Marketers’ least favorite time of year has arrived: budgeting season.
Every year, marketers across industries get push back on their budgeting plans from CEOs and CFOs. They scrutinize each component of marketing’s production and make marketing justify every dollar and headcount.
But consider this: when the Lenskold Group and emedia asked marketers how much they could increase incremental profits in company with a 10 percent increase in budget, nearly half of marketers responded, “I don’t know”. The reality is that marketers cannot expect a CFO or anybody to place value on the marketing budget if they are not able to quantify it themselves. Not only will that uncertainty inhibit marketers from receiving more dollars, it gives CFOs latitude to invert the question and ask, “What are you going to do now that I’m taking 10 percent of budget away?”
It’s the marketer’s job to be able to place value on their budgets.
What Not to Do
Some marketers look at the previous year’s spending and simply decide where they want to add more or less spending. While this seems to be a logical tactic, it’s the wrong approach since it positions the marketing budget as an expense, and marketing as a cost center.
Another common approach is the marketing budget ratio (MBR) -- marketing investment divided by total revenue. According to IDC, the average ratio for companies earning less than $250 million in revenue is 9.1 percent, and the weighted average is 6.4 percent. Be very cautious of this ratio, as it can be misleading. The numbers from IDC are typically the average of large tech companies in a mature market; this means the average is dragged down compared to smaller, fast-growing companies. Additionally, the ratio varies depending on gross margin and level of competition within each industry. If you must use the MBR when planning the budget, look for companies similar in size, growth stage, industry and level of competition to your company.
An Alternative Route to Budgeting Success
The best way to develop a marketing budget is to treat that budget as if it’s an investment -- something that delivers an expected, quantified return over time. In order to build a strong business case around this concept, a marketer must understand the dynamics of their funnel. Take a deep dive into how new potential customers enter in the top of the funnel, how much you need to invest to find those prospects and help them move through the revenue cycle.
Additionally, all aspects of the nurturing process must be carefully considered, including how long a potential customer is nurtured before they become leads, how many become leads, how those turn into sales opportunities, and, finally, how those opportunities are won. Taking a close look at these cohorts of leads will shed light on how the conversion rates of each of those groups differ.
With this model in place, marketers can run scenarios that show how the budget translates into more leads, opportunities, and wins down the funnel. (They can also quantify the impact budget cuts will have.) At most companies, any significant investment must be supported by a business case that shows it will deliver a “hurdle rate”, or minimum rate of return. If you can make that case, the CFO generally approves it. Of course, some types of activities -- demand generation comes to mind -- are easier to tie to ROI than others, such as brand-building or PR. But no matter what the activity, make “worst case”, “expected case”, and “best case” assumptions to show the range of possible outcomes.
Thinking in Fantasy Land
I’ll preface this by saying absolutely no one does this, but it’s an interesting thought experiment for both marketers and CFOs. Let’s assume that the CFO and marketing department are completely aligned and both parties view marketing spend as an investment. The logical conclusion is that they will also recognize that marketing spending today delivers returns in subsequent periods. For example, significant impact from a trade show should not be expected within the same quarter as the event because leads earned during the show usually don’t convert until two, three, or more quarters after the fact.
This suggests that the marketing investment should be amortized over a longer period of time, incurring the P&L expense as the benefits are accrued. This is the model that is used for many budget line items, including capital investments, so why should marketing be any different? It would allow marketers to get out of “short-term” thinking and invest properly in long-term programs like brand building, content, and more.
However, like I said, this a fantasy; I don’t expect the FASB to change the generally accepted accounting principles for marketing anytime soon. But it’s still a good idea to keep in mind. It’s one end of the spectrum, and on the other end is the quarterly cost and revenue budget we’re used to. The goal is to be in the middle. The more you can treat your marketing budget like an investment, you’ll build the idea that marketing drives revenue and doesn’t simply incur costs.