We’ve noted before that annual planning is dead and outlined the need for more agile, flexible budgets. Although many marketers recognize that rigid, Jan-1-to-Dec-31 budget models are too confining, many companies still focus on annual budgets — especially in companies where marketing departments are seen as cost centers — and each year, CMOs argue for larger budgets.
Marketing Budgets Are Still In the Past
Despite the shift away from yearly budgets (and towards flexibility) for marketing spend, one thing stays the same: traditions about the total size of a marketing budget. The old rule of budgeting a range of 10 to 20 percent of last year’s total sales still stands; the former if you’re feeling conservative, the latter if your goal is to be more aggressive.
This tradition is still clinging to life; even with the modern, predictive nature of budgeting, many tactics for determining how much money to put into marketing campaigns may be reactionary to recent sales and marketing ROI. It’s understandable — past sales are the most concrete barometer of how your company has been doing and how much revenue you can reasonably expect to capture in the year to come.
The problem is that this method is rather arbitrary, especially in light of the improving landscape of analytical forecasting tools that make predicting future sales figures less reliant on guessing. The ability to forecast not only total sales but revenue streams broken down categorically is both effective and not cost-prohibitive for large companies.
This Puts Marketers In a Lose-Lose Situation
CMOs are now facing a no-win paradox: annual planning doesn’t afford the agility to adapt as the marketplace changes; yearly budgets are determined by the previous years sales, limiting current options based on past (positive or poor) performance.
Given these constraints, CMOs now have to think about budgets in both the short (be it a quarter or a month) and long-term — and you have to pay for it with a percentage of last year’s sales, regardless of increases in this year’s Q1, Q2, or Q3 sales figures.
Marketing budgets connected to 10 or 20 percent of last year’s total sales are confining because they only allow you to spend for the sales you have had in the past...
...But It’s Smarter To Spend for the Sales You Want
Marketing budgets shouldn’t be based on an arbitrary number that is a year old (or more). The main goal for all marketing departments is to impact the company’s bottom line: sales attribution, path to purchase, and analyzing marketing ROI help determine which marketing tactics are leading to (cost-effective) sales and which ones aren’t. Many companies focus so much on sales that they forget marketing’s main goal: increasing sales.
Instead, marketing spend should be based on an attainable, solid goal; forecasting future sales is a better way to determine marketing spend than analyzing past sales. Using predictive modeling, CMOs can determine how to forecast sales by how much marketing spend is necessary to reach a sales goal.
Forecasting sales keeps the company’s bottom line as the main target — rather than figuring out how many sales you can manage with your marketing budget of 10 to 20%, ask how many sales you need each quarter, and use that number to determine your marketing budget.
Forecast Accurately and Often
Your marketing spend is more useful once you’ve projected budget based on goals rather than random factors like a percentage of the previous year’s sales. Keeping the end goal in mind can help you spend smarter, knowing that you have the data to keep you aware of how your budget is working and the agility to change the allocation to certain channels on short notice.