Today’s consumer packaged goods firms need the agility to redirect investment into growth-driving initiatives if they are to remain competitive amid volatile market conditions.
On one hand, CPG companies are operating across a wider number of new markets as they search for growth opportunities. At the same time, many have been weakened by struggling sales in Europe and North America, as well as by slowing growth in emerging markets. In response to these pressures, CPG firms are increasingly recognizing the need to develop a culture of cost management.
Crucially, developing such a culture can enable CPG companies to redirect funds from across the business into areas that can better drive brand equity and growth, and so provide a competitive edge. To achieve this, however, a more strategic approach to cost reduction is required. While CPG companies have been cutting costs in manufacturing and packaging for years, they have not been able to replicate the same in marketing and sales without negatively impacting the top line.
Most brands have a lack of transparency about marketing investment because commonly, a pot of money is allocated for spending on retail promotions, but they don’t know exactly which campaigns it will be spent on. One way to counter this is through implementing zero-based budgeting (ZBB) – an approach focused on taking funds out of areas with little impact or differentiation and spending them in areas that drive growth. A central benefit of ZBB is that it delivers greater visibility of the value added by each item of the budget because it requires individual expenses to be justified for each new budget cycle.
ZBB in the marketing sphere
The ZBB approach has struggled to gain much traction with marketers to date, both due to a misconception that it entails “budgeting from zero,” and its requirement for greater effort in determining ROI on every aspect of their spending.
Rewiring the traditional budget approach may at first seem like a daunting task for marketing leaders. In reality, ZBB is a structured process that can lead to simplification of the marketing unit, delivering both quick wins and longer-term gains. For instance, marketing funds freed-up by ZBB can be reinvested with a more strategic purpose, such as building brand equity by implementing more innovative campaigns on social media channels. ZBB can also prove especially valuable for redirecting investment dollars throughout the year from non-working media such as market research, production and agency fees, into areas such as media buying, brand promotion and packaging which directly impact sales.
There are also some opportunities to reduce unnecessary spending and improve ROI on working money, in areas such as advertising, media and digital. Decoupling the creative from the more operational, transactional processes and bidding out these two parts separately generates significant value for the organization.
With its clearly defined ownership of spending, ZBB often provides the much-needed impetus to shift historic investment strategies that are underperforming in a new direction that better capitalizes on the latest market trends. For example, after adopting a ZBB approach, one multinational confectionery firm is shifting ad budgets from traditional channels such as TV to cheaper, more targeted digital platforms moving forward, having found that several online campaigns yielded better ROI than TV ads. In another case, a multi-category CPG company found that up to 30 percent of the brand promotion spend was not adding to any brand equity build-up.
Finally, ZBB makes it possible to rightsize the marketing function across brands and categories. By comparing marketing efficiency across marketeers, senior managers controlling the budget can ensure that the most promising brands are provided with adequate support, while lower-priority brands receive less investment.
As companies in the CPG sector search for new funds to invest in higher ROI initiatives, ZBB will be an increasingly important tool. The opportunities lie in shifting spending from low-priority to high-return areas, optimizing marketing return on investment and rightsizing the organization. This helps to improve the organization’s bottom line, but more importantly, to drive future growth and boost the top line.