What a Victorian Art Critic can teach us about marketing budgets
Welcome to a special guest blog from one of de Winter’s favourite industry experts, David Meikle…
David specialises in business and marketing consultancy and strategy, agency performance management, process design, value management and procurement of marketing services, as well as training.
An innovator and problem solver with a career in advertising and marketing communications spanning more than two decades and including two of the biggest global advertising networks – Grey Worldwide and Ogilvy & Mather – David explains the importance of sharing your budget with your agency…
A few years ago I was delivering some training to people in marketing procurement through ISBA. It’s interesting that sometimes you can say what you think might be the most logical, non-contentious thing – and it morphs into a heated debate – with a life of its own. This is what I said:
“When briefing your agency on a project it’s important that you agree a budget in advance”.
Wow. The reactions I received came with the kind of incredulity I might have expected if I’d proposed that clients write their agencies blank cheques, but not simply to agree a budget in advance. After emotions died down a little and I had managed to persuade the collected delegates that I was not trying to bankrupt their businesses (which included a car manufacturer, and leading insurance provider, a cereal manufacturer, a mobile telephony provider and six more similar blue-chip organisations), it transpired the main reason for their contemptuous response was this: “if we give them a budget they’ll just spend it”.
“Yes, they will.” I said.
“There you go then!” they replied.
“Yes, you do!” I agreed.
“If we give our agency a budget of say £100,000, the estimate will come back at £99,999.99!”
“Good!” I said.
“NO!” they cried.
“Why on earth not?” I asked.
Now, call me Poirot, but I could see that there was a massive disconnect between me and the rest of the room. It transpired that there were two fundamental misunderstandings.
The first is that marketing expenditure is an investment, not a cost. The difference being that costs are not expected to correlate to a return greater than their outlay, but marketing generally is. In much the same way that a baker buys ingredients to make cakes in the belief he can sell them for more than the price of the ingredients and labour it took to bake them so, too, marketing activity is expected to deliver a benefit to the marketer greater than their outlay.
Therefore, in much the same way as you would not expect your investment broker to hold on to a bit of your cash in case you wanted it rather than buy bonds, agencies spend what they’re given to increase the amount of the return.
The second problem in our mutual understanding was this: the delegates believed that agencies were spending their budgets UP TO the budget level, and even over the budget, whereas the norm is for agencies to negotiate the prices from their own supply chain DOWN to be within or at least close to their budget. The first assumes that agencies are gilding the lily whereas instead they’re usually trying to deliver greater value than their clients could seemingly afford.
But assuming that marketers and moreover procurement buys this argument, it begs another question: how should clients go about setting budgets for projects, or campaigns, or even (dare I ask?) agency fees?
Like all other investments, marketing budgets are value judgements. To make optimal value judgements for such budgets there are multiple considerations to accommodate before deciding on a figure:
- What do I have? “How much do I have in my overall budget after I have made similar allocations to other projects or needs?”
- What do I need? “How much do I think I’ll need to achieve my stated objectives?” By all means you might ask the opinion of your agency to inform this opinion further.
- What do others spend? “How much do my competitors spend on this kind of thing?” In the mind of the customer – particularly if I want them to stop buying from a competitor and start buying form me, how much do you need to spend compared to them? Or in the case of media how much do you need to spend to achieve an effective share of voice?
Lastly, and perhaps most importantly, the budget setter has to consider whether they are in danger of approaching a point of diminishing return or not achieving the critical mass they need to achieve their objectives. Consider the graph below:
Brands/products with compelling, rational and competitive propositions need a lower investment to begin to see a return and when the spend starts to increase the return starts to diminish. Consider the apocryphal ‘Free Beer’ proposition, it matters far less how beautifully the poster is designed and written compared to ‘£5 a pint’.
However, brands/products with a strong emotional story to tell, brands that rely on how you feel about them to command their loyalty, such as fashion brands, food brands, and perfume brands, will see little or no return on a their investment until they reach a critical mass of their spend.
The answer is that there isn’t a right answer but the current alternatives to agreeing budgets are potentially quite harmful.
Often projects will be pitched to the lowest bidder or a final budget will be agreed after the agency has revised and cut back its original proposal once or twice. The first may not be fit purpose and the second is inefficient and demotivating. But one thing is for certain, your path to an optimal return on a marketing investment is to make an informed value judgement about what you want to spend. John Ruskin the Victorian art critic got this right when he wrote:
“It’s unwise to pay too much… but it’s worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little, you sometimes lose everything, because the thing you bought is incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”