A couple of weeks ago, McKinsey came out with the results of their study on “Measuring Marketing”.  In one of their questions they asked whether companies planned to change their marketing budget in the next 12 months.  The results are displayed below.

While the overall picture is negative, I was surprised by the spread of these answers.  45% of the companies were planning on reducing their budgets, 27% had no changes planned, 20% of companies were planning on increasing their budget and 9% didn’t know.  What is driving these widely different investment strategies?  I would like to think that they are the result of thorough analysis and deep understanding of what the effect is of different marketing investment levels on business performance.  However, something tells me this is probably not the case. 

The truth is that very few companies understand the business impact of spending more or less on marketing.  When it comes to setting the marketing budget, most of them use very arcane and rudimentary methods to make multi-million dollar investment decisions.  Below is an overview of some of the most popular methods.  It’s a long list but it’s by no means exhaustive (if you know of any other articles please post them below).  I do think it captures most of the methods companies use today.

1979 – Harry’s Rules

Exactly 30 years ago Harry Henry published an article in the Cranfield Broadsheet that described 15 approaches to determine how much to spend on advertising.  They are :

1.      Intuitive / rule of thumb – “enough to do the job” based on experience

2.      Maintaining previous spend, sometimes inflation adjusted

3.      Percent of previous sales – backward looking, compounds failure (or rewards success)

4.      “Affordable” – what’s left after cost and profit requirements are met

5.      