Marketing budgets are currently “completely fucked”, according to Marketing Week columnist and Mini MBA founder Mark Ritson. With marketers coming into a tricky budget setting season amid a period of economic turmoil and a looming recession, that’s no insignificant problem.
Speaking at Marketing Week’s Festival of Marketing today (6 October), Ritson said: “For all the talk of ESOV [excess share of voice], MMM [marketing mix modelling] and econometrics, everyone’s budget is a bag of piss. We’ve failed. And the more we try to fix it, the more it’s failed.”
However, Ritson believes he might have a formula to help marketers better set and use their budgets to grow their businesses, inspired by the technique for cooking triple cooked chips.
“Chefs despaired for many years at the way people made chips. Everyone was making them badly. So they came up with a foolproof technique, a three-step technique, that always produces perfect chips,” he said.
Boil the potatoes, pan fry them, deep fry them. “What could go wrong?,” Ritson asked.
“It doesn’t matter how long you fry them for, it works, and it makes amazing chips. So maybe we could do something similar with budgeting. Just fuck all the complexity off and do it in a better, more simple way.”
Here’s Ritson’s three-step approach to marketing budgets:
Step 1: Aim for 10% of turnover
Before anything else, marketers need to work out how much money they need to drive growth and get the best competitive advantage in the market, Ritson said.
To do this, he suggested marketers turn to a rule of thumb proposed by econometrician and founder of Magic Numbers and fellow Marketing Week columnist, Grace Kite, who analysed three separate reputable sources to determine how budgets should adjust to the size of a business if the objective is to maximise return on investment (ROI).
“I found something incredibly helpful,” Kite wrote in a Marketing Week column earlier this week.
“That is, across three very reputable sources, the conclusion was very consistent. A good rule of thumb is to spend between 5% and 10% of turnover on advertising for the highest return on investment.”Three data-led pointers for marketers during budget season
According to Kite, this was true in the ARC database, a joint initiative between the IPA and magic numbers to bring hundreds of econometrics findings from six econometrics shops together, as well as a range of budget optimisations done by Accelero founder Paul Dyson, and Nielsen’s 2022 ROI study.
Ritson suggested marketers aim for 10% of their business’s turnover, to get the “maximum efficiencies and effect” and, most likely, a competitive advantage.
“That’s step one,” he said.
Step 2: Optimise the long and short of it
The next step for marketers is to work out how much of their budget needs to be spent on long-term brand building, and how much needs to be spent on short-term performance/activation. Crucially, marketers need to spend on both to drive sustainable growth, Ritson said.
“The most important word in ‘The Long and the Short of it’ is ‘and’. You need them both. Brand sets up the sale, activation/performance closes the sale. If you have the above in the right proportions, you will win,” he explained.Ritson: Can you achieve long and short at the same time? Usually, no
Research by effectiveness experts Peter Field and Les Binet famously suggests the optimal budget mix for the average B2C brand is 62% spent on brand, 38% on activation. For B2B the weighting shifts to 46% brand, 54% activation.
However, according to Field and Binet’s research, the optimum budget mix also changes across categories. For financial services, for example, it should be 80% brand, 20% sales, as customers tend only to be in market to change their financial service providers once every five years.
In retail, the optimum budget mix is 64% brand, 36% activation, while in FMCG it’s 60% brand, 40% activation.
“Most of you will probably be thinking, I’m nowhere near that number,” Ritson said. “The data is clear. If you were to spend this kind of money on brand, you would make more money, but you’re not doing it. It’s an astonishing failure.”
The data is clear. If you were to spend this kind of money on brand, you would make more money, but you’re not doing it. It’s an astonishing failure.
So why don’t companies adequately invest in their brands? According to Ritson, the main reason is businesses and marketers are “trapped” in a 12-month cycle of delivering short-term results.
“You will get better ROI by dumping all of your money into performance marketing,” he said.
“[But] the long term is not simply the adding up of short-term ROI, and a great ironic move is costing our companies billions of dollars in lost revenue.”‘Marketers need to get real’: Addressing the significance of ROI
Category is only one of many vectors that change the optimum long and short spend, and marketers must get their heads around what their business requires, he added.
“You don’t need econometrics to work out the optimal amount. Pete and Les’s work is pretty empirical. Find your category, the age of your brand, how much is online, how much is offline? It’s going to give you a percent. Aim for that percent from the 10% [of turnover],” he said. “It’s got to be the same for 10 years to properly work.”
Step 3: Measure success correctly
The final step in Ritson’s “triple cooked” marketing budget technique is to measure the outcome of those long and short pots differently.
Last month, Marketing Week’s exclusive Language of Effectiveness Survey revealed more than a third (36.9%) of the 1,610 brand-side marketers surveyed say the tracking of ROI has increased in emphasis in recent months.
Almost half of marketers (48.4%) say ROI is the most important metric for their CEO, CFO and board members, and just over a quarter (28.4%) of marketers say they always measure the return on investment of their campaigns when conducting effectiveness analysis.
While ROI is “absolutely” the correct way to measure short-term performance marketing, marketers need to stop trying to measure the ROI of long-term brand spend, Ritson said.
“Let’s stop measuring the long of it and brand building with stupidly complex, just ridiculous dollar estimates,” he said.
“Just because you can’t show it, doesn’t mean it isn’t doing it. But these fictional calculations aren’t helping us convince the CFO – it just looks shonky. Trust the percentage of the top revenue figure and build your brand. Measure brand building efforts with branding metrics.
“The short-term performance stuff, total ROI. That’s absolutely appropriate. Just don’t get caught in the middle of it.”