This is a question that we hear often. After years of helping clients navigate the complexities of budget planning, we’ve found that simple, well-executed strategies consistently outperform complex mathematical models. While we’re not against using advanced analytics (we are econometricians, after all), we’ve learned that keeping things straightforward is often the key to success.
We’ve written many blogs about setting marketing budgets and even a short ebook about budget setting, so feel free to jump straight there and download a free copy.
For this blog, we are taking the best bits of our previous blogs and bringing our insights on optimising your marketing budget into this 2024 version.
As with many past years, our political and economic landscape has changed and could seem uncertain to some.
Is there anything analytics can do to make the process easier? We believe, in times of uncertainty, it’s important to go back to basics and follow these eight steps, as well as use analytics to define what we DO know so that we can better manage and plan for those things we don’t.
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Define Your ‘Optimum’ Clearly
Before diving into the numbers, it’s crucial to define what you mean by “optimum.” Are you aiming to maximise sales, market share, or brand awareness? Each goal requires a different approach:
- Maximising Sales: More budget generally equals more sales. However, it’s important to consider whether the additional sales justify the increased costs, focusing on metrics like marginal revenue or profit.
- Maximising Market Share: This can be misleading unless your tools can accurately predict competitors’ actions, which is rare. Typically, maximising your sales will also increase your market share.
- Non-Financial Goals: Consider factors like brand building or amortising the fixed production costs. For instance, reducing promotions might increase profitability but could clash with production targets, especially if you’ve recently invested heavily in new machinery.
Defining your budget clearly is just as important. Does it include agency fees, production costs, or your media manager’s salary? These details can significantly impact your optimisation efforts.
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Start with ROI
Return on Investment (ROI) should be your starting point for budget optimisation, but you should also consider cut-through and diminishing returns. And while ROI won’t give you exact spending amounts, it provides a strong directional sense of where your money will be most effective. We’ve also written a book on ROI – download The Big Book of ROI.
However, relying solely on rules of thumb, like share of voice, can lead to inefficient spending. Accurate ROI measurement is essential to ensure your budget delivers efficient media deployment and the best possible returns.
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Recognise the Commitment Required
Optimisation is a complex process that often raises more questions than it answers. Handing the task to consultants without fully understanding the underlying issues can leave you with a plan that’s labelled as ‘optimum’ but is difficult to implement in practice. There really is no shortcut to budget setting, so we highly recommend that you invest the necessary time and effort to define the problem and its parameters thoroughly.
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Define the Trade-offs
Optimisation invariably creates winners and losers. For example, reallocating budget from one market to another will likely cause friction. It’s crucial to clarify which trade-offs are acceptable and which are not before you start the process.
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Let Reality Guide You
While mathematical models provide valuable insights, real-world constraints often complicate execution. For example, tripling your budget on a brand might seem optimal on paper, but in practice, it could lead to excessive spending on media ratings, which could drive up costs and distort your calculations.
Additionally, budgets are rarely smooth. For instance, reducing your TV budget by 25% might not translate neatly into fewer campaigns. So, instead of the two campaigns a year you currently run, you do… what? One and a half? Which one do you halve? Or do you do a heavier deployment of a single campaign? But maybe that is too heavy for a single campaign. Only a weekly optimisation will tell you the answer to this.
Understanding these practical limitations is key to making your budget work in the real world.
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Involve Stakeholders Early
Budget optimisation isn’t just about numbers; it’s about people. Building consensus is critical, whether it’s convincing the sales director to cut back on spending or reassuring brand managers that their budget adjustments won’t harm their brands. Sometimes, compromising on a smaller budget cut now and measuring its impact can be more effective than enforcing a larger cut that faces strong resistance.
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Implement Gradually
Optimisation is a journey, not a sprint. Jumping straight to an ‘optimum’ allocation in one step can be risky, especially when the outcomes are polarised. We recommend taking a phased approach, optimising within brand first. Start with media only. Moving money between ad campaigns within the same brand. Then maybe within brand group – brands that sit within the same Marketing Manager’s remit. It’s key to identify who is making the decisions here.
Each small win builds confidence and makes the process smoother.
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Remember: People Make the Final Decision
Ultimately, models don’t make decisions—people do. It’s easy to either blindly follow a model or completely dismiss it, but the best results come from engaging with it thoughtfully. Understand why it suggests certain actions, consider potential risks and proceed with caution.
Have a read of our short ebook ‘A Guide to Setting your Marketing Budget’ to help you think through your budget setting and how an econometric model could help you accurately allocate your money.
If you’re ready to optimise your marketing budget or simply want to discuss your budgeting challenges, we’re here to help. Contact us, and let’s start making your budget work smarter, not harder.
Tom Lloyd
