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How Do You Know if it's Time to Spend MORE?
 By Pat Lapointe, Marketing NPV LLC

As the economy begins to recover, CMO thoughts turn to the prospect of spending increases and the prospect of topline growth. For some, leaping ahead aggressively is exactly the right thing to do. But headline-grabbing stories of marketing heroes who have taken this approach tend to emphasize the few who have succeeded, and gloss over the vast majority who have squandered not just money, but personal credibility by jumping headlong into a hurricane of economic uncertainty. The margin of error between success and failure in such times tends to be very narrow. It can be a roll of the dice against pretty long odds.

As if that wasn’t reason enough to be cautious, CFOs, fresh off their cash crunch nightmares, are reluctant to open the spigot without a clearer vision of ROI than ever before. The standards for risk-adjusted payback have gotten much higher in the past year.

The quickest way to lose credibility is to suggest that you need to raise your spending level to match the competitors to maintain some equilibrium in “share of voice.” Most CEOs and CFOs see this as foolish logic. For example, how do you know the competitor isn’t making an irrational decision? What do you know about the effectiveness of your spending versus theirs? How much ground would you lose if they outspent you by a substantial amount? If you don’t have specific answers to these questions, anecdotal evidence won’t help. Relying on fear and doubt may get you the spend levels you’re requesting in the near term, but if it doesn’t work out, the memory of your recommendations will undermine your career progression for years to come.

To make smarter budgeting decisions and build credibility with the rest of the senior management team, you’ll need a sound framework to set a strong foundation for your recommendation.

Same or Different?
If you’ve used marketing mix models (regression analytics) in the past, you may be thinking that the very same tools are the best predictor of the expected return from various spend levels. Perhaps. But for that to be true, you have to pass a simple test…

For each of the following questions, answer “same” or “different:”

• Are the buying patterns in your category largely the same as they have been over the past few years, or are there different dynamics taking shape which seem to influence who buys what, and how much of it?
• Are the competitors in the marketplace the same or different, and are they taking the same familiar competitive postures and positions, or are they acting differently than before?
• Is your marketing mix for the coming period the same, or are you introducing a different set of tactics?
• Is the relative strength of your marketing message execution (compared to competitors) about the same, or is it different?
If you answered “same” to all four questions, then chances are, your mix model will guide you correctly toward the right spend levels. However, if you answered “different” to any one of those questions, the analytical tools that served you well in the past may not be up to the challenge of properly forecasting the right spend levels for the future. In fact, they may actually be misleading you, delivering a “precisely wrong” direction.

And if you can’t answer the questions because you don’t have a mix model, then clearly, you too need a better approach.

A Better Framework for Spending Decisions
To build a stronger foundation for the “right” spending levels, look first at the marketplace. In turbulent economic times, buyers re-evaluate the value propositions of what they buy. They make tradeoffs on the basis of what is or isn’t “necessary” anymore. Shouting louder (or in more places) is unlikely to break through newly-erected austerity walls. What do you know about how the buying environment has changed, and how does your spending plan seek to capitalize on it?

Second, tune into what the CEO is looking for… leverage. They want to find places where the return on investment is potentially large and realized quickly, to generate more free cash flow to fund accelerated growth.

To help, focus your thinking on these key variables:
Value Proposition - What is the relative strength of your product/service value proposition versus your competitors? If you believe (or better yet, KNOW through customer research) that you have a relative and meaningful value advantage which can be furthered by increased marketing spending, then spending more might be the right thing to do.
Message Strength - How strong is the relevance, clarity, and distinctiveness of your message, and can you defend it from copycat claims?
• Marketing Response Elasticity - Is your category going to be responsive to more marketing spending, or does it require additional or different types of stimulus (e.g. more direct selling) to shift the status quo? If you’re not sure, then it’s best to experiment on a smaller scale with higher spending levels before you jump off the cliff.
Customer Switchability - What do you know about customer profitability and prospect switchability? Are profitable prospective customers more likely to jump to you now, or are you more likely to attract cherry-pickers who will bleed your margins? Can you tell the difference between the two? What is your current share-of-customer? If it’s high, you may not have much upside amongst your loyal base. That would cause you to bet on the ability to steal customers from competitors, or attract new customers to the category. How easy are these prospective converts to identify? How willing are they to switch? The barriers to attraction generally get higher and more costly to overcome as you further penetrate the market. The incremental lift per dollar spent may be lower than your historical averages.
Competitive Reflex - Are you the dominant market share leader? If so, the marginal cost of each additional share point may be much greater, assuming you can wrest it away from another established player. Alternatively, if you are a minor player trying to steal share from giant competitors, be sure you have a clear vision of what the true cost may be when they react (which they usually do). No business will sit back and watch their customers stolen away – especially the profitable ones. Plan for their reactions. You don’t want to get caught with all your cash on the table if they haven’t played their first card yet.
Operational Readiness – Are you operationally ready to serve the new business you hope to attract? Is your supply chain in order? Do you have the right resources properly trained to provide the necessary level of customer experience to realize the potential value you went after? If you thought the cost of acquiring them was high, just wait until you pay to re-acquire the ones you couldn’t serve well.

And finally, if you score yourself high on all of the above dimensions, don’t forget to check…

Balance Sheet Strength – Does the company have the cash resources to fund an aggressive escalation in spend? Would further marketing spending increase the company’s overall risk exposure beyond a reasonable point? If the marketing effort failed, would it seriously harm the company’s financial viability? If you don’t know, find out BEFORE you recommend spending more. You don’t want to have the executive committee tell you that your spending proposal is well conceived, but poorly timed. In technical parlance, this is known as a “career-limiting outcome.”
Of course, even if all of the above considerations suggest the time for more spending is NOW, this framework doesn’t take into account the possibility that the company may actually have more attractive options for investments. Economic resurgence means new plants and capacity are needed to serve anticipated demand. Pent-up desire for improved information systems gets re-considered. And, generally every manager who cut their budget during the downturn is seeking to gain some of it back.

But if you follow this framework to build your business case, chances are your proposal will win on the strength of your comprehensive, credible analysis.

---Source: MarketingNPV Journal Jan. 2010 (www.marketingnpv.com).
 

Melissa Data


 
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