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for example, spends less than 1 percent of sales on advertising.10 This is due to a combination of brand strength,11 superior products, and lock-in effects that make it unappealing for many customers to even consider any other brand. From the perspective of many users, the perceived switching cost of transferring their music, photos, and contacts to another platform is simply too high to bother. Conversely, you may have to spend more than your fair share if your competitors have some such advantage over you. But be aware that focusing solely on SoS can lead to an unhealthy budgeting spiral that leaves all competitors worse off. This is why we encourage you to approach budget sizing from additional angles, namely inside-out and in terms of saturation effects.

      Inside-out: Clarify your targets and build your budget on the activities required to reach them

      The outside-in perspective afforded by competitive benchmarking is helpful to give you a sense of the right magnitude of your marketing budget. Your budget level should be high enough to get noticed in the marketplace, but it should also reflect what you are trying to achieve as a company. Because of the differences in marketing strategy and overall business objectives, benchmarking alone is insufficient to determine the appropriate budget level. The high variation we see both in ad-to-sales ratios and positions on the SoS/SoM scatter plot testify to the fact that companies differ in their growth ambitions, in their short-term versus long-term orientation, in the scale effects they benefit or suffer from, and in the operational marketing objectives they pursue.

      Your budget should take into account both your general strategic direction and your market share targets. Building on these foundations, you can define specific activities and estimate the funds required for each. Ranked according to typical budget need in ascending order, examples include:

      • Ongoing support for an established brand

      • Launch of a new model or product range

      • Organic growth with existing products

      • Brand extension – to a new category, for example

      • Introduction of a new brand.

      Put yourself in the shoes of a consumer goods executive. Assume you have set out to build a new non-food brand for the Chinese market. Once you have outlined the structure and the size of your target group (e.g., all female consumers in big cities aged 19 to 45) and quantified your perception and preference targets (e.g., 50 percent aided brand awareness and 25 percent purchase consideration), your media agency can help you calculate the required reach and investment – for example, by using utility models as pioneered by von Neumann and Morgenstern.12 Repeat this process for all the major marketing objectives you seek to achieve in a given year and sum up the individual investments to arrive at a total activity-based budget figure. To reduce complexity, you may want to go through this exercise brand by brand, country by country, or target segment by target segment, depending on the structure of your organization and the business priorities of your company.

      In our experience, many companies will readily invest in highly visible above-the-line campaigns that drive awareness, but tend to neglect activities that drive purchase and loyalty. This is because such activities are often less spectacular than classical campaigns, and because they can be more cumbersome in terms of planning and steering. One consumer electronics company, for example, used to invest the bulk of their budget in classical media campaigns to promote their brand, partly spurred on by their creative agency that was desperate to win a Cannes Lion. But an analysis of consumer attitudes (see Chapter 3) revealed that lagging purchase consideration was actually the company's biggest issue. Subsequently, they included a range of activities in their marketing plan that would drive consideration, such as a new campaign featuring innovative products – rather than just the brand – and a set of activities targeting sales personnel at major electronics stores. In this case, the resulting budget was actually lower than before, but much more in tune with what the company needed to achieve in the marketplace to close the gap to its key competitor.

      Saturation analysis: Review your budget in light of the expected return it will generate

Your competitors are going overboard with advertising spending. The noise they create calls for massive investments on your part as well, as do your ambitious growth targets for the company. And still it can be a bad idea to increase the marketing budget. Why? Because it may not pay off. Even if both outside-in benchmarking and inside-out activity planning lead you to believe a higher investment is required, the figure you arrive at may actually be beyond the efficient range. The disguised case in Exhibit 1.4 shows how the marginal ROI declines as the size of the budget increases.

Exhibit 1.4 Saturation analysis.

      Source: McKinsey

      As you can see from the shape of the curve, saturation is not a black-and-white affair. Long before your total budget reaches the saturation point, incremental returns generated by additional marketing investment begin to level off. In other words, your budget becomes less efficient the more you spend. As you get close to the tipping point, we encourage you to assess every new marketing activity, every additional instrument, and every request for a budget increase from one of your direct reports or product managers in light of the expected return. If your current budget already exceeds the saturation point, consider decreasing the budget to increase the relative return on marketing investment.

      Additionally – or alternatively – you may also want to change the way you spend, based onthis “marginal benefit” mindset. In this book, we will present a wide range of approaches you can apply to quantify and optimize the expected return on a given marketing instrument or activity. Granular growth analysis will help you find the investment units in which your budget is bound to have the biggest impact (Chapter 2). Insights derived from purchase funnel analysis will point you to the stages in a consumer's decision journey at which marketing investments are likely to be most worthwhile (Chapter 3). A common currency will help you compare different marketing instruments in light of their real reach per cost (Chapter 5). Creative storytelling is a great way to engage with consumers, often at very little cost because of the viral effects and free editorial coverage it generates (Chapter 4). Advanced analytical approaches let you optimize your mix across instruments (Chapter 6). Smart activation allows you to get the most out of your investments in specific instruments (Chapter 7). Don't hesitate to ask your trusted agencies for ROI estimates, and by all means have your team challenge their assumptions. Tying agency remuneration to marketing ROI can be a great way to motivate service providers to help you make your budget more efficient (Chapter 8). Screen the marketing technology landscape for solutions that enable you to monitor and manage marketing performance on a continuous basis (Chapter 9), and build an organization that is sufficiently agile and adaptive to react to relevant changes in market dynamics, competitor moves, instrument availability, and consumer behaviour (Chapter 10).

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