How to measure, allocate and invest marketing spend more effectively using zero-based productivity.
Marketing is critical to growth and consumer engagement, and its costs can account for more than 10 percent of revenues in many consumer-facing businesses. Yet few companies have fundamentally changed how they measure and assess marketing’s impact—often resulting in budgets and programmes that are close cousins of years past. This apparent paradox derives from a time when the bulk of the marketing budget was concentrated in above-the-line channels such as TV and radio, which are characterised by more limited measurability of outcomes than are typical of below-the-line activities such as search-engine marketing. And, since most companies build budgets based on the previous year’s spending levels, it has taken a long time for deep discussions of marketing ROI to reach the boardroom and become an executive-level priority.
In recent years, the proliferation of technologies that can process massive data sets, combined with the growth of digital advertising channels—which are inherently more measurable—has unlocked a massive opportunity to measure the performance of marketing investments. Even though analytical tools have become more widely available, our experience suggests that few companies apply the same level of scrutiny to overall spending in marketing categories.
To gain a more detailed view of marketing and sales expenditures, organisations must overcome several barriers. First, marketing budgets are often separate for each business unit and country, which limits visibility and comparisons. Second, the multitude of spending categories can make it difficult to identify the highest-value opportunities. Last, companies tend to use media agencies to manage, or at least intermediate, a significant share of their marketing spending.
These very obstacles, however, also make marketing and sales spending categories especially ripe for cost savings. Zero-based marketing—a comprehensive approach that extends zero-based budgeting principles to marketing categories across the enterprise—can uncover opportunities for savings worth 10 to 25 percent of spending in certain categories, and these funds can be reallocated to higher-value areas. In fact, with the rare exception of industries that are in a global state of decline, a well-executed reinvestment in high-ROI opportunities will deliver a greater return than “banking the savings” will.
Taking a Zero-based approach to marketing requires commercial leaders to pause and ask five critical questions.
1. Based on bottom-up analyses, what are realistic but ambitious targets for our company?
Companies need clarity about the fundamental drivers of their value creation, but often the drivers are not consistently understood or thoroughly applied when the strategy is developed. Business value is created by improving return on invested capital or top-line growth (for example, increased market share, positive market momentum, or a combination of both). Hence it is crucial to set targets that are consistent with the life stage of each area of the business in relation to consumer demand and preferences. These targets need to be defined through bottom-up analysis of revenue pools and growth drivers.
Zero-based marketing establishes the lines of communication across business units and functions as well as the cadence for growth discussions. These efforts help to avoid underfunding areas with limited potential and instead free up resources to invest in high-ROI opportunities that might be overlooked or left with the crumbs after the demands of historically larger business areas have been satisfied.
2. How do we understand what is driving marketing costs?
The many marketing spending categories that exist are driven by different factors. To thoughtfully reduce, reallocate, or increase marketing spending across various categories, it is essential to establish a baseline where every dollar can be linked to a driver (or set of drivers) that determines why that money is being spent.
For instance, we can separate media spending into two categories: working and nonworking. The former is shaped by the reach, frequency, and quality of the advertisement the company deploys to communicate with customers; the latter is determined by the amount of creative, production, and research activity performed to create assets such as a TV ad, and it is not directly driven by how many customers will see or react to the asset. Therefore, the logic by which each of these media spending categories will be assessed is very different. In most cases, this approach would go one or two levels deeper to identify much more granular factors.
3. How can the organisation establish the right conversations to identify opportunities?
Marketing leaders have to work very closely with finance and other functions on resource allocation decisions. As mentioned before, marketing teams should set clear targets for growth and market share based on value-creation potential.
Then, rather than trying to understand the absolute spending on TV campaigns, for example, teams should compare saturation levels and gross rating points (GRPs) per message to find opportunities. Instead of oversaturating a target group, funds could be redirected to a campaign highlighting new products or brands. Similarly, in digital channels such as social media, data should be presented to quantify the impact on awareness, consideration, and conversion, not just presence or share of voice. In this way, the discussions become more structured and fact-based, allowing changes in direction to be clearly supported and communicated—while also aligning marketing spending more tightly with strategic priorities.
4. How can an organisation reallocate funds among the different cost types to ensure it is maximizing ROI?
Commercial leaders very often have all the data they need to assess the relative productivity of various spending categories and their coherence with consumer needs and competitors’ positioning. Zero-based marketing compels managers to rely on factual information to achieve consensus. With data-driven insights, generic statements such as “We should spend more in digital” or “We should continue to invest most of our money in Brand A because it’s our power brand” either become more meaningful or are exposed as myths.
Companies can then make better spending decisions—for example, by allocating less to above-the-line campaigns and more to personalized communications through digital channels or customer-relationship-management (CRM) campaigns. In some situations, the ROI from a secondary in-store display might be
greater than that of a price promotion. Such information provides commercial leaders with the tools to shift their spending.
5. What is the best way to track funds freed up in other areas to enable growth?
A zero-based approach establishes a consistent terminology for spending and investment, making ROI and budget discipline the common ground for decision making. More important than the tools and methodology used, however, is personal commitment on the part of marketing leaders. In all zero-based marketing efforts, commercial executives must provide marketing managers with full ownership of their respective cost areas, along with targets to achieve in the form of ROI, and where relevant, savings and reinvestment. Establishing a governance mechanism to track progress of these owners against their commitments is a fundamental step to ensuring that growth targets are met as a result of the adoption of zero-based marketing.
A zero-based future
It has never been easier for companies to reassess their level of marketing spending, where funds are allocated, and ROI by category. From greater access to data to media agencies with in-house capabilities to measure the performance of marketing activities, companies have a range of tools and support at their disposal. All that remains is for marketing executives to use those tools to embrace a more analytical, granular approach to spending decisions.
*The author would like to thank Jeff Jacobs, Roberto Longo and Mita Sen from McKinsey & Company for their contributions to this article