The marketing budget planning season is upon us. It’s the perennial exercise to showcase our past year’s accomplishments along with next year’s plan and budget justification. While an important endeavor, it’s typically more a tug of war than group hug.
Here are 4 budget-setting strategies to get closure on this year’s marketing budget more quickly.
Companies typically set marketing budgets in one of 4 ways: (1) external benchmarks (expressed as a percent of revenue), (2) prior year’s spend, (3) zero-based budgeting, or (4) random allocation.
(1) Setting Marketing Budgets Based on Benchmarks: Marketing by Percentages
While each business is unique, there are a number of external benchmarks available that can help you frame up your budget request. Benchmarks are often broken down by industry (manufacturing, for example, versus education), by type of business (product or service), by primary audience served (B2B or B2C), and a host of other factors. These benchmarks are often further broken down by elements of the marketing mix (brand building, for example, versus events or digital marketing).
And, what do the external benchmarks tell us? According to a 2014 Gartner Research study, companies spent on average 10.2 percent of their revenue on overall marketing. A February 2016 CMO survey published by the American Marketing Association, Duke University and Deloitte pegged marketing spend as a percent of company revenue at 8.4 percent overall (ranging from 6.9 percent for B2B product companies to 10.4 percent for B2C services companies). The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue on marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin is in the 10 to 12 percent range.
While the magic number hovers between 7 to 10 percent, don’t expect to see that in your marketing budget—rarely do all marketing funds roll up into a single marketing leader. Marketing infrastructure, software, company website, field marketing, sales support, executive and employee communications, analyst relations and others are often “gray areas” that can be funded by (and report to) IT, sales, HR, finance and other departments across the company.
Another large element of your marketing budget are your employees, which can comprise up to half of any marketing budget. This includes not only your direct team, but also any contractors and contingent marketing professionals you may use to supplement your team. There are many good external benchmarks that provide guidance on the optimal “people-to-program” ratio for your business.
(2) Setting Marketing Budgets Based on Prior Year: The Historical Approach
With this approach the prior year’s marketing budget is used as the starting point, with adjustments up or down based on business projections. If the revenue forecast for next year is steady, you can expect your marketing budget to remain flat. If the forecast is cautious, your marketing budget may be trimmed 5-10 percent as a contingency. If high growth is forecasted, your marketing budget may see an increase to align with — and help drive — the anticipated growth.
This approach requires the least effort and generates the least headaches — at least for the CEO and executive team. Unfortunately, it does not allow for smart tradeoffs and investments across various departments. As a marketing chief, you could view it as a sign that management likes what it’s currently getting and wants more of the same the following year. That is, if your current marketing baseline is already in the 7 to 10 percent range.
The historical approach to budgeting is expeditious, but not particularly effective in the long run. It doesn’t allow you to invest in new technologies, channels or programs and leaves you vulnerable to falling behind. Reallocating resources from one business or department to another is hard work and generates a lot of internal strife, hence why there is little corporate appetite to do so.
A McKinsey study shows that the vast majority of organizations are surprisingly slow to reshuffle their resources. The study found, however, that companies that consistently reallocated their resources experienced higher and less variable returns, and performed better during an economic downturn.
(3) Re-Setting Marketing Budgets: Zero-Based Budgets
On the other end of the spectrum is the most extreme method of establishing budgets—zero-based budgeting or ZBB. This process resets all existing budgets to zero, requiring leaders (not just marketing but also sales, supply chain, procurement, manufacturing, etc.) to justify their proposed spend—and anticipated return—on an annual basis.
This budgeting strategy regained prominence earlier this year when Unilever announced it would move to zero-based marketing budgeting as a means to better manage costs and squeeze more efficiency out of marketing. While this is an ambitious way to achieve “radical corporate leanness” and strip out unnecessary costs, it often backfires by producing superficial and temporary savings… and a distracted, demoralized leadership team.
Deloitte published a very good guide titled “Zero-Based Budgeting: Zero or Hero?” In it they list these advantages and disadvantages associated with ZBB:
- Resulting budget is well justified and aligned to strategy
- Catalyzes broader collaboration across the organization
- Supports cost reduction by avoiding automatic budget increases, often resulting in savings
- Improves operational efficiency by rigorous challenging of assumptions
- Costly, complex, and time consuming as budget is rebuilt from scratch annually, whereas simpler and faster traditional budgeting requires justification only for incremental changes
- May be cost-prohibitive for organizations with limited funding
- Risky when potential savings are uncertain
- Execution challenged by budget cycle timing constraints
- Typically requires specialized training or personnel to accomplish, and requires more resources in general
- May be disruptive to the organization’s operations
- Could harm organizational culture or brand
Building a culture of cost management and accountability is critical for every company. The annual budget planning cycle is probably not the best way to get there. If you want to achieve a longer-lasting transformation, better to initiate a thoughtful marketing excellence change initiative. Read my article on marketing restructuring best practices here.
(4) Setting Marketing Budgets: The Random Allocation
The fourth strategy for establishing marketing budgets is, well, random. It’s based on subjective measures instead of objective measures. It’s based on the executive’s team perceived value of marketing as a function. It’s based on “what’s left over” after all other expenses have been accounted for. If you find yourself in this budget-setting scenario, you might want to start polishing up your resume.
I’ve personally experienced all four of these budget-setting strategies over my corporate career. They all have their pluses and minuses (with random allocation being my least favorite). Regardless of which strategy your business deploys this year, your end goal should be to get through the annual budget-setting tug of war as quickly as possible and back to the business of producing brilliant marketing that engages customers.
What budget-setting strategies have you experienced? Which ones work, and which ones don’t? I welcome learning from your experiences in the comments.
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