Marketers, CEOs, and Salespeople may look at marketing as an investment. As an investment you want to buy low and sell high. The CFO may look at marketing as an expense. He wants efficiency and lower costs. Either way, the business yearns for lower, more effective marketing.
Many marketers I’ve talked to get a fixed expense for marketing budget…say 10% of revenue. As revenue goes up, so does marketing investments at the same rate. So, if revenue grows 20% year over year, then the $1M marketing budget fom last year would become $1.2M this year. I’ve even heard marketing managers say they have to spend their budget allocated for that quarter or they lose their budget! Sounds more like government than a business.
The P&L problem with this approach is that the company needs to maintain or improve product margin if you want to maintain or improve operating profit margin…because you keep spending the same % marketing expense each year. What’s the likelihood that your margins are staying the same or going up?
The bullseye approach is for marketing costs to scale. The concept of scaling is simple, but amazingly is rarely managed in marketing departments. The idea of scaling is that if revenue grows 20%, marketing expense may only be allowed to grow 15%.
Marketers who like this approach think like shareholders (which might include themselves). Business performance is #1 priority.
Marketers who don’t like this approach don’t like math, or are thinking for their resume. Budget and program size (or resume bullets) are the priorities.
There are two primary benefits to the marketing scaling approach:
It forces marketers to think about how to optimize effectiveness and efficiency of their marketing spend. It forces ruthless prioritization of the most impactful activities (the bulls eye!).
Scaling contributes to the overall P&L so you don’t have to stop growth if margins get squeezed. You have more flexibility on price because marketing expenses (and all expenses) should scale.
Depending on your business situation, you may look at two options of what your marketing expense will scale to:
Scaling to total revenue Scaling to revenue is simple and forces discipline to grow company volume and revenue more efficiently over time. It is best used in the following situation:
Your primary focus is on volume and revenue growth…but not at the sake for operating profit margin %
Margin % is pressured and decreasing
You lack measurement precision on product margin
You lack levers to effect margin % (affecting customer or product mix)Scaling to operating income (or operating profit margin dollars)
Scaling to operating income is best in these situations:
Your focus is on total earnings (this is ultimately the focus of every business)
Product margins are steady so you can grow revenue at the same margin % (i.e. grow volume and you automatically scale to total margin dollars)
You have confidence that marketing can help you grow margin % on a lower growth rate (ex: sell to higher margin customers or invest in higher margin products at lower volume).
This is just scratching the surface, and even so can get overwhelming. To simplify, think of scaling this way. Your 10% marketing budget will be 9% next year and 8% the year after that…and at the same time you have to accelerate growth every year. That way of thinking forces you to hit the marketing bullseye!