Money (14)

When it comes to setting a marketing budget there are two key questions which run through every marketers head: how much should be spent and importantly, where should it be spent?

Such questions echo through marketing departments across the globe. The former can be lazily answered by saying “the same as last year” or “as a fixed percentage of revenue,” and the latter query is open to creative debate, and unfortunately, a rational approach is not always engaged.

In times of economic uncertainty, all business decisions demand scrutiny and marketers need to evaluate opportunities appropriately. The latest IPA Bellwether report indicated that marketing budgets sustained growth for a successive fourteenth quarter. Therefore, it is now more important than ever that marketers ensure their campaigns see a positive return on investment.

When finance departments allocate their budgets, they have a range of well-established appraisal techniques in place, yet these are seldom, if ever, used on marketing projects. The problem with taking a finance approach to setting a marketing budget, is that finance needs two numbers that marketing finds difficult to determine, the expected return on investment (ROI) and the risk associated with that return.

To allocate budgets correctly, there are essentially two questions which marketers must ask themselves: how much is the budget going to pay back, the ROI, and how likely are they to see the revenue realised, the risk? Traditionally, marketers would focus solely on the ROI of a given brand campaign, and where financers have considered risk, marketing directors will often avoid mentioning the subject at all. In order to truly get the best results, marketers need to acknowledge that considering the risk is just as crucial to the success of a campaign as the return.

What is marketing risk and how do we identify it?

Marketing risk can be defined as the uncertainty associated with obtaining a specific ROI. This can be measured in different ways; for example, by looking at how volatile risk has been in the past, or by identifying best and worst case returns for the future. The problem has always been to measure these in practice, especially when marketing budgets have to be allocated across a portfolio of brands.

ROI, on the other hand, is usually calculated by using methods such as econometrics. This estimates the rise or fall in a brand’s sale, as the marketing investment varies. On a graph, growth is typically S-shaped rather than a straight line; marketers need to invest a minimum amount before seeing a growth in sales i.e. the threshold, whilst investing too much will not produce a significant rise in sales. By finding the optimum position on the spectrum - not so much investment that the budget is wasted, and not so little that a growth in sales does not occur - marketers will find the best ROI for their campaign.

We can think of risk as the uncertainty associated with marketing. It turns out there are two types:

1. Systemic uncertainty

Systemic uncertainty can be defined as the uncertainty in estimating sales that are influenced by variables outside of marketers’ control. This can include competitors’ activities, market trends or macroeconomic changes, and these variables can have a positive or negative effect. Although these variables are outside of marketers’ control, the fact remains that they do still need to be considered when planning a campaign.

2. Estimation error uncertainty

This is the other type of uncertainty and accounts for the unknown. The further away you move from current or historic investment levels, in either direction, the more uncertainty there is. What this means for marketers, is that there will be greater uncertainty as the investment deviates from the norm and we move away from our ‘window of experience’. This is simply because it is not known what will happen in the future and marketers cannot draw on past experiences.

With any marketing campaign, there will be risk associated with the budget, but by looking at the risk and where it lies, marketers can think about where is best to invest and as a result, can plan how to get the best ROI for the brand. Crucially, the risks and returns associated with allocating marketing budgets can form the basis of a strategy to improve ROI and reduce uncertainty. This approach is consistent with the way a finance team would operate, and may even enable marketing and finance colleagues to speak the same language.

By Sam Dias, managing consultant at Ninah, part of the Zenith Group