Making the Business Case for Your Marketing Budget - 9 minutes read
Chief marketing officers are reporting increased pressure to prove the impact of marketing spending. But too often this means a focus on short-term metrics, like sales revenue, instead of longer-term efforts like brand building. To achieve their long-term strategic objectives, CMOs must work on building the business case with their CFOs and other peers. The authors offer 10 actions that will help marketing leaders build the patience, trust, and confidence that long-term growth and value are on the horizon.
Scrutiny over marketing budgets is a common experience for most CMOs. In fact, as reported in the August 2021 CMO Survey, pressure to prove the impact of marketing efforts is substantial and rising, with 59% of marketing leaders reporting increased pressure from CEOs and 45% experiencing pressure from CFOs.
A common challenge in this dynamic is proving the impact of marketing spending. How will marketing dollars drive business performance? How much bang will I get for my marketing buck?
To answer this question, many CFOs focus on the short-term financial impact of marketing spending, particularly sales revenue. More than 50% of CMOs we surveyed said they faced pressure from non-marketing leaders who “tend to focus on the short-run effect of marketing spending” and are “not patient for the long-run effects of marketing spending.”
While important, we see this focus on short-term sales impact as too limited. Marketers need to help the CFO and rest of the C-suite think beyond the short-term. How can CMOs build the business case with their CFO (and other financially driven peers) that creates the patience, trust, and confidence that longer-term growth and value are on the horizon?
Based on evidence from the August 2021 CMO Survey as well as a series of interviews with CXOs in Deloitte’s Global Marketing Trends study (2021) and the forthcoming Google/Kantar “Org of the Future Study-40 CXO Interviews,” U.S. (2021) study, we’ve identify 10 key actions that can help marketing leaders to achieve these outcomes.
CFOs want to know what marketing dollars are “actually going to do for the business,” as one CMO of a financial institution told us.
Marketers should be able to answer the questions: How does marketing spending marry up with what is most important to the future of the company? What are our strategic goals and how does what we are doing from a marketing perspective get us to that goal? The logic behind your answers should be made explicit (see point 3 below), it should be defended with evidence, and it should be supported by metrics. For example, if the company wants market leadership, brand building will be an important strategy, and brand awareness and stature should be tracked. If new competitors are entering your market, strengthening customer relationships to resist their overtures is critical and customer retention metrics should be tracked front and center.
Here is one telling data point from the CMO Survey: Only 35% of marketers report that they use “an integrated marketing team in which marketing and finance experts work together.” This is in stark contrast to the 77% of marketers who say they use an integrated team approach “in which digital and nondigital work together.” When marketing and finance work together more closely, there is an opportunity for better planning, more informed decisions (on both ends), and more agile reactions as needed.
Several companies are addressing this gap. For instance, brewer MillerCoors created a role, senior director, Marketing Finance, that reports directly to the CFO and has a dotted line to the CMO. By sitting on both leadership teams, this role allows for greater visibility — and collaboration — between the two departments. Similarly, Energizer works to ensure finance is brought into any marketing initiative at the onset of a project — including having the two teams physically sit next to one another to cultivate greater collaboration.
The best marketing leaders have a logic, based on experience and data, regarding how marketing spend will impact various business activities and outcomes. This logic should be clearly articulated and justified to other decision makers, particularly the CFO, so it ultimately becomes a shared logic — one that all members of the senior management team buy into. The idea is to make finance an advisor and stakeholder in the effort, so its buy-in is baked in from the beginning.
There is no room for a black box when making the case for marketing spending. Marketing leaders must show their impact on KPIs associated with the brand and customer relationships — and they must regularly track these measures.
Unfortunately, this is not the case in many companies. In the CMO Survey, only 3% of marketers reported measuring brand equity “consistently” while 35% of marketers reported measuring brand equity “almost never” and 30% using “ad hoc/when needed” measures. Likewise, only 8% of marketers reported measuring customer retention/lifetime value “always” or “consistently” while 22% of marketers reported measuring brand equity “almost never” and 28% using “ad hoc/when needed” measures. Most companies need more regular collection of these metrics.
CMOs often face headwinds when making the case for investments in brand building, which many marketers acknowledge as being especially difficult to measure as compared to lower funnel activities that are closer to sales and revenue.
