Tuesday, March 10, 2009

How do You Know if it's Time to Spend MORE?

In times like these, budgeting and resource allocation decisions tend to get made fast and furious, with little time for clear thinking. Unfortunately, it’s exactly these times when some real discipline is required to both make smart decisions and build credibility with the rest of the senior management team. So if you’re thinking about recommending that your firm should be spending MORE on marketing right now, STOP.

If you’re thinking “let’s spend more now to gain share”…

Good luck. 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 simply squandered more by throwing money into an economic hurricane. The fact is that there’s not much empirical data to prove the merits of this strategy beyond a reasonable doubt. Many “studies” have been done, but none have derived their conclusions from projectable samples which account for the primary risk factors, nor have any led to any high-probability “formula” for succeeding with this strategy. The margin of error between success and failure tends to be very narrow. It’s a roll of the dice against pretty long odds.

If you’re thinking “we’ve got to keep up our spend to maintain our share of voice”…

Be careful. Matching competitive levels of spend (or making decisions on the basis of “share of voice”) is most often seen by CEOs and CFOs as foolish logic. 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, relying on anecdotal evidence won’t help. It 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 credibility for years to come.

When times get tough, buyers re-evaluate the value propositions of what they buy. They make tradeoffs on the basis of what is or isn’t “necessary” any more. Shouting louder (or in more places) is unlikely to break through newly-erected austerity walls.

To make a sound case for spending more, tune into what the CEO is looking for… leverage. They want to find places to squeeze more profitability out of the business. To help, focus your thinking around:

  • the relative strength of your value proposition, channel power, and response efficiencies versus your competitors.
  • your assumptions about customer profitability and prospect switchability as buyers cut back.
  • your price elasticity to find out where the traditional patterns may collapse or where opportunities may emerge.
  • the relevance, clarity, and distinctiveness of your message strategy, and your ability to defend it from copycat claims.

And make sure to check with finance to see if the company’s balance sheet is strong enough to handle higher levels of risk exposure during revenue-stressed periods. If it’s not, the whole question of spending more is moot.

If your comparative strengths seem to offer an opportunity, then increasing spend may just be a smart idea. But even so you have to anticipate that competitors aren’t just going to let you walk away with their customers or their revenues. And that may just leave you both with higher costs in times of lower sales. In technical parlance, this is known as a “career-limiting outcome”.

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