Building The Optimal Marketing Budget

There are two ways to come up with a marketing budget. There is the foolish way and there is the strategic way.

Let me review both options for you. Those of you who do it strategically and work to a January-to-December planning year started the process back in June. If you set budgets the foolish way, you are way behind.

Often, it is the weaker marketer that lets the finance department muscle in and set their budget. They focus on the tactical until mid-September, when they are issued with the expectations for the following year.

So, for example, the finance team might instruct the marketing department that next year they are expected to grow top-line revenues by 7 per cent and achieve sales of $75m. They are also told that their marketing budget for the year ahead will be $3m based on the 4 per cent advertising-to-sales ratios that the company uses to derive marketing budgets.

It can look deceptively logical until you look at where these numbers come from. The 7 per cent growth rate isn’t based on strategy or research. It comes from arbitrary growth expectations that your board or global team have applied to your business, irrespective of the fact that they have seen no data and probably not even visited your market in years.

The 4 per cent ratio of revenue to marketing spend is doubly foolish. First, because it is another completely arbitrary number (why not 10 per cent, or 2 per cent?) that senior managers deem acceptable. Second, because this ratio is applied after the $75m revenue expectation has already been set, it is clearly derived from a belief that marketing is not an investment that can increase revenues but rather a cost that we must pay each year, irrespective of sales.

The serious point about all this is that when a company sets a budget this way, all strategy dies. Any serious marketer will realize that if the numbers and the investment levels are already in place long before they have even looked at research or strategy for the year ahead, he or she is literally pointless. The joke is on any and every marketer that accepts these budgets and works within their parameters for a whole year of their life.

It does not have to be this way. The smart way to build a marketing budget does not start top-down with the senior finance team but rather begins bottom-up with the marketing department.

The financial plan for a calendar year will always be set between September and October, so it’s crucial that marketers don’t wait for an uniformed number but rather start working on their proposed strategy in the 2nd quarter.

That might sound early, because it is. But if you don’t get the strategy in before the budgets are set in September, you will be lost like everybody else.

A smart marketer collects research in June and July. They build and populate their segmentation. They decide on their targets for the next year and then, crucially, decide on their objectives for each segment. Here you will note that I am not talking about the flaccid, open-ended objectives that populate most companies. You know the type – “Improve brand sentiment among young adults”. I am talking about SMART objectives you can hang your hat on and pay bonuses on – “Increase brand preference among the ‘Out to Lunch’ segment from 29 per cent to 65 per cent by 1 December”.

Once you set a real objective, you can work out what it’s worth. Annualize the figure for the year and go and brief your agencies. Share the objectives with them and ask them to come back with tactics and associated costs. Put all that together and you have a bottom-up, strategic budget to propose to top management. You can propose how much money you need and how much money you can generate in the year ahead.

Or you can simply monitor how many followers you have on Twitter until someone from finance looks at a line chart for 10 minutes and tells you what to achieve.

This thought piece is featured courtesy of Marketing Week, the United Kingdom’s leading marketing publication.