What’s exercising the minds of the world’s leading financial marketers right now? If you answered budgeting, then you are certainly not alone.
Financial marketers have adopted a diverse array of methods over the previous 12 months. We take a look at a few of the most popular approaches and their pros and cons.
The Task-Based Method
The premise for this method is extremely straightforward and familiar. You simply tally up the cost of all marketing activities planned for next year and your budget is complete.
Pros: Simple; Relatively fast; Defendable; Known, fixed budgeting.
Cons: Calculation-heavy; Challenging to get accurate costings from all vendors; restricted to specific ‘buckets’ of spend; Unrelated to revenues or competition; Inflexible – little or no room for adjustment.
The Percentage-Of-Revenue Method
This is another common method of budget calculation. It involves applying a fixed percentage of revenues and then allocating that amount for marketing. Task-based planning can be applied as above once the budget has been determined. CFOs tend to be quite in favour of this method: it relates directly to revenue and gives a known budget line.
Pros: Simple; Manageable; Revenue focused, Known budgeting.
Cons: A broad generalisation in terms of need and therefore likely to be inaccurate; Assumptive –Sales volume is the consequence of a host of factors in addition to marketing; Does not allow for new innovation; Often derived by past performance irrespective of new objectives; Can be reduced (subject to revenue performance); Unrelated to competition; Inflexible; Viewed as a budget allocation rather than an investment.
The Desired Market Share Method
This method can be a little harder to calculate. First you have to define your market, then estimate the total marketing expenditure of all of the companies competing for that market. Finally, you apply a percentage based on securing and maintaining your desired market share.
Pros: Revenue focused, Known budgeting
Cons: Difficult to obtain good data, especially on competitor / market spend; Can prove a complex calculation.
The Historical Incremental Method
The present and previous years’ budgets can in theory provide a basis for assessing the budgets for the forthcoming year. However, this approach is determined on a number of assumptions
For examples, has the previous marketing budget achieved its previous objectives? (Were the objectives worthwhile and are they still current?). Do you have new objectives for next year and new initiatives planned? Are there new competitors or substitutes entering the market that render the previous budget inaccurate or irrelevant?
Pros: Simple; Fast; Known
Cons: Hugely assumptive; Implies no change to the market or the approach; Inflexible; Does not allow for innovation.
The Affordability Method
This method simply looks at what funds are available rather than an objectives-driven approach. On the surface it looks to be the ‘safe’ option but it is not without its risks.
Pros: Simple; Fast; Known
Cons: Can be limiting to revenue growth; Can lead to ineffective, unsustained and fragmented bursts of activity as budget becomes available, as opposed to taking an integrated approach.
The Competition-Based Method
This method is based on a simple premise. Find out what your competitors are spending and budget more to gain an edge. In reality, this is fraught with difficulties.
Pros: Simple (in principle)
Cons: Incredibly difficult to obtain the data or know if it is accurate; Assumptive on competitors’ spending being effective.
The Desired Customer Growth Method
For new customer acquisition specifically, this can be highly effective. If you know the number of new clients you need to acquire within the next year and you can establish how much it costs to win a new customer, you are a simple multiplication away from defining your budget. It is however, a bit of a one-trick pony.
Pros: Simple; Fast; Accurate; Known
Cons: Highly dependent on data accuracy; Ignores branding and other core marketing activities.
The SOV/SOM Method
This method looks at the relationship between a company’s share of voice (SOV) and its share of market (SOM). Organisations that have a high SOV-to-SOM ratio need to spend more in order to take on the competition.
Pros: Accounts for both spending level and market share. Task-based planning can be applied once the budget has been determined.
Cons: Complex to attempt for all but the most sophisticated organisations; Extremely difficult to obtain accurate up to date industry and competitive data to obtain SOV / SOM in the first instance.
All of these are methods that we have seen applied in financial organisations. All come with their fair share of positives and negatives. All, when taken in isolation, are missing that magic ingredient – integration.
To achieve this, we advocate taking the best of all of the analytical methods and creating your own hybrid model (based on available data).
Whichever methods you select to create your unique mix, the integrated marketing plan and associated budgets should allow for:
A holistic examination of business objectives
Prioritisation of strategic goals aligned to the above
Prioritisation of tactical goals aligned to the above
Focus on differentiated, consistent marketing and brand proposition
Detailed assessment of the competitive landscape and impact
Delivery of an integrated marketing programme, where every element leverages off the next and builds value
Flexibility to allow for innovation and the testing of new approaches.
As ever, if there is anything we can help with, please get in touch.