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Very little happens in marketing without money. Securing enough money to support an organization’s goals is a fundamental responsibility of a CMO or a VP of Marketing. Most heads of marketing learn from experience how to get what they need. Unfortunately, many of them have to learn the hard way, through errors and inadequate budget allocations. The reality is that many marketing executives simply lack basic skills in building, presenting, and defending budgets. Remember that when an executive team makes budgeting decisions, it needs to consider whether investing in new research, more salespeople, or a new marketing initiative is the best way to spend money. An effective marketing head must be able to convince the team that this is the way to go.
How can Marketing accomplish this task? Successful CMOs understand that when they communicate with management, a key strategy is to change the focus of the budgeting conversation from ‘cost’ to ‘investment.’ Through experience and demonstrated results, they properly portray the marketing department as a team that can drive growth. With the digitization of marketing, CMOs are better armed than ever before with credible data to demonstrate marketing’s impact and to garner the investment they need.
In addition to obtaining funds, heads of marketing must possess the knowledge and expertise to effectively manage these funds. Note that these two roles are inextricably connected. Specifically, the failure to properly utilize marketing funds can have repercussions on funding decisions in subsequent fiscal years. To avoid this scenario, marketing leaders should put into place procedures to ensure the budget is used properly and tracked diligently. Running a tight ship will burnish the marketing head’s reputation and make him or her a more effective leader.
This chapter will cover the entire process of marketing budgets, from the planning cycle and the methodologies used, through funding allocation to programs and marketing teams, and ending with the all-important functions of defending and tracking budgets.
The Budgeting Cycle
Most organizations plan the next year’s budget a few months before the end of their fiscal year. Every organization is different, but executives that are well prepared and can justify their requests always come out ahead. High-performing heads of marketing have mastered the budgeting cycle – the process of planning, justifying, spending and tracking their budgets. We have outlined these steps in Table 1, and we discuss them in greater detail in the following sections. As you study the steps, remember that budgeting is a cycle, not an event – you are never finished.
|Planning||Understand the business objectives. Gather marketing effectiveness reports from previous years.||Start with the business plan, not last year’s marketing plan. Though this takes a bit more work, it will ensure that Marketing’s goals and the overall business goals are aligned. Otherwise, you might simply be going through the motions.|
|Building||Pick a budgeting methodology. Decide on a high-level marketing mix to achieve your goals.||If this is a new company or a new assignment, you may need to start from the beginning. The percentage of revenue methodology is recommended (discussed below). Provide high-level guidance on the mix and goals to your team, and have them build it from the bottomup.|
|Justifying||Compare proposed investment to peers and industry benchmarks. Align program spend, marketing goals, and overall business objectives.||Spend a lot of time here. Get as much outside information as you can. You may find yourself educating other executives on industry norms.|
|Using||Allocate budget by department, by month or quarter. Ensure marketing department leaders utilize fully.||Believe it or not, some people have a hard time spending what they say they will. Make timely, within-budget spending a basic consideration in evaluating your personnel.|
|Tracking||Designate an individual in Finance or Marketing Operations to track spend and produce budget-tracking reports.||An ongoing dialogue between the person tracking the spend and the department head avoids end-of-quarter surprises.|
|Reporting||Demonstrate the efficacy of investment against stated marketing goals and business objectives.||Use the reports discussed in Chapter 21 to demonstrate the business value of the company’s marketing investments.|
|Adjusting||Adjust budgets periodically based on changes in the marketing mix, “belt tightening” across the company, or opportunities for additional investment.||Keep and eye on what’s working and what’s not. Don’t be afraid to change the mix. Do your duty if business conditions require you to trim a bit. But, don’t be afraid to ask for more money if you can justify the investment.|
Table 1: Steps in the budgeting cycle
There are four primary methods for determining the marketing budget. We examine them in this section, beginning with the most widely used method, the percentage of revenue.
