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      We encourage you to dive into these pages with an open mind, be bold enough to ask the big questions, start with small improvements, and scale up the things that work – for your company, your brand, and your department. Not all the topics we cover will be equally relevant for all readers, but we are confident that there is something here for everybody who is serious about marketing performance.

      There is an ocean of opportunity between perfection and inaction. Even if the challenge seems daunting, doing something is bound to be better than doing nothing at all. In our work with many of the world's foremost marketing executives, we have found that pragmatic, ROI-minded CMOs are consistently successful at forging alliances with their peers, engaging the supervisory board, and transforming the marketing function for the greater good of their companies. We encourage you to take control of the return on marketing investment, let others know what you are doing, and invite them to join your cause. Before long, the smart money will be on you.

      1 – Budget sizing: Combine multiple lenses to right-size your marketing budget

      Why does budget sizing matter?

      How much should you spend on marketing? It's the biggest question of all, and yet many companies settle on an easy answer. Most years, they spend whatever they spent the previous year. If they make adjustments at all, these are often a function of overall company performance: if the company is prospering, the budget goes up – sometimes beyond what is necessary or effective. And in times of stagnation or decline, marketing budget cuts are as certain as death and taxes, even if reduced marketing support is the last thing a troubled company needs. This is because a lot of companies still define their marketing budget as a percentage of past sales. In effect, budget sizing is decoupled from business requirements. Budgeting inertia is further aggravated by the fact that many companies buy media many months – if not years – in advance.1 If you are serious about turning the marketing function into a profit centre that contributes to the company's bottom line, put an end to these wasteful practices and introduce zero-based budgeting. First conceived in 1970 by Peter Pyhrr2 – a controller at Texas Instruments at the time – zero-based budgeting is about “reviewing every dollar in the annual budget”, 3 taking nothing for granted, and only signing off on budget positions that promise sufficient returns. Applied to marketing, this is nothing short of a paradigm shift – from a cost item to an investment opportunity.

      The role of marketing is not a constant, nor is your mandate as the CMO. Markets change, and so does your company's competitive position. Even your brand profile and your business model are bound to evolve over time. Such changes need to be reflected in the size of the marketing budget. Consider, for example, the case of an insurance company that depends on frontline excellence. If sales force performance is lagging, you may have to intensify your marketing communication to drive short-term consumer pull while your peers in sales do their homework to fix the underlying issues. Now fast-forward five years into the future. Aggressive new market entrants have declared a price war, and your competitors are launching secondary brands to secure their share of the lower end of the market. In this new situation, you will want to invest in brand building to strengthen your brand, justify your price premium, and protect the profitability of your company.4 Now fast-forward 20 years into the future. Your brand is the top dog, and you are the market leader. You are finally able to decrease the marketing budget and allocate funds to other functions without putting your business at risk.

      Whatever happens, we encourage you to put an end to “budgeting as usual”. The size of your budget should reflect your ambitions for future growth, rather than the past performance of the company. Start treating budgeting as a profitability driver and build your budget as an investment case rather than as a cost item.

      How to drive marketing performance with fact-based budget sizing

      A few years ago, an electronics retailer embarked on a radical experiment. For an entire month, the company cut its ad spend by 60 percent. It was a top-management decision, just to see what would happen. Revenues plummeted. Store managers felt betrayed by the corporate centre, and their motivation dropped to an all-time low. But while the experiment substantiates the direct sales impact of advertising, it doesn't say much about the appropriate budget level. Indeed, 40 percent of last year's budget may be too little, but how much is enough?

Cause-and-effect relationships between the marketing budget level and market success are notoriously difficult to establish. There are simply too many other influencing factors: the creative quality of your campaigns, your mix of marketing instruments (see Chapters 5 and 6), prices, promotions, distribution, weather, seasonality, consumer confidence, competitors, financial markets. In light of this complexity, no tool or algorithm can give you the right budget level at the push of a button.5 Historic relations between cause and effect should not be the only driver of sizing decisions anyway. Your company's objectives for the future and your own perception of market dynamics are equally important. Instead, we propose a multi-lens approach to budgeting that is both systematic and pragmatic. It starts with transparency creation and moves on to combine three perspectives on overall budget size (Exhibit 1.1).6

Exhibit 1.1 Five elements of budget sizing.

      Source: McKinsey

      Create full budget transparency; you will be surprised by what is hidden in the cracks and crevices of your organization

      Transparency creation – it's easy to say and hard to do. This is because the marketing budget is scattered across so many different business units, functions, and departments at most companies. While most CMOs are in charge of all advertising, responsibility for activities such as co-op campaigns, sales support, public relations, owned media, and sponsorships often resides elsewhere in the organization. Yet all these activities affect your target audience in some way or another, and they should all contribute to your overall marketing objectives. A substantial share of the budget can also be hidden in the P&L of local subsidiaries, franchise partners, or affiliate companies.

      So, before you even think about sizing, compile a comprehensive list of all the buckets in your current budget.

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