Zero-based budgeting

In four conversations last week, I found myself talking about what to think about when developing a marketing budget.

I’ve been asked dozens, if not hundreds, of times: “For my industry, what percentage of sales should we devote to our marketing budget?” I get it from my students. I get it from our clients. And I get it from the people in the audience when I speak. My answer is usually, “It doesn’t matter,” or, “Why do you care?” depending on how feisty I’m feeling.

Ultimately, your marketing budget needs to be zero-based. Though few people talk about it, I’m not alone on this–it’s one of the cornerstones of Integrated Marketing Communications.

Think about it: Do you really want to do what your competitors are doing? Even if you did, your goals and financial capabilities would never be identical. A company that wants to reduce base erosion by 10 percent would have a different budget than one that wanted to grow their base by 30 percent.

Zero-based budgeting is a process that simply means don’t start with baseline assumptions. You can and should reference what you’ve done in the past, but you really need to start from your objectives to build from there.

You simply shouldn’t pre-project budgets based on industry averages or agency recommendations that don’t reflect your company’s goals and resources.

Instead, pay for what you need to meet your goals, based on the appropriate strategy, tactics and deliverables necessary to execute your marketing plan.

That’s the responsible way to invest in your marketing.

Note: In part, this post has sourced some information from the white paper length preview of my book on Responsible Marketing.

Join the discussion 2 Comments

  • I agree with this recommendation, but I’d be cautious about using that word “zero.”

    The problem is that most companies do not know what it takes to reach their goals. They see something like Facebook attract millions of users without advertising, so they themselves refuse to advertise — without analyzing the unique characteristics that enabled Facebook to get that far. (Indeed, considering that Facebook’s growth has plateaued, it should start investing some of its bankroll into an ad campaign.)

    I find too many companies who refuse to spend any money on marketing, believing that “word of mouth” will save the day — ignoring the fact that the % of companies who succeed via “word of mouth” alone is so small as to almost be anecdotal.

    The temptation for most entrepreneurs is to view marketing as an expense instead of an investment that can pay for itself several times over. So while there’s no fixed budget that applies to all marketers, it’s important that something be invested. Unless they want to leave their entire operation to chance, zero should not be an option.

  • Freddy,

    Good points, all.

    To clarify, the key here isn’t about doing marketing on the cheap or trying to spend as little as possible on marketing. Clients often want to spend less than we recommend, and when it looks like they won’t get the return necessary to make the investment worthwhile, we tell them not to bother.

    Zero-based budgeting is about working from your objectives. So, if you want to grow 25% this year, let’s do the math to determine what it takes.

    Let’s say historically response rates have been X%, and it’s taken Y number of leads to add so many new customers. Based on that historical data (and working backwards), how many new business inquiries are necessary to get to the desired objective?

    If that number is $1, let’s spend a $1. But if it’s $10 million, then realize it’s going to take $10 million.

    Contrast that to, “Our closest competitor ABC Widget did $100 million last year and spent $5 million on marketing, or 5%. So since our revenues were $1 million last year, let’s spend $50k.”

    The numbers have no meaningful relationship to one another.

    What matters are your goals and objectives and the investment necessary to reach them. You have to work backwards from zero to get there.

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