Take the guesswork out of marketing spend

Although many companies have increased their marketing spending over the past decade, the impact of this spend has often been ineffective. Since 1992, measured advertising expenditure has grown by 50 per cent, but these increases have led to increases in sales in only 50 per cent of cases examined. It is not only advertising that is suffering from questionable effectiveness – analysis of trade promotions suggests that 80 per cent of all promotions are unprofitable and have no useful long-term effects.

Cranfield started research into marketing spending effectiveness in 1995, and in 1998 it established the marketing value added best practice research club. Today the club has 20 members, including Diageo, Unilever, HSBC, Barclays, AXA, BT and Hewlett-Packard.

Today, in a potentially long period of slowed economic growth, it is crucial that businesses streamline and restructure their marketing spending by adopting a “do more with less” approach. This will require the management of marketing spending as both a cost and an investment.

The research club has established three key themes and several practical steps that management can take, as follows.
Rigorously manage spending. Know what marketing spending buys. Cut back marketing waste. Reallocate and challenge spending.
Add focused analytical rigour. Define objectives and tasks. Establish a fact base. Raise standards and consistency of measurement. Test critical marketing hypotheses.
Gain credibility for marketing spending. Analyse cause and effect. Make evaluation transparent. Communicate marketing's value.
Strategic purchasing of manufacturing and administrative factors has become an accepted practice to control costs and improve efficiency. Yet for a variety of reasons, marketing spending has not been managed as efficiently. Marketing managers tend to inherit budgets and allocations unquestioningly from their predecessors. They select agencies and creative executions, and negotiate costs of media and agency fees, despite having few or no relevant metrics to manage good purchasing behaviour.

Marketing inputs are typically subjective, difficult to evaluate objectively and often purchased in a hurry. Finally, marketing spending is veiled in uncertainty and doubt – “Why should we cut 5 per cent off our marketing spend when this will put market share at risk?”

It is time to manage marketing spending just like any other purchase. Fully applying strategic purchasing discipline will not put the brand equity at risk. When properly implemented, marketing spending effectiveness can reduce costs by 5 to 15 per cent and substantially accelerate growth by doing more with less. The rules of marketing spending effectiveness emerging from our research are as follows.

Know what marketing spending buys. Marketing spending is often poorly served by management reporting systems. One major UK brewer was, until recently, unable to say to within £5m how much it spent on promotional T-shirts. Establishing a fact base for marketing spending evaluation is an important step. The common IT systems in companies – CRM and key performance indicators – are rarely good for analysing marketing spending effectiveness.

Cut back marketing waste. Businesses can significantly reduce their total cost of marketing by challenging historical practices and critically evaluating their marketing purchases, searching for cheaper substitutes, and providing more flexible specifications on purchases. Working with agencies to reduce shared costs is also productive.

Reallocate spending to focus on high value-creation areas. Marketing spending is often shared out indiscriminately across all brands and all areas of the market, while ignoring enormous differences in value creation. Not all growth is good growth, and applying value-based management discipline can help managers to refocus. Promotions are often run during periods of panic and there is widespread evidence that the mesmeric “spike” that promotions generate is unprofitable in four cases out of five.

Add focused analytical rigour to unfocused marketing budget debate. Replacing entrenched territorial behaviour (“it's my marketing budget”) with corporate accountability is critical. Defining objectives and tasks of marketing spending is an effective approach. Many companies are moving towards a zero-based approach to marketing budgeting.

Raise standards and consistency of measurement. Inconsistency of data can make it impossible to apply logical comparisons across brands and markets. Market research, customer satisfaction surveys, new product research and financial evaluation frameworks all need to be integrated in a consistent way.

Critical marketing hypotheses need to be subjected to rigorous testing periodically. Areas such as pricing, long-term advertising and promotional effects are subject to industry mythology and rules of thumb. Examining the evidence behind these beliefs can be very revealing and result in fundamental reappraisal of spending priorities.

Gain credibility for marketing. Use econometric analysis wherever possible to understand cause and effect. Build models to simulate and predict the effect of alternative patterns of marketing spending. Apply these models as part of the budgeting process.

Make evaluation transparent. The language of marketing is specialised and the specialists must take the time and effort to explain themselves to non-specialist colleagues.

Communicate marketing's value to non-specialists. Run workshops to brief other managers on the critical market trends and the role of marketing spending to take advantage of opportunities and combat threats. Use facts and figures in the presentations, not words and pictures. Be honest about failures as well as successes and create a culture of learning by doing.

Following this approach to marketing spending effectiveness makes sense for any brand, in any economic climate. Not only does it offer an excellent means of focusing resources on critical performance drivers, it does this while reducing overall costs. Such a programme should be considered as more than just marketing spending effectiveness – it is the starting point for self-funding brand renewal.

Professor Robert Shaw is the director of the marketing value added best practice programme at Cranfield Centre for Business Performance in UK.