- Percentage of Revenue – The marketing budget is derived as a percentage of the overall organization’s expected revenue for the fiscal year.
- Competitive Comps – The marketing budget is derived by estimating the competition’s spend. This task is easier to perform for public companies, which must disclose how much money they spend on sales and marketing.
- Activity-based – This bottom-up approach begins with the organization’s revenue number and works backwards. The budget is calculated based on how many leads are needed to hit the number. In addition to lead acquisition costs, other expenses, such as customer retention, awareness, branding, and run rate costs (see below), need to be factored in.
- What You Can Afford – The least favorite approach, this “hand-to-mouth” method is sometimes just a reality for smaller companies. Needless to say, it is always a good idea to show the CEO, president, owner, or founder the budgets derived from competitive comps and activity-based methods to influence their ideas of what they can afford.
Even if your company uses percentage of revenue for setting the marketing budget, creating a bottoms-up, activity-based budget makes your funding requests easier to defend. For example, if your team is effective at generating MQLs that convert to SQLs, then the money you request for demand generation will be difficult to challenge. Going further, an activity-based budget will include certain “keeping the lights on” or run-rate costs. This term refers to activities and programs the marketing team cannot do without, such as PR agency retainers, collateral production, and website maintenance. Any big ticket items like advertising and event sponsorships must be closely tied to corporate awareness and demand generation goals.
Marketing Spend Benchmarks
Most executives outside Marketing do not have a solid working knowledge of how much money they should allocate to their organization’s marketing efforts. Perhaps they have a general recollection from their experiences at a previous company. Or, they might have seen the Sales and Marketing operating expense line on an SEC filing. In some cases, of course, they simply have never dealt with marketing budget allocation before. All of the above scenarios occur in the business world, and none of them is good news for a head of marketing. Without an informed discussion, your marketing department will likely get less, and not more, than it needs.
For heads of marketing who are confronted with these scenarios, perhaps the best strategy is to expose these executives to current marketing budget benchmarks. Fortunately there are many sources that provide this information. Included here are industry research firms like the Corporate Executive Board, analyst firms like Forrester Research and IDC, and specialized marketing research firms like SiriusDecisions and Marketing Sherpa. The range of spend on marketing has remained quite wide over the years, from as little at 1.5% of revenue to slightly more than 10% of revenue. Despite these disparities, however, an overview of marketing spend benchmarks reveals some fairly consistent patterns:
Consumer Products vs. B2B Products – Not surprisingly, consumer product marketers spend more than B2B marketers. This pattern is due largely to factors like the cost of advertising and spending in support of the brand.
Company Size – Small businesses frequently spend proportionally more than larger businesses because they do not enjoy the economies of scale, yet they need to provide many of the same marketing programs and services. As a VP of Finance colleague of mine once explained, “We’re not fat, we’re short.” He meant that we were spending proportionally more on marketing because we had not reached the revenue heights of our competition.
Industry – Some industries spend more than others on marketing. In B2B, for example, software companies spend more than mining companies. Similarly, beer and soda manufacturers spend more than most other consumer products. Marketing spend in the insurance and pharmaceutical industries notably increased starting in the late 1990s due to their increased use of advertising to reach consumers directly.
Business Growth Stage – Companies in growth mode spend more than those in slow growth or maintaining mode. This should not be a surprise. After all, acquiring new customers is the most expensive marketing task.
Regardless of where your company falls within these various patterns, it is essential that when you utilize industry benchmarks, you compare your company to the appropriate profile. Large companies with an established brand name and “cash cow” products that rely heavily on renewals rather than new sales will spend less on marketing. So, if you work at a startup, don’t let your CFO use data from a large company to talk you down to a spend level that does not fit your business.
Once the total budget is secured, a CMO’s job is not over. The next step is to allocate the money to the various marketing activities, departments, and/or individuals. CMOs typically distribute funds based on three considerations:
- the marketing mix
- people versus marketing programs
- across individual marketing teams
We examine all three in this section.
