If marketing and finance are going to learn to live together, they’ve got to find a common language and create a budget that satisfies them both.
Unfortunately, marketing budgets are often created around myths and misunderstandings that confound CFOs. Here are my favorite marketing myths and how to fix them—do any of these sound familiar?
Myth #1: “If we get just one new customer, the advertisement pays for itself”
This is classic “top line thinking”: Spending money to make back the same amount ignores all the costs of delivering your service or product. In other words, if you spend $5,000 on a trade show to find a customer who buys a $5,000 widget from you, you still must pay for the widget.
Instead of comparing marketing expenses to top line sales, use gross margin. Using gross margin is safe and simple—if the gross margin on one widget is $100, then your $5,000 trade show investment will break even with 50 customers (not just one).
Note that if most of your customers tend to buy more items from you over the long term, you could use a more complicated metric called Customer Lifetime Value.
Like all good myths, this one has a kernel of truth. Advertising and marketing is an important budget item that should drive sales. But this ignores the key criteria for any budgeted expense: getting a positive return on investment (ROI).
My firm recently bought a print ad in a magazine. Thousands of people may have seen the ad, but not a single person called the phone number we listed there, or asked for the product advertised. So we certainly spent more on marketing, but did not generate any more sales.
Marketing budgets need to be spent on relevant and effective marketing campaigns, and to pass muster with the CFO, every campaign better include a way to measure results. In turn, the results need to include a calculation for the ROI as measured by the additional gross margin dollars generated. (See #1 above!)
When one marketing campaign starts working (and generating a positive ROI), it will be tempting to go all in. If it works a little, why not do a lot?
That’s hard logic to argue, but a CFO will know that there’s real danger in having too many sales too quickly. A company is a complex machine that cannot always react quickly enough to changes in demand—operations, cash flow, staffing, logistics can all come crashing down under the weight of too many new customers. And plenty of companies have gone bankrupt trying to grow too fast.
In fact, there are ways to calculate the fastest growth that a company can afford. It’s not the marketer’s job to know the details of that calculation, but if there’s a hint that marketing could drive demand out of control, marketing ought to make sure the CFO is fully aware.
What the competitor spends is rarely a good benchmark for a marketing budget. Unless you also know the competitor’s costs, margins, and capacity, there’s no reason to expect that you can duplicate their marketing.
Instead, marketers should work within the larger corporate budget and shoot for a number that is reasonable and sustainable. It’s estimated that the average small company (less than $25 million in revenue) spends 11% on marketing, and the SBA recommends just 7 to 8% for firms under $5 million. That may be more or less than your business can afford, so the CFO should help you see the full picture: what other costs fall into the total marketing spend and where marketing fits into the overall cash needs of the company.
Myth #5: “We spent it last year”
This is my personal fave and it comes in many flavors, including “We do this every year” and “If it ain’t broke, don’t fix it.” Here’s a new idea: Make budget decisions based on fact instead of tradition.
Rather than repeating last year’s mistakes, the marketing department should adopt a “zero-based budget” process and carefully justify each line item in the proposed budget. How? By showing the expected ROI and how it will be measured.
In fact, if the same campaign was done last year, then you already know the exact ROI … right? If the ROI is strongly positive, then maybe the right answer is “We spent it last year … and it worked!” But if success was marginal, or not measured at all, consider it off the table until you can describe how the expense will be justified.
In the end, finance and marketing can learn to live together. When finance empowers marketing (by sharing metrics, costs, and strategic goals) and when marketing becomes more disciplined (by measuring results and calculating returns), the business will grow and everyone wins.
Partner, FUSE Financial Partners
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