Zero-based productivity—Marketing: Measure, allocate, and invest
marketing dollars more effectively
Taking
a zero-based budgeting approach to enterprise-wide marketing costs can uncover
new opportunities and spur more-informed spending decisions.
Marketing is critical to growth and consumer
engagement, and its costs can account for more than 10 percent of revenues in
many consumer-facing businesses. Yet few companies have fundamentally changed
how they measure and assess marketing’s impact—often resulting in budgets and
programs that are close cousins of years past. And few marketers are confident
about identifying the real return on investment (ROI) of their marketing
spending, or the impact of
trade-offs.
This apparent paradox
derives from a time when the bulk of the marketing budget was concentrated in
above-the-line channels such as TV and radio, which are characterized by more
limited measurability of outcomes than are typical of below-the-line activities
such as search-engine marketing. And, since most companies build budgets based
on the previous year’s spending levels, it has taken a long time for deep
discussions of marketing ROI to reach the boardroom and become an
executive-level priority.
In recent years, the
proliferation of technologies that can process massive data sets, combined with
the growth of digital advertising channels—which are inherently more
measurable—has unlocked a massive opportunity to measure the performance of marketing investments. Even though analytical tools have
become more widely available, our experience suggests that few companies apply
the same level of scrutiny to overall spending in marketing categories. In
fact, more than 60 percent of Fortune 1000 chief marketing officers claim that
they cannot quantify the impact of marketing in both the short and long term.1
To gain a more detailed
view of marketing and sales expenditures, organizations must overcome several
barriers. First, marketing budgets are often separate for each business unit
and country, which limits visibility and comparisons. Second, the multitude of
spending categories can make it difficult to identify the highest-value
opportunities. Last, companies tend to use media agencies to manage, or at
least intermediate, a significant share of their marketing spending—and
agencies are often more interested in maintaining historical spending levels
and allocations than challenging past assumptions to achieve savings. All of
these challenges are underpinned by an entrenched, reactive mind-set when it
comes to setting priorities and budgets.
These very obstacles,
however, also make marketing and sales spending categories especially ripe for
cost savings. Zero-based marketing—a comprehensive approach that extends zero-based budgeting principles to marketing categories across the enterprise—can
uncover opportunities for savings worth 10 to 25 percent of spending in certain
categories, and these funds can be reallocated to higher-value areas. In fact,
with the rare exception of industries that are in a global state of
decline, a well-executed reinvestment in high-ROI opportunities will deliver a greater
return than “banking the savings” will. A recent McKinsey survey revealed
businesses that are methodical about investing funds unlocked through zero-based budgeting and other programs
into growth—either proven winners
or future products and services—outperform the market. Notably, often more than
50 percent of these savings can be achieved in the first 12 months of a
zero-based marketing effort, allowing for a very rapid reallocation.
Gaining a granular view of spending and opportunities
Zero-based marketing
requires commercial leaders to pause and ask five critical questions.
1. Based on bottom-up analyses, what are
realistic but ambitious targets for our company?
Companies need clarity
about the fundamental drivers of their value creation, but often the drivers
are not consistently understood or thoroughly applied when the strategy is
developed. Business value is created by improving return on invested capital or
top-line growth (for example, increased market share, positive market momentum,
or a combination of both). Hence it is crucial to set targets that are consistent
with the life stage of each area of the business in relation to consumer demand
and preferences. These targets need to be defined through bottom-up analysis of
revenue pools and growth drivers.
For example, the
leadership team at a fast-moving consumer goods company could consider
reallocating marketing dollars from products in its portfolio that have sizable
market share in a low-growth category to products with the potential to gain
share in high-growth categories. Although this action sounds intuitive,
companies with cost-plus budgeting often don’t have a culture that enables
conversations about such resource allocation.
Zero-based marketing
establishes the lines of communication across business units and functions as
well as the cadence for growth discussions. These efforts help to avoid
underfunding areas with limited potential and instead free up resources to
invest in high-ROI opportunities that might be overlooked or left with the
crumbs after the demands of historically larger business areas have been
satisfied.
2. How do we understand what is driving
marketing costs?
The many marketing
spending categories that exist are driven by different factors. To thoughtfully
reduce, reallocate, or increase marketing spending across various categories,
it is essential to establish a baseline where every dollar can be linked to a
driver (or set of drivers) that determines why that money is being spent.
For instance, we can
separate media spending into two categories: working and nonworking. The former
is shaped by the reach, frequency, and quality of the advertisement the company
deploys to communicate with customers; the latter is determined by the amount
of creative, production, and research activity performed to create assets such
as a TV ad, and it is not directly driven by how many customers will see or
react to the asset. Therefore, the logic by which each of these media spending
categories will be assessed is very different. In most cases, this approach
would go one or two levels deeper to identify much more granular factors. For
working media, examples are the number of customers acquired (or retained)
during the ad airing period and the recall rate of the ad among target
customers; for nonworking media, factors could be the reuse rate of existing
ads and creative assets and the average production cost per asset, among
others.
Establishing a common
currency, where every dollar spent can be compared against others and decisions
can be linked back to objective drivers, is fundamental to zero-based marketing.
