Marketing Budgets – A Big Business Fantasy

It happened a few years ago . . .

The inspiration for this article comes from what happened to me a number of years ago when I was consulting to a major financial institution.

My assignment was to help a new division assemble a marketing team and materials. Naturally, one of my first questions was, “What is your marketing budget?” They responded with a six-digit figure; I believe it was $163,000. I then asked the next logical question, “How did you arrive at this figure, and what does it include?”

I received what I discovered later to be a common answer. It went something like this:

“Well, we looked at our major competitor (also a bank) and they have allocated $215,000 for marketing basically the same service. Since they’re 35% bigger than we are, we multiplied their budget by 65% and came up with $139,750. Since we knew we’d have some start-up costs, we added $27,950 to cover those. That’s it.”

The Budget Process, repeated many, many times, with variations!

Yes, this “system” became familiar to me as I saw it put into place over and over again. Some of the more ambitious (or should I say aggressive) rising stars in the corporate world sometimes took off an extra ten percent because “we’re better sales people.” (They wanted to look good for management.)

“What were they smoking?” you ask. I have no explanation except perhaps they were rolling their own banana peels (that’s for Beatles fans everywhere).

Now before you declare this situation ludicrous (which it is) and the people behind the budget calculation hallucinatory (which might have some truth to it), be aware that this kind of logic is employed in big companies all over the world.

Budgets are allocated on an annual basis and the department heads have to come up with some figure. If they under-estimate their needs, having to go back to the well is distasteful. If they over-estimate, well, they may turn to folks like us and ask us to pre-bill projects to keep that department from losing that budgeted money.

This kind of thinking can really confuse the situation, but it’s a reality in the world of corporate America. Be aware of it so you don’t let your amazement show!

Marketing budgets should really be developed this way:

  • Determine (or estimate) the Lifetime Customer Value (annual revenue x number of months or years for the average relationship)
  • Determine how much the client is willing to pay to acquire a new customer (the Allowable Cost of Acquisition)
  • Determine how much the client is willing to pay to retain a customer

Then, with these numbers in hand, determine how many customers the client wants to book (or can “handle” on a weekly or monthly basis), understanding that there is always an investment associated with booking and maintaining business and that overbooking is not desirable.

This is a realistic way to budget. Unfortunately, very few businesses operate this way.

What stories about budgeting can you share?  We’d love to hear ’em.

Joseph Krueger
The Marketing Machine®


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