HOW TO CREATE AN EFFECTIVE PROCESS FOR DEVELOPING SALES FORECASTS AND MARKETING BUDGETS (PART 3)
Step 2: Evaluate Your Marketing Budget
A marketing budget defines how much money your company plans to spend on specific marketing activities, such as advertising, sales automation, over the course of your company’s fiscal year. Most marketing budgets are divided between fixed-expense items, such as salaries and telephone expenses, and discretionary expenses. In some companies, special marketing budgets are developed for specific projects such as a major product launch or attendance at a national trade show.
Every marketing manager has an opinion about how large a marketing budget he or she needs to achieve total marketing domination. But in most companies, the total amount of money that is budgeted for marketing activities is ties to a percentage of the company’s sales revenues. If sales revenues go up, additional marketing funds are allocated, and if sales go down, the company tightens its marketing budget.
Some companies allocate a disproportionate percentage of their sales revenues to marketing activities to help them “buy” market share. However, at some point a company must limit its marketing expenses if it wants to earn a profit for its shareholders. There is no proven formula that your company can use to help it determine how much money it should invest to market its product. However, most companies that achieve total market domination invest 30 to 40 percent of their sales revenues to build and retain market share.
CREATE A MARKETING BUDGET
In the past most companies based their marketing budget on their previous year’s budget; however, most companies today use zero base budgeting or ZBB to help them control expenditures. ZBB involves allocating your company’s resources on the basis of a cost-benefit analysis of each of your company’s major marketing activities.
The ZBB process involves three steps:
- Break down each marketing activity into “decision packets”, which include all the information that your company needs to calculate a marketing activity and compare its costs and benefits with other marketing activities. Each decision package should include the activity’s purpose, costs, and estimated benefits, as well as the consequences that are expected if the activity is not funded.
- Evaluate each marketing activity and rank it in order of decreasing benefit to your company. In a large company, the rankings for each marketing manager’s activities should be passed along to his or her manager (or the manager’s manager) and re-ranked until all activities have been evaluated and compared.
- Allocate your company’s marketing resources on the basis of your senior manager’s final evaluation. As a rule, high-value marketing activities are funded immediately, while lower-priority items may be eliminated or may be funded if additional marketing funds become available.
The ZBB process makes it possible to compare the relative value of different marketing activities and can help your company identify and eliminate low-payback marketing activities. However, the value of the ZBB process depends on individual manager’s honesty and candor. If your managers lose their objectivity, your budget process will become political, and allocations will depend more on individual manager’s ability to promote their pet projects than on the ability of specific marketing activities to help your company achieve its business objectives.
| Benefits of ZBB Process |
| Evaluate past performanceImprove resource allocationTrack progress toward specific objectives and key resultsIdentify problems and learn from past mistakesImprove communicationPositive impact on motivation and moraleDevelop managers’ planning skills |
Companies that achieve total marketing domination use ZBB to target their marketing resources to the marketing activities that will provide the greatest return on the investment.
REAL WORLD BUDGETS
One of the major assumptions in all sales forecasts is the amount of money to be spent on marketing. In most selling situations, the more money that a company invests marketing its products, the greater its sales will be. However, at some point, investing additional marketing funds will continue to generate sales, but it will not increase a company’s profits.
If your company’s marketing budget, as a percentage of your company’s sales revenue, is lower than your industry average, it may be that your company’s sales force is more efficient and that your company has a lower cost of sales than its competitors. On the other hand, it may mean that your company is underspending and will eventually lose market share to companies that have more aggressive marketing budgets.
Companies that achieve total marketing domination are willing to invest all of the marketing resources that are needed to achieve their long-term business objectives. It can be tempting to increase profits by cutting back on marketing expenses; however, this strategy can rarely work for very long. The key to building market share is to continue funding the marketing activities that yield the greatest positive return on your company’s investment. Of course, key marketing factors change over time, so it is critical to implement a zero-base budgeting process that will enable your company to track the success of each marketing strategy that it is funding.
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