An essential component of budget planning is to analyze the prior year’s marketing mix to identify the most effective tactics and programs as well as the ones that provided few benefits for the business. Marketing should maintain or increase funding for successful tactics or programs and decrease or eliminate funding for unsuccessful ones.
In addition, if a company changes its go-to-market strategy, then Marketing needs to add appropriate promotional and enablement budget. If, for example, the company reduced the price of a product to increase market share, the appropriate increase in demand generation and/or distribution would need to be added to compensate. Using the forecasting techniques described in the last chapter, CMOs should come prepared to ask for more money for demand generation if they can demonstrate that it will help to grow the top line.
Programs versus People
Don’t forget about people: They make your department function. At the same time, however, they may be one of your most expensive budget categories. For all of these reasons, it is essential that you carefully review how much you are spending on people versus programs. You may be allocating too much to one or the other.
A standard rule is that a well-run marketing department should spend more on programs than on people. There are companies that spend a great deal on people, in some cases more than they do on programs. This allocation as upside down. You lose a lot of flexibility and reduce the money you have to leverage channel partners and third-party agencies. A ratio of 60:40 programs to people seems about right. If your people spend exceeds 40% of your total expenditures, then you should review your budget for activities you can outsource.
Calculating the programs-to-people ratio is straightforward. Simply add up all your personnel costs — typically salary and benefits, or “fully loaded cost” — and all of your marketing program costs, including outside vendors. The total of the two is your overall marketing budget. The percentage of the total budget spent on programs versus the percentage spend on people is the programs-to-people ratio. For example, a company that spends $6 million on programs and $4 million on people, for a total of $10 million, would calculate their programs-to-people ratio as follows:
($6,000,000 ÷ $10,000,000) = 60%
($4,000,000 ÷ $10,000,000) 40%
Allocating across Marketing Teams
Marketing budgets should be allocated after each marketing team – or person in a small company – has completed and presented a marketing plan for the upcoming year. These plans should include run-rate costs. They will also contain requests for budget to achieve the annual marketing goals, which should be tied to the company’s annual business goals. Finally, the marketing plans inevitably will contain requests to fund new initiatives.
The job of a head of marketing is to ensure the marketing plan supports the business and the marketing budget supports the plan. The final decisions concerning budget allocation across marketing teams can be arrived at via one of three methods: by consensus, through collective bargaining, or by CMO fiat. Consensus is the preferred model, although things don’t always work out that way, and a strong hand may be required.
It may also fall upon the head of marketing to ask hard questions if changes to the marketing mix are required. For example, if live events have not generated a satisfactory ROMI, then shifting those dollars to another activity or program makes sense. Taking money away and changing “how we’ve always done things” is not easy, but it frequently is necessary. Doing the same things year after year, while expecting an uptick in budget along with revenue increases, can cause Marketing to become flabby. Adjusting and readjusting the marketing mix helps your team and your business avoid “marketing ruts.”
A CMO may also want to take the opportunity to adjust spend ratios. For example, if the marketing budget is running high as a percentage of revenue, then it is the CMO’s responsibility to adjust it downward. The CMO essentially has two options for performing this task. The first is the “haircut” approach in which he or she reduces all functions by the same amount or percentage. The second is to target the reductions specifically to underperforming or overfunded areas. In addition, when marketing areas request additional staff, the marketing head needs to review the programs-to-people ratio to ensure those requests won’t create serious imbalances.
Finally, a CMO should also not be afraid to request additional funds if an opportunity presents itself in the market. If a competitor falters, for example, or there is a competitive advantage in the product line to be exploited, then increasing the spend on promotion is a logical strategy. In scenarios like these, Marketing can employ predictive forecasting to present a likely positive outcome if management agrees to allocate the additional sums.