3. How can the organization establish the
right conversations to identify opportunities?
Marketing leaders have
to work very closely with finance and other functions on resource allocation
decisions. As mentioned before, marketing teams should set clear targets for
growth and market share based on value-creation potential.
Then, rather than
trying to understand the absolute spending on TV campaigns, for example, teams
should compare saturation levels and gross rating points (GRPs) per message to
find opportunities. Instead of oversaturating a target group, funds could be
redirected to a campaign highlighting new products or brands. Similarly, in
digital channels such as social media, data should be presented to quantify the
impact on awareness, consideration, and conversion, not just presence or share
of voice. In this way, the discussions become more structured and fact-based,
allowing changes in direction to be clearly supported and communicated—while
also aligning marketing spending more tightly with strategic priorities.
4. How can an organization reallocate funds
among the different cost types to ensure it is maximizing ROI?
Commercial leaders very
often have all the data they need to assess the relative productivity of
various spending categories and their coherence with consumer needs and
competitors’ positioning. Zero-based marketing compels managers to rely on
factual information to achieve consensus. With data-driven insights, generic
statements such as “We should spend more in digital” or “We should continue to
invest most of our money in Brand A because it’s our power brand” either become
more meaningful or are exposed as myths.
Companies can then make
better spending decisions—for example, by allocating less to above-the-line
campaigns and more to personalized communications through digital channels or
customer-relationship-management (CRM) campaigns. In some situations, the ROI
from a secondary in-store display might be greater than that of a price
promotion. Such information provides commercial leaders with the tools to shift
their spending.
5. What is the best way to track funds freed
up in other areas to enable growth?
A zero-based approach
establishes a consistent terminology for spending and investment, making ROI
and budget discipline the common ground for decision making. At a global
manufacturing company, for example, the CEO used the same cost-management tool
that had been tracking budgets and spending for zero-based budgeting to plan,
track, and monitor growth initiatives. The change resulted in more transparent
budgeting decisions about which initiatives to finance and an ability to track
and redirect resources during the course of the year to ensure optimal
spending. The company achieved the target ROI.
More important than the
tools and methodology used, however, is personal commitment on the part of
marketing leaders. In all zero-based marketing efforts, commercial executives
must provide marketing managers with full ownership of their respective cost
areas, along with targets to achieve in the form of ROI, and where relevant,
savings and reinvestment. Establishing a governance mechanism to track progress
of these owners against their commitments is a fundamental step to ensuring
that growth targets are met as a result of the adoption of zero-based
marketing.
Impact of zero-based marketing
One EU-based consumer
packaged-goods company launched a zero-based marketing program with the goal of
redirecting funds from marketing and sales categories to support of new growth
initiatives. The management team was skeptical of the cost savings it could
achieve, since these categories had been scrutinized already.
As a first step, the
team created a database of more than 50 spending categories across business
units and regions. It then applied industry benchmarks to set targets for each
category. Using this detailed information, the team identified cost-savings
initiatives, including removing some components from the media agency contract
reducing overall agency fees, and cutting packaging design costs. The
zero-based approach created new budgets and a proactive cost-management process
for each category.
The impact was
significant: a 15 percent increase in spending efficiency, with more than 70
percent of the opportunities coming from nonworking media levers. More
important, the process helped to instill an ownership mind-set among marketing
and sales managers, enabling cost-reduction efforts to be sustained beyond the
initial stages.
In another case, an
online gaming operator was in a period of stagnating revenue growth while
marketing costs—mostly for digital channels—were increasing year on year due to
market inflation and increasing competition. With profitability coming under
pressure, management was compelled to take a hard look at the cost of acquiring
new customers in relation to their value. By mapping all of the marketing
activities and their contribution to new customer acquisitions and then linking
them to the behavior and economics of the customers acquired, executives were
able to rank their spending categories in order of effectiveness.
They were stunned by
the results: 15 percent of their marketing was destroying value by bringing in
low-value customers at a negative ROI. In the space of three months, marketing
leaders cut spending in those areas and used the savings to finance
high-potential channels. One such channel was programmatic media buying, a
methodology that allows the marketing function to precisely target specific
customers using personalized messages and offers based on their behavior. With
the savings, the function was also able to build a rich data set comprising
third-party sources of data such as social media activity.
It has never been
easier for companies to reassess their level of marketing spending, where funds
are allocated, and ROI by category. From greater access to data to media
agencies with in-house capabilities to measure the performance of marketing
activities, companies have a range of tools and support at their disposal. All
that remains is for marketing executives to use those tools to embrace a more
analytical, granular approach to spending decisions.
By Jeff Jacobs, Roberto Longo, Mita Sen, and Björn Timelin
https://www.mckinsey.com/business-functions/operations/our-insights/zero-based-productivity-marketing-measure-allocate-and-invest-marketing-dollars-more-effectively?cid=other-eml-alt-mip-mck-oth-1808&hlkid=a58cad5139c743aba19ac0e0d77b075e&hctky=1627601&hdpid=b933575b-bbce-450b-a8aa-4d11c1abb79a
No comments:
Post a Comment