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CEO's Expert Tips on The 2 Ways to Write an Annual Marketing Budget
By: Reid Carr, President and CEO of Red Door Interactive
Featured in iMediaConnection
There are two main ways to budget for the year's promotional plans. One could be labeled "what we have been doing to get the results we got," and the other is "what we should be doing to get the results we want." You've likely already locked down your budgets for 2014, but that's no reason not to stop and take stock. Did you take the best approach?
The first one is easier to deliver than the second and is, as a result, also the most common. The first one comes from the perspective that the budget is the end result (as in, "I have to turn in a budget, so here it is"), whereas the second one comes from the perspective that specific customer or sales growth numbers are the end result.
Reviewing past results is always a critical part of the process, but I caution against using the previous year's budget as a starting point. In practical application, you know that you've made commitments prior to the budget year, so you have to plan for those expenses, but I advocate for a fresh look as if you were entering a new situation as a new executive on the job. Question everything.
The "how we've always done it" method
Using an X percent of revenue model
Many executives operate from a percentage of sales or revenue. Granted, from a P&L standpoint, this makes a lot of sense, and it's easy to manage, easy to adjust to changing conditions, and easy to benchmark. The primary downside here is that it doesn't greatly incentivize being exceptional unless, of course, you push the percentage abnormally low without a marketing reason for doing so. In which case, you are simply asking marketing to frustratingly accomplish exhibit heroics. The second challenge comes when the company is facing extraordinary volitility in the business where that percentage ebbs and flows, which makes it difficult to lock in long-term contracts where you miss out on efficiency and close doors on some opportunities.
Start with last year's budget and then add 5 percent
(Or, of course, you could decrease the budget by 5 percent, but who really starts there when asking for budget?) This strategy is typically just evidence of misalignment with the company's financial interests. It is largely arbitrary (unless it is matched with the company's growth rate, which is more in alignment with the percentage of revenue model) and is focused on the marketer's desire to simply "have more money to do more things." It is not necessarily a sophisticated, thoughtful approach, and while it may end up alright, it is probably used most when things are going well for the company and no one will "bug you about it."
Commitments plus new ideas
This is basically when the marketer takes committed contract costs and then adds the costs of new activities to pursue. This version at least takes into consideration some specific new ideas that are probably supported through experience and/or research. It doesn't really challenge the existing contracts, though one might assume those are perpetually challenged, and it doesn't take into account the financial value of the work. It is a cost-based approach and an important exercise, but it should be expanded upon.
The "what we want to happen" method
Let me preface this section with the concept that, of course, there are commitments that have been made and the economic realities of margin, competitive spending, etc. It isn't that I am advocating for throwing out the "how we've always done it" budget, but rather setting it aside for a moment to broaden your thinking a bit.
Start with outcomes
What are the biggest opportunities that marketing can support on behalf of the company? How can they be measured, reported, and then tied to financial outcomes? What is the quantifiable market opportunity? What shifts are happening around us? This is a SWOT analysis that leads to smart goals, measurements, and defined tactics.
If we were able to shift our brand perception from X to Y, would we see more customers walking through our door? Get realistic. How many more? Would they spend more per visit? How long would it take to make the shift? (Hint: It usually takes longer to get there than anyone originally expects.)
Once the goals and measurement methods are in place, tactics can be developed. Those tactics may or may not be tactics that are already in practice.
Money is no object
If money were no object, would you pursue some different tactics? Why those? It isn't that you throw caution to the wind, but it is a healthy exercise to imagine a world where the barriers don't exist. It allows the creative juices to flow a bit and can put some fun back into the budgeting process. Involve others. Worst case? You might end up crafting a picture of your future state several years down the road that people can get excited about. Best case? You might even expose some opportunities you hadn't previously considered because you've been blocked in the past. The amazing thing that can happen from this exercise, though, is that you might run across these opportunities "by accident" sometime during the year and they won't cost as much as you thought they were going to.
Moving the ball down the field
Have you taken the time to look at the classic awareness, consideration, trial, conversion, and loyalty cycle? Have you broken it down by geography, product, and market? Is your spending matching your problem areas? When we look at things with fresh eyes, we often identify gaps when new products have been introduced, sales channels have changed, or we've moved into new markets. Or, worse, we put all the money into awareness (the big numbers) and forget some of the key areas at the end of the funnel. With a new lens, break it apart at a high level to build it back up.
First 90 days
If you were the new VP of marketing at this company, starting today, what would you do differently? If your company has been through any transitions in the last couple of years -- growth, decline, or new strategy -- you probably have a new job and should think of it as such. How would you look at these challenges differently? Would you hire someone different for the role you're in? I am not saying here that you should step down if you don't match the profile. However, I would consider augmenting your skills with some extra support should you need it. This will likely require extra budget or time. Consultants or agencies can often offer that extra boost. Plan for it.
A few additional tips
Have a war chest to pursue unexpected opportunities
Put in extra budget to pursue opportunities and test ideas. You can bury extra money in each line item and just know that it is there, if that is what is required by "the powers that be." Or, hopefully you can call it out specifically and establish creativity and continuous learning as a culture.
The environment changes day to day in our business. Plus, unique, last minute opportunities arise that you'd like to pursue without having to run it up the ladder. If you have a sound strategic plan with clarity about what fits and what doesn't, you're going to need war chest funds.
Be flexible and give the team credit
Know that you might have been wrong with your budgets, and get it right quickly. Have a mechanism by which you are measuring key performance indicators every day and every week, and share that openly with the entire team.
Does everyone understand your drivers? How fast your team makes micro-adjustments within an overarching strategy is the measure of a strong marketing organization. Can one person be willing to hand over funds to another if the tactics they oversee are outperforming expectations? It may not be in the execution of a tactic but in externally changing trends. Reducing one bucket to fill another isn't personal; it is smart.
Partner with finance
Get your partners in finance involved early in the budgetary process. What do they want to see and how do they want to see it? Within line items, are there capital expenses which need to be separated from operating expenses? Is there budget from one group that should be allocated to another?
All too often I have experienced the new VP of marketing having to clean up the budgeting from the most recent marketing VP in very detailed and mundane ways. Usually, the excuse was, "details like this weren't exactly their thing." And they actually were taking financial "blame" for more than they had to, such as software or licensing fees (eating up some of their "2 percent of sales") that could be attributed elsewhere in the organization.
If the details are buttoned up, it can free you to be far more creative and have the support of finance in the process.
Hopefully these tips and tactics, with a fresh look and building upon past success, can help you achieve the results you want rather than just do what you've always done. Strong performance starts with numbers and ends with numbers. Hopefully, I helped you unlock some creativity within those bookends. Good luck in 2014!