“It’s not a question of spend at the top or the bottom of the funnel, it’s yes and,” explained one global financial services’ CMO. “There’s a misunderstanding with other executives that you can steal from Peter to pay Paul… but it doesn’t work. Brands have to be more differentiated. They have to knock on the door and say ‘hello’ (to customers). If we don’t do a better job of this, I don’t think consumers are going to care if we provided an offer.”
Given this reality, marketers need to place bets across a balanced portfolio to spur shorter-term wins and longer-term value. CMOs can start by understanding the CFOs’ preference for financial data to assess the success of marketing investments, creating a funnel-wide view of how marketing is delivering value in each part of the funnel and, importantly, demonstrating how it will be measured with clear ties back to business strategy.
For example, Berkshire Hathaway’s Geico has analyzed the role of marketing at each stage of the funnel for customers seeking auto insurance. They know that being on the customer’s radar is critical to winning market share in that business. That’s why you see the ubiquitous Geico Gecko, in everything from billboards to TV commercials. Awareness-building, and the call to action of “15 minutes could save you 15% or more,” gets Geico into customers’ minds early for potential downstream purchase actions. That’s why Geico has maintained huge marketing spend at the top of the funnel over decades — the full-funnel analysis tells them it’s worth it.
In a Deloitte survey of C-suite executives, only 17% said they collaborated with the CMO in the last 12 months. Monthly meetings of the senior management team are unlikely to be the best environments for making the case for marketing spending, as marketing leaders are not setting the agenda and are unlikely to have the airtime to offer a nuanced and comprehensive view of marketing’s impact.
Instead, we recommend that this work should happen one on one, in a setting where the CMO offers evidence and logic for spending, while addressing important questions. A side benefit of this approach is that non-marketing leaders will appreciate that marketing is an investment, not just a cost. In turn, regular senior management meetings are then more likely to be filled with greater understanding and appreciation of how marketing contributes.
The gold standard for building a business case for marketing spending is to run an experiment using a control group that does not get marketing spending. The goal is to build a strong understanding of the counterfactual — what if marketing spending had not occurred? This might be done in small-scale experiments in the field or in the lab. Many companies are nervous about running experiments (which customers should get the spending?) or only perform them on very tactical decisions (red or blue?). We think it’s time to get more serious about experimentation and to use it strategically to guide marketing investments and build C-suite confidence.
MGM Resorts International implemented a large-scale experiment involving 1.5 million customers to test a new behavioral targeting approach that involved shifting marketing dollars to reach and convert consumers. The company’s experiments revealed that, relative to existing approaches, the new targeting scheme produced 20 cents in incremental profit per dollar spent — equating to $10 to $15 million in incremental annual profit.
Recent research published in the Journal of Marketing finds that satisfied customers are more responsive to brand marketing and sales efforts, more open to future company offers, and more likely to share positive word of mouth — netting, on average, a 3% savings in future expenditures. This is something a CFO can take to the bank.
According to the CMO Survey, 41% of marketing budgets are based on the previous year’s expenses and adjusted during the year if needed, while only 10% of marketing budgets are revisited every month or quarter to meet company objectives.
We suspect that one reason budgets are not scrutinized more regularly is that metrics are not collected very regularly. The majority of companies in the CMO Survey consistently measure sales and digital/web/mobile performance, but measurement rates drop off dramatically for other metrics as noted above. Given this metrics gap, how can marketers ask for changes to budgets? Marketing leaders need up-to-date knowledge to drive conversations about budgets.
More than half of all marketers scored their colleague below average in perceiving marketing as an investment according to the CMO Survey. This view creates a challenge for marketing leaders who must educate other leaders about the long-term value of marketing spending. Building this case takes better data, more experiments, and the CMO’s ability to make connections between strong brands and customer relationships and the long-term health of the company.
The good news is that evidence of this value can already be found in large-scale studies correlating stock returns associated with customer satisfaction. The data shows that a portfolio of firms that score high on customer satisfaction ratings outperformed the market, achieving a 518% return between 2000 and 2014 (as compared to 31% return for the S&P 500).
CMOs need to orchestrate a balanced portfolio of marketing investments to drive measurable results. They can start by building a win-win collaboration with their CFOs focused on growth that can drive short- and long-term business performance. This requires customer and brand metrics that tell the long-term story, a funnel-view of marketing spending that points to what is driving the business, and experimentation that can guide agile actions that permit translating the short-term into the long-run.
Source: Harvard Business Review
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