An Approach to Marketing Budgets
I’ve seen and experienced it more than a few times in my career. An economic contraction results in flat or declining sales and business units are asked to tighten their budgets. One area that seems to get hit hard is the marketing budget. During times of economic constraint, being good stewards of the budget is essential; however, scaling back the marketing budget too drastically can worsen the situation.
Why? People can’t buy what they aren’t aware of, and when things do turn around, if you aren’t top of mind, your competition probably is. The outcome of too drastic of a budget cut can mean an even bigger hit to your profits when the economy bounces back.
Your marketing team should have a deep understanding of buyer behavior and what the customers and prospects are looking for. Marketers should:
- Performing regular environmental scans to identify what’s going on in the marketplace
- Updating the competitive analysis so they understand how your features stand up to the competition and market price sensitivity.
- Listening to your target audiences (customers and noncustomers) to identify any product enhancements or expansions to the product line that could drive more revenue
- Monitoring product sales and campaign key performance indicators and reporting to leadership any significant increases and decreases
When the budget needs to be tightened, having a strong partnership between your marketing and finance teams is critical. Your marketing team should be able to articulate clearly what’s occurring with product sales (based on campaign key performance indicators) and how the team is adjusting the campaign to make up for any shortfall. The objective – grow revenue while mitigating risk. Perhaps some products or offerings could be eliminated or scaled back, with those resources leveraging another offering that is doing well.
When budgets are tightened, don’t just go in and remove money. Be strategic about your approach. How?
Establish an ad hoc team that can analyze the sales and product history, explore what can be scaled back (conservatively), free up resources, identify your 20 percent, and create your contingency plan. Let’s take a closer look at each of these steps.
Establish an Ad Hoc Team
This team should have representation from your Chief level, someone with authority to ‘make things happen’ within the organization. At a minimum, this team includes the head of your marketing department and the associate responsible for promoting the product or offering, a finance representative, the product owner, someone from your digital/web team, and shipping. I recommend that the product owner be the department head. This person may bring in specific product owners when necessary.
This team will be responsible for the work that follows.
Analyze the Sales and Product History
By looking at sales reports, understanding a product’s cost of goods, calculating the product’s margin, and assessing the campaign’s performance, you can identify what products are struggling and which products could have better outcomes if they had more resources. During this process, the assessment team should also be looking to identify if product expenses can be reduced. Is there an element that could be eliminated if made digital? Could a process or system be modified to reduce the time? Can shipping costs be contained? If you are doing a deep dive by product, ensure you have the right people at the table – representatives from finance, marketing, shipping, product owners, etc.
As you review the marketing portion of the budget, analyze historical sales – going back three to four years, if possible. This will help you get a larger picture of the sales trend. Consider unit sales year-over-year, month-over-month, and year-to-date for comparison. Are there trends you can spot from this information? When were there sales spikes historically? Why did those spikes occur? Were those spikes marketing-driven, or was there something going on in the environment that triggered product sales?
Your marketing team should campaign outcome reports. Outcome reports come out of the marketing plan’s Metrics/Measurement section. Within any marketing plan, your team should have key performance indicators listed. These are the ‘things’ that will be monitored that prove the campaign is either doing well or failing. These reports heavily influence the following year’s marketing campaign.
Along with analyzing the sales history, you want to know the product history. You need to know the following:
- How long has the product been in the market?
- What enhancements have been made?
- When was the last price increase?
- How did the previous price increase impact sales?
- What is the price point for the leading competitors?
- What differentiates your product from the competition?
- Can that differentiator drive a higher price?
- If you increased the price, would you lose sales?
- Could you invest in a product enhancement and relaunch your product at a higher price point?
- Can you enhance your offering with a product line extension using customer feedback to increase your revenue?
Now is also an excellent time to review what you know about your customers. Why do you pick your product or offering over the competition? What about your product do they like? What don’t they like? Do they want any enhancements? It would be best to have an ongoing way of listening to your customers. Suppose you don’t, go online. Are they talking about your company or product online? What are they saying? Check hashtags that use your company name and products. You can even put together a quick survey and ask them. If you have a call center, how is that team regularly sharing insights from conversations and engagements they have with your customers?
Tip for Success
As you gather information, plotting your offerings against the competition using a matrix is helpful. A product matrix lets you map your products, price point, margin, unit sales (go back a few years), customer satisfaction ratings, desired features, etc. As you build it, look for opportunities and risks, and flag them. You can use this tool later to rank and determine if investments in product features or product line expansions could drive more revenue.