Creating an appropriate annual budget is essential, but by itself it is not sufficient. In addition, Marketing must present the budget in an accessible and reader-friendly format. The ideal approach is to produce the budget in a summary form, with additional details available as needed. The most common method is to create a series of linked spreadsheets. The top sheet displays the marketing budget by department – or by geography – by quarter. The linked spreadsheets should provide details by department or geography. The departmental spreadsheet should contain a summary by program, by quarter. Collapsing rows provide a summary view of each program or major activity. Expanding rows enable executives to drill down for any detailed information they require.
Figure 1: A summary view of the overall marketing budget
Figure 1 represents my marketing budget at a mid-size software company. I created the budget in Microsoft Excel; the summary view reproduced in the figure is the top sheet. Each of the eight departmental budgets comprises its own sheet and is linked to the summary (Channel Marketing had separate programs and MDF budgets, since program dollars were allocated, while MDF accrued.). I selected this format because it is easy both to maintain and, when necessary, to adjust.
Figure 2 represents the European marketing budget. Notice how the “Lead Generation/Awareness Programs” and “Alliances” sections have been expanded to reveal the details. The Microsoft Excel Outline feature does an excellent job of displaying programs at a summary level while allowing readers to drill down by clicking on the ‘+’ sign to expand to reveal the individual tactics.
Figure 2: The European marketing budget with detail exposed for lead generation and awareness programs, and for alliances
Presenting and Defending Budgets
Presenting the marketing plan and the associated budget is one of the most important annual events in the life of a head of marketing. You are ensuring you get the money you need to achieve your objectives, while demonstrating you are an effective leader who can get your team the resources they need. Despite the vital nature of this function, however, many heads of marketing are not very good at it. In this section we explore the best strategies to present and defend marketing budgets, based on our extensive experiences in this area.
The first rule of presenting a marketing budget is to frame it in the context of the company business plan. If the company plan is to expand into Europe, for example, the marketing plan and spend need to reflect and highlight this objective. If customer retention is an issue, then money should be shifted from lead generation to the customer loyalty program. Whatever your company’s priorities, make certain the budget is specifically geared toward supporting them.
Unfortunately, many marketing leaders make the mistake of walking into the boardroom with only a spreadsheet of all the line items requested by their staff (something like Figure 2). This approach requires your CEO, head of finance, VP of Sales, and whoever else is in the room to interpret your data. Be warned: This scenario usually is not pretty. These individuals likely won’t understand why you need all of these monies and how everything fits together. Ultimately, your specially crafted spreadsheet will probably look like one big number to them. So, what to do instead? Basically, keep the rolled-up version for the marketing team, and create a budget spreadsheet or presentation for the executive team that conveys the same numbers but also clearly demonstrates how each number supports the business.
Further, come prepared with marketing spend benchmarks for your industry. Better yet, come prepared with estimates of how much your competition is spending. This approach will help you to stave off any broadsides concerning why Marketing is spending so much money.
Table 2 below shows an outline for presenting a marketing budget for approval. The presentation should start with an overview of the key objectives for the business, and how Marketing will support them. The next slide should show how well marketing is performing against current goals, and a comparison to the competition. These will give the executives present confidence the function is performing well. Only after these have been presented should any proposed budget numbers be shown. The budget should be shown in summary form with a clear tie back to the business objectives. Requests for additional funds should be labeled with the business objective they support, for example “European Channel Expansion” instead of “Increase in MDF.” Close with a slide that offers proof your investment will pay off.
