The annual budget setting exercise is a rite of passage for every marketer once they become responsible for a budget, in most companies.
While they vary in practice, most have a common structure: Marketing works up a budget based on historic performance plus a wish list of projects they want to fund for the coming year. For some companies, there are many marketing teams doing this workup. It will be up to the CMO to consolidate these and negotiate with the CFO and CEO for approval.
At the C suite level marketing’s plans and projections are important, but so are budget requirements from other teams across the enterprise. Now the competition begins; who gets funded, who comes up short.
All of this is based on what is known at the time budget decisions are set. For many companies, once the budget is set, it is set like hard concrete. Woe be the manager who misses target or who is at risk to over-spend due to factors that could not have been known at the time the budget concrete was poured. Media inflation, unexpected increases in costs, supply shocks in the value chain, they all have the potential to disrupt the best laid plans.
As the year unfolds, the concrete can create more problems:
- If a new opportunity arises, and it inevitably does, marketing is forced to cut budgets where it does not want to in order to fund the new. Why cut something that continues to look like it contributes to profitable growth?
- Imagine that some of the things being tested in the previous year are returning much better results than status quo. They should be rolled out, but can they be without cutting other productive projects?
- Sometimes the market trends so favourably that a bright future is there for the taking….if marketing has the budget to exploit it. If they don’t, the favourable tail winds may do more for competitors.
- Predictive models, if sufficiently accurate and reliable, can show upside opportunities from those budgeted. Are you able to take advantage?
Think of a fixed budget as a barrier to opportunity:
As budget rises, marginal revenue should as well, but on a diminishing curve. For businesses with relatively fixed marginal costs, there will come a point where marginal costs exceed marginal revenue; this point represents the maximum contribution marketing can make to sales over this period.
But a fixed budget typically, in our experience, falls well short of this, leaving the brand/company with a lost profit opportunity, shown here as the grey area on the graph.
What can be done?
Consider building some agility into the budget process instead. Instead of targets and budgets set in concrete for a year, there is the recognition that things change (for better or worse) and so should the budget.
Agile budgeting can incorporate contingency funding, flex targets, outcome-based opportunity funding, or rolling budgets over shorter time horizons. Each has its strengths and weaknesses. But before they are considered, you should decide if your annual budget process is holding you back, and by how much. It might be time to lose that ball and chain.
