% of sales? (A higher number means more price flexibility.)

Relative product quality, Differentiation - strength vs. Competitors (as defined by End Users)

Market share - % of Industry $, rank, and relative to industry's top 3 or 4 players

Innovation - what % of sales or cash flow comes from new products (developed in past 3 years); R&D as % of sales or cash flow

The process

In these uncertain times, some companies budget quarterly; some budget almost continuously.

Prioritize your marketing plan so that payback drives decisions. Will you put customer retention (inexpensive) ahead of acquisition (which is 5 to 10 times more expensive)? Will you put competitive battles ahead of category expansion (which is slow and expensive)? Do you know how the pieces of your marketing mix work together, where the synergies are and where the unnecessary duplication is? Which activities drive key performance metrics?

"Zero-based" budgeting is enjoying a revival. It's an old technique from the stagflation era of the 1970s. It has a scary name, but basically involves stripping the process or department back to the studs and rebuilding; it could be renamed "clean slate" budgeting. And it could get the CMO sufficient resources, once you prove the size and demands of the required tasks and processes.

The envelopes

You could take a functional approach, splitting your budget into activities. Here's one example in use:

  • Demand - promotional efforts to stimulate near-term demand and leads
  • Loyalty - increase the value of specific customer segments
  • Channel - enhance the productivity/profitability of channel partner relationships
  • Brand - build awareness, consideration, and preference for the brand

You could take an output approach, such as:

  • Sales force expense
  • Media advertising
  • Promotion expense
  • Other marketing expense

The analytics

A couple of segmentation techniques help you understand cash flow leakage:

  • Customer profitability - Typically, 16% of customers are money-losers, and 67% merely break even - leaving only one in six who are profitable. Know who's making you money, who's losing it, and the profiles to predict which new customers will become profitable.
  • Channel pocket price - Are some channels costing too much? There are a couple of dozen ways in which revenue can be siphoned off, via trade terms, volume discounts, invoice adjustments, return policies, etc. Are these counted as marketing costs, or assigned elsewhere?

The results

Periodic feedback -- industry, marketplace, customer and financial -- is essential. You need a good market info system, combining quantitative and qualitative input from trade sources, channels, your sales force and CRM.

Ultimately, you'll get effective and efficient marketing that's seen as a cash generator.

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