|Key Objectives||List a handful of objectives that are tied directly to the company’s annual plan||A small list that is consistent with the company plan will serve you well. Use words like “invest,” “support,” and “grow” to underline the connection to the business.|
|Marketing Efficiency||Show efficacy stats, such as investment-to-revenue; any planned cuts or reallocations; and, optionally, industry or competitor comparisons.||Lead with strength by showing efficacy, which also demonstrates your command of the department. Make your own cuts, as required by overall budget trends, so others don’t do it for you. Highlighting industry or competitor comparisons is usually reserved for situations where you are severely underfunded.|
|Summary Budget||Show summary version of the run rate, the previous annual budget, and incremental items.||Less is more here. Tie back to key objectives. Illustrate that the run rate and previous budget are essential. Depict incremental items as investments in the business. Do not show detail here or enter the budgeting rat hole. Illustrate any potential reduction in run rate or previous budget to demonstrate you are a good steward of your money.|
|Proof||Provide further detail on new investments and how they will achieve the organization’s objectives||Make sure you know your numbers cold and you can back up your assertions on how new investments will drive the business.|
|Backup||Anything you might be asked or probed about. You will likely need a summary view of program spend, metrics from the previous year, and more detail on competitor spending.||These slides are called “backup” for a reason. If you can seal the deal without them, don’t use them. Sometimes bringing up a detail slide can unravel a previous agreement.|
Table 2: Essential components of an executive level marketing budget presentation
Finally, if you are requesting incremental budget, make certain you can point back to results. For example, if your company needs to grow the top line by 50% and you know that a certain program can generate those leads, start by demonstrating how effective this program has been, and then show the math to support how additional investment will grow the top line by 50%.
Budget Tracking and Accounting
Spending your money wisely is an excellent strategy to ensure you get more money next year. When companies suspect that marketing teams are wasting money or spending it indiscriminately, closer scrutiny is sure to follow. And, rightly so. After all, CEOs and CFOs are paid to spend investor, donor, and shareholder money wisely.
Also, keep in mind that most people who work in Marketing were never accountants, nor did they major in accounting or finance in college. Not surprisingly, then, accounting is not their strong suit, especially the creative free thinkers in the group. Budget planning, process, and reporting are critical skills that need to be instilled in each member of a well-run marketing organization. To make this a reality, an effective marketing leader will devote time to each of the following functions:
Staff Education – Many marketing teams are unaware of how accounting works, including the processes for opening purchase orders, processing vendor invoices, and accruing expenses. Further, different companies do things differently, so prior knowledge acquired in a previous company may hurt, not help. Ideally, then, your company should send someone from Accounting over to Marketing for a refresher. For whatever reasons, however, few companies take this step. Regular Reporting – Even if you have a well-constructed marketing budget and your staff understand the process, the plan can come apart without good tracking. Purchase orders that were assumed to have been issued may not have made their way through the full process, and completed work may not have been invoiced. Actual expenses may be greater or less than vendor estimates. Regular budget versus actual (or BvA) reports from Finance, sometimes called budget trackers, can solve this problem. Budget trackers are spreadsheets that show planned spending and actual spending side by side. Some larger marketing teams have a marketing operations role that performs this function.
Use It or Lose It – Many companies have a “use it or lose it” policy regarding budgets. The policy is not intended to be punitive; rather, it is designed to encourage teams to spend on plan. CFOs are expected to provide accurate guidance on earnings. Therefore, spending less than what was budgeted may goose up earnings, but it also makes the CFO’s forecast inaccurate. Especially in public companies, this is not a good thing. Unless there is a planned reduction or reallocation of the marketing budget, teams should be held to their quarterly budget numbers. Marketers may need to learn the art of “parking” money with a vendor; in other words, paying a vendor in advance for services rendered later. A caveat – CMOs should have a chat with their CFO counterpart to take their temperature on this practice. Some CFOs view parking funds as a violation of financial compliance regulations. Others don’t see it that way. Still others just don’t want to know.
Holding Marketing Staff Accountable – Even those CMOs who have educated their staff and who obtain weekly BvA reports from Finance can still run into problems if there is no staff accountability. For this reason, it is a good idea to build budget management into the MBOs of any manager who manages program budget. A better plan is to tie budget management o each manager’s bonus. Ideally, budget spend should be either exactly on target or 1%-2% under target. Objectives that reduce employee bonuses for significant underspending or overspending can be very effective.