The structures of most organizations – and the respective decision rules – are often the products of history and politics rather than business requirements. Typically, the marketing budget mirrors this internal view. As a result, the building blocks of the budget are often departments and business units, rather than products, channels, or target groups. But the budget should be a function of the market you are serving, the objectives you are pursuing, and the instruments you are using to reach these objectives. To promote an investor's mindset, we recommend you create transparency in two respects:
• Which objective is a given investment meant to support – brand building, customer acquisition, or sales support for a specific product or service?
• Which instrument, or combination of instruments, are we using to reach that objective in our target group?
This will lay the foundations for optimizing the allocation of funds to business units (see Chapter 2) and instruments (see Chapters 5 and 6). Ideally, investments should be split according to where and how they reach your audience: on TV, in a print ad, online, as a leaflet that is delivered to their homes, in a store, in the form of an addressed direct mailing, or as part of a loyalty programme. This will help you take on a consumer perspective, rather than worrying about budget ownership. Keep in mind that costs incurred at the same touch point may be split between multiple departments. For example, your company's website may be co-funded by the IT department, corporate PR, and your own function. Some marketing activities may not be treated as marketing expenditure at all. For example, co-funded sales stimulation campaigns are often managed as stand-alone profit centres. While this is good news from a return on investment perspective, it can turn transparency creation into a nightmare. Depending on the size and the complexity of your organization, transparency creation can take several weeks, but it is worth the effort. It will not only help you quantify the total “I” (investment) in “ROI” (return on investment), but often also triggers a productive debate among executives about appropriate allocation keys and accountability assignments.
Systematic transparency creation is imperative not only at the corporate level; it should be a matter of course for all your direct reports and their teams – be it to allocate funds to investment units (Chapter 2), to quantify the true cost of each touch point (Chapter 5), or to apply advanced analytics and optimize the mix of marketing instruments (Chapter 6). In each of these respects, transparency is the prerequisite of reliable, fact-based decision making. In this chapter, we will focus on the total size of the budget.
Outside-in: Conduct benchmarking analyses to find out what it takes for your voice to be heard
Your marketing activities don't take place in a void. You are in constant competition with other companies for customer attention. In a noisy environment, it isn't always easy to make sure your voice is heard. Of course, volume isn't the only way to get your audience to listen. A relevant message, a creative campaign, and a compelling story are equally important to engage your target group. But it's all for nothing if your messages never break through to them.
Marketing expenditure as a percentage of revenues is perhaps the most common indicator of relative marketing intensity. While this metric varies greatly with industry and country, it is a quick and easy way of determining whether you are spending in a healthy range. Typical ad-to-sales ratios range from 1 to 17 percent (Exhibit 1.2), but there is a wide spread within each industry.7 In any case, you should have a good reason to spend either significantly below or above the average for your industry.
Exhibit 1.2 Average ad-to-sales ratios for different industries.
Source: Advertising Age, Capital IQ
Of course, marketing as a percentage of sales is a highly aggregated figure, and it can easily be distorted. For example, if you are a B2B2C company selling to intermediaries, your ad-to-sales ratio will look disproportionately high. This is because sell-in to retailers is lower than sell-out to end customers. Because of such distortions, you should use ad-to-sales ratios for rough orientation only. For benchmarking purposes, we recommend plotting your share of spending (SoS) against your share of market (SoM).
The textbook opinion is that your share of spending8 should roughly match your market share to sustain your position relative to competitors.9 In general, our experience corroborates this rule of thumb. But as the disguised example in Exhibit 1.3 shows, the “fair share of advertising” is not normally a linear function of revenues. If your market share is relatively low, you will have to overspend to get noticed (Players 1 and 2). Conversely, if your market share is very high, you are able to underspend (Player 3). This is a pattern we observe consistently, across countries, various industries, and many companies. Other reasons to deviate from the SoS/SoM equilibrium may be derived from specific strengths or weaknesses in sales performance, brand equity, or promotion intensity. For example, a high-performing sales force or a strong brand can compensate for part of the marketing communication investment that would normally be required to reach a share of spending in line with your market share. But if you are launching a new brand, or setting out to conquer a new market segment, you may need to overspend in relation to your market share. In general, marketing communication should always be managed as one of multiple interdependent commercial levers, such as prices, promotions, brand, and sales.
Exhibit 1.3 Outside-in benchmarking: Share of spending versus share of market.
Source: McKinsey
When you conduct this kind of analysis, only include companies you actually consider your competitors according to your definition of the relevant market. Separate rounds of analysis may be required for different countries and categories. Note that the share of spending in our example is limited to gross media expense, the only figure that is easily available in the public domain. For deeper insight, the share of spending analysis should also include major below-the-line positions – such as leaflets – especially for retailers. The trouble is that this data is hard to come by, at least for competitors. Once you have gone through a transparency creation effort, you will know your own expenditure. There are different approaches to quantify the equivalent for competitors. Some providers of advertising data – such as AC Nielsen and Ebiquity – also track non-classical media. Alternatively, you can approximate below-the-line spending by deducting observed above-the-line spending from total marketing expenditure as given in a competitor's annual report. But keep in mind that reported ad spending is usually based on gross rate cards. In reality, most companies are awarded substantial discounts on those rates. A hundred “observed” advertising dollars might actually have cost the advertiser only 50 dollars or less in cash-out. Accounting for these rebates, which vary greatly across countries, is particularly important when you combine marketing spend data from multiple sources. We recommend that you conduct this type of analysis for the last three years to reflect the dynamics in the market. Typically, changes in SoM trail changes in SoS.
There is no wrong or right when it comes to your position in