Explore What Can Be Scaled Back
As you work through the financials and the robustness of your product or offering, you will start to identify what’s working well for your business and what’s not. Do not assume that the products that aren’t doing well should be scaled back or stopped. There are a few possibilities that could have led to the under-performing product:
- A subpar marketing campaign – maybe the visual didn’t resonate, the messaging was a flop, or perhaps the marketing mix was wrong
- To determine if adjustments would make a difference, audit the marketing campaign. Is the audience defined correctly? Look at the promotional channels – does it reflect your target audience? Look at the visual identity of the campaign. Is it appealing? Does the message support the visual? Is it on brand?
- Not enough time in the market – did the product have enough time in the market? Did the campaign run long enough to break through the noise?
- Poor word of mouth – people turn to friends they trust for recommendations. Was there a social element in your campaign? Did it generate the interest you thought it would?
- Features fell short – was the product rushed to market? If so, did the quality not meet customer expectations? If you improved the quality of the product, could you see an increase in sales?
- Unidentified market need – this is a huge one. Was market research conducted to identify if there is a market for your offering?
I could go on, but you get the point. Don’t throw the baby out with the bathwater. Looking at the situation will take some tough skin, but now is the time for frank conversations.
Tip for Success
At the ad hoc kick-off meeting, establish some ground rules. Make sure there is consensus that there will be candid and frank discussions and that all will participate and do so respectfully. If, during meetings, you observe people getting defensive or shutting down, revisit the ground rules without calling anyone out specifically.
Free Up Resources
By this point, you deeply understand your product offerings, their profitability, and your competition. For the sake of this article, think of resources in terms of staff, time, money, or tools.
The ad hoc team should review and validate the environmental scan. Part of this process should include speaking with department heads. Are they hearing about or seeing anything happening in the environment that could affect your business – either positively or negatively? These individuals should be asked if there are specific actions they think the company should be taking that would greatly benefit them. There is no commitment to these actions at this time. This is just information gathering.
The ad-hoc team should look at processes and systems in place that may be a hindrance. Improving processes and systems means improved efficiencies, which could free up staff time needed for this ad hoc group and its work.
Outside of asking staff about the environmental climate, the team should look at your industry to identify what’s happening there.
As the team performing the environmental scan conducted their work, did they hear comments about people being able to ‘do better’ if they had access to better tools? If so, what are the mechanisms? What’s the price point? How long before you might see an ROI on those investments? What impact on revenue would there be from using those tools?
By now, you have a solid product matrix. Identify the product(s) you could pull back on – low margin, low sales, small market share, little market penetration. Now is a great time to determine whether to remove those products from the market. If you free up the marketing budget and resources for these products, consider the outcome if you shift the dollars to your other products that have been doing well (and have the more significant margin).
Identify Your 20 Percent
We all know the 80/20 rule. Eighty percent of your business comes from twenty percent of your customers. You must maintain your relationships with the eighty percent – even during economic decline. This is especially important if you don’t have the cheapest product. Do not read that sentence as ‘drop your price, so you are the cheapest product in the marketplace.’ That’s not what we are talking about. It should be expected that if people fall on hard times, they will naturally adjust their purchases to be good stewards of their budgets. You will see this dip. It’s common. You need to make sure your product is so much better that either they can’t stand the other one and will come back to yours immediately, or they will shift temporarily and come back when there isn’t so much pressure on their finances.
Make Them Rockstars
This batch of customers (your 20 percent) deserve gold standard treatment. While I don’t recommend extending too many discounts to this group – you don’t want to train them only to buy when there is a sale – there is a benefit to extending a few ‘perks’ to your highly valued (and highly profitable) customers. Extending these perks will help you establish brand loyalty.
Know Them and Know Them Well
You can’t know too much about your 20 percenters. Look for every opportunity to gather (and share) information about them. Your marketing team should have a persona for this group. Outside of that, though, throughout the data-gathering process, you want to ensure complete transparency regarding customer knowledge. At a minimum, you should know the following:
- Who buys your product?
- When they buy
- Why did they buy it
- What they love about your product and brand
- What they don’t like about your product or brand
- If they buy your competitor’s product and why
- What does the customer journey look like
At some point, you should consider segmenting your customers into groups, performing a customer journey for each, and developing personas for them. Because we are focused on economic constraints and how to maximize your marketing budget, I’ll leave those topics for another day.
At this point, you deeply understand each of your products. It’s time to identify the money that can be reduced and reallocated to drive more revenue. I recommend documenting your planned changes in a business continuity plan (also called a COVID-19 Recovery Plan).
Build Your Business Continuity Plan
You can call it a Business Continuity Plan or a COVID-19 Recovery plan; either way, it’s your roadmap to profitability. At this point, the ad hoc team is equipped with all the business intelligence they need. They need to review the information they’ve gathered, identify opportunities and the ‘stop doing’ things, rank the impact each action could have on the organization, prioritize the activities, and get to work!
Let me know if you need help with the process or plan development. You can also check out my COVID-19 blog post.