Find the pockets of growth

You want your fair share of granular growth? Then your marketing budget allocation approach has to reflect the granularity of what is happening in the market. This will help you reserve sufficient funds for growth opportunities as they arise and evolve. Start by defining the relevant splits: by country, category, business unit, brand, target segment, or a combination of these. Most companies either opt for a tiered approach – i.e., they define a hierarchy of multiple breakdown dimensions – or they work with predefined investment cells.

• A global car manufacturer allocates its marketing budget to brands in a first step, reflecting the roles of these brands in the corporate portfolio, such as “invest to grow”, “sustain and harvest”, or “phase out”. In a second step, the respective brand budgets are subdi-vided by country.
• An international maker of consumer electronics has defined more than 300 investment cells, typically at the intersection of national markets and product categories. The cells are prioritized according to their potential and the budget is split accordingly.
• A consumer goods company works with three tiers of investment cells and allocates its marketing budget first to business units, then to national subsidiaries within these business units, and finally to regions.

For practical reasons, the primary breakdown should reflect the structure of your company. If the budget split is at odds with decision rights or P&L responsibilities, chaos will ensue. So if your company is structured by brands, the budget should be split by brands as well. The same goes for business units or product categories. Additional levels of division should reflect both organizational aspects and business opportunities in a given market, country, or category.

Once the general dimensions are defined, you need to specify the appropriate level of granularity for each. Take geography. You can work with clusters of countries, individual countries, additional splits by states or regions in a country, or even go down to the city level. Granularity should be governed by market dynamics, rather than corporate hierarchy. For example, marketing responsibility for a retail company may reside at the national level, but it will often make sense to differentiate marketing activities for regional clusters, if not cities or even neighbourhoods, for some budget positions, such as locally distributed leaflets.³ Even companies with no regional infrastructure of their own may choose to promote different products in different regions.

More granularity brings more insight, but it also creates additional complexity in areas such as data gathering, budget management, and impact tracking. To find the right trade-off for your industry and company, examine how homogeneous the market is at different levels of granularity, e.g., in terms of average growth rates, competitive intensity, and your own growth ambitions. A European retail conglomerate, for example, opted for a highly granular approach to break free from an extended period of stagnation. In the past, the company had worked with about 200 geographic cells. But when they found out how big the differences were within these cells, they increased the resolution dramatically to more than 2 million cells that were defined using industry-specific criteria, such as average household income, basket size, and purchase frequency in various retail categories. The entire marketing budget was reallocated to the new micro-cells. Now the retailer was able to pursue growing, profitable parts of the market in a much more targeted way, using local media to support sales. The leaflet distribution budget was reduced, yet sales quickly picked up because the remaining budget had been reallocated to the most promising micro-cells.

Align allocation criteria with business priorities

Ask three board members how the budget should be allocated to investment units, and you will get four answers. The CEO, hoping to beat or even take over a competitor, is all for going by short-term revenue potential. The CFO, ever wary of how investors will react to the next quarterly report, will probably favour margin or EBIT. As the CMO, you may be inclined to go by the size of your target group in a given cell, or the strength of your brand relative to competitors. The fact of the matter is that these can all be valid criteria, depending on what your company is trying to achieve in the marketplace. The trick is to combine conflicting criteria in a meaningful manner, and to align the allocation key with business objectives and marketing opportunities.

Start by creating a long list of potential criteria (Exhibit 2.2). At this point, try to capture the perspective of all relevant stakeholders, even if that means that you end up with a list of 20 or 30 criteria initially. An inclusive, transparent process will help you mitigate political discussions during later stages. Make sure you include criteria from different categories:

• Financial criteria, such as revenues or gross profit, both current and expected.
• Strategic criteria, such as market growth or the strategic role of a category or market.
• Marketing criteria, such as share of voice or brand strength.

You can pressure-test the practical relevance of a given indicator by asking if and how it would affect the budget. For example, do high advertising prices in a given country call for a higher budget to put your national subsidiary on an even keel with those in other countries? Or should the budget be reduced and reallocated to other countries where advertising is more affordable? And does high brand strength justify higher investment to cash in on the strength, or should funds be diverted to other investment cells to compensate for relative weaknesses? This discussion will not only help you cross controversial criteria off your long list, it will also help you clarify what ultimately matters most to the company: top-line growth, profitability, market capitalization, or independence.

Don't use more than four to six criteria. More criteria will only bring marginally better results – if that – but they will add greatly to everyone's confusion and make it hard to explain the budgeting approach to anyone who isn't an expert. To cut down your initial long list to the handful of criteria that really matter, apply four simple filters to each prospective criterion:

• Can you actually implement it? For example, do you have the required data at the level of granularity defined by your investment units?
• Is it really relevant to allocate the budget, i.e., will variance in the indicator call for variance in the budget?
• Is it sufficiently differentiating, i.e., do the investment units you have defined actually achieve significantly different scores?
• Is it independent of other criteria? For example, it doesn't make sense to use both market share based on volume (units sold) and market share based on value (revenues) because these criteria are highly correlated.

Consider the case of a consumer electronics company. The head of product development strongly advocated using the “number of products per business unit” as part of the allocation key, suggesting that a business unit managing more products than others should also receive more budget to support the products with marketing activities. While this indicator would have been easy to implement, it didn't pass the second filter. Because the company never ran more than five to ten product-related campaigns per year anyway, it would not make a difference whether a business unit oversees 50, 150, or 500 products. The criterion turned out to be irrelevant from a budget allocation perspective, although it may well have been relevant in other contexts, such as R&D funding.

A US telecom company pursued an even more sophisticated approach to narrow down their long list of criteria. Initially, the list included as many as 60 criteria. But instead of using the four filters, they tapped into the company's rich database and applied linear regression analysis to assess the relative influence of each criterion on key performance indicators, such as new customer acquisition, average revenue per user (ARPU), and customer retention rates. This allowed the company to prioritize allocation criteria based on actual business impact, rather than judgement. Eventually, the operator selected six criteria for budget allocation purposes, including market share, demographic composition, and network quality. Based on the new allocation logic, the company shifted about 30 percent of its marketing budget from large, saturated markets to smaller markets with greater growth opportunities. As a result, net customer acquisition increased by 3 percent.

To fine-tune the way the criteria influence budget allocation, individual criteria can be weighted to accommodate different strategic priorities for different regions, business units, brands, or periods in time. For example, assume your company has recently entered a new regional market and is building its business there. To account for this fact, you could attach double weight to “market growth” for that country. This will ensure that the country in question receives sufficient funds to support the company's growth expectations. And while the set of criteria should be maintained from year to year, weights can be adjusted as strategic priorities change.

Specify investment thresholds

According to the law of diminishing returns,⁴ more funding doesn't necessarily create more growth, or only up to a point. Beyond that point, the incremental impact of additional investment decreases and eventually fades away. Conversely, any budget below a certain level may be ineffective, e.g., because your share of voice in a noisy environment is simply too low for your advertising to register with consumers. To reflect both of these effects and protect your company from wasteful spending, your allocation key should include investment thresholds. Common types of thresholds include:

• ROI-based thresholds below and above which the expected marginal effects strongly decrease (see Chapter 6 on how advanced analytics can help to determine ROI).
• Strategy-based thresholds to cap spending on lower-priority investment units (e.g., a maximum budget-to-sales ratio), or to prioritize specific markets (e.g., a minimum budget level for emerging markets or newly established categories).
• Capability-based thresholds to curb funds allocated to investment units with limited marketing capabilities. For example, a newly formed business unit may not be equipped to handle a multimillion dollar marketing budget effectively.
• Continuity-based thresholds to avoid disruptive change and let the organization adjust to higher or lower budget levels. For example, budget changes could be limited to +/- 20 percent of the budget received in the last planning period.
• Benchmark-based thresholds to ensure that marketing spending is in line with industry best practices, or that it reflects the share of voice required to break through the noise of competitive advertising intensity in a given market.

Many companies only look at marketing intensity in terms of advertising in classical media, primarily because this information is easily available from advertising tracking agencies. But using classical media budgets as proxies of total marketing spending can lead to serious distortions. For example, a company that invests primarily in sponsorships and branded events (compare the Red Bull case insert in Chapter 4) will be vastly underrepresented in this kind of analysis. To counter this effect, a global car manufacturer went to great lengths to collect meaningful benchmarks in more than a dozen priority markets, both for its own brands and those of key competitors. The company created a database of more than 4,000 sponsoring engagements and events financed by its competitors. A dedicated team broke down the cost drivers – such as licence fees and activation – to estimate the necessary investments, combining information from a variety of sources. Similarly meticulous approaches were applied to other unknown parts of competitors' marketing budgets, such as direct marketing, customer relationship management (CRM), and dealer marketing. Based on this effort, the company was able to set much more accurate investment thresholds, even for local below-the-line spending. The expanded fact base put an end to political discussions about individual line items in the marketing budget.

For details on how to allocate funds within a given investment cell – such as a national market or a product category – to specific marketing vehicles – such as classical advertising or direct marketing – see Chapters 5 (one currency) and 6 (advanced analytics).

Stick to the rules

With the investment units specified and the allocation criteria identified, you are ready to allocate the budget. A simple scoring model enables you to compare investment units according to your weighted allocation criteria, e.g., 20 percent past sales, 30 percent current margin, and 50 percent future market growth. Don't forget to apply the appropriate investment thresholds, including both minimum and maximum levels. These thresholds act as “reality adjustments” and help you reallocate excess budget recommended by the scoring model for a given cell (Exhibit 2.3), ideally to cells for which the recommended budget is below the minimally effective level. Don't allocate the entire budget though. Set aside an emergency fund to be able to react to changes in the market environment – such as a new regulation or an unexpected competitor move – or to try out new marketing instruments as they become available. See Exhibit 2.4 for a disguised example of fact-based budget allocation in the financial services industry.

Before submitting the new budget for board approval, make sure all relevant stakeholders understand and approve of the allocation approach. Of course, approval of the approach doesn't mean that everyone will be happy with the outcome. This is bound to happen and you shouldn't let anyone tamper with the criteria to change the results. This kind of interference undermines the whole idea of fact-based allocation and throw you back to endless arguments about political and historical issues. Constant changes are also bound to frustrate your marketing team. Here is what a seasoned marketing executive told us: “After weeks of negotiations, I was informed that I would get EUR 50 million for the next year. It took me weeks to plan our marketing activities to make the most of these funds. But two months into the new year, my budget was cut by EUR 10 million, and my team spent another four weeks adjusting the plan for the rest of the year. Had I known right away that I would have only 40 million, I could have spared everyone hours and hours of overtime. Then, in late November, I got another 10 million because the company was doing well. But the condition was to use the additional funds that same year. I had no choice but to spend the money in December, when advertising cost is at an all-year high, and I get the least bang for the buck. By the end of that year, half my team was burnt out, and I was ready to chuck my job”.

Don't let this happen to you. Dig as deep as you need to find the most promising pockets of growth for your company, define allocation criteria and weights that reflect your company's business priorities, adjust the recommended budget to make sure you are spending within efficient brackets, and stick to the rules. If you do, you will be well prepared to ride the next growth wave, be it foreign air travel, local retail, or Greek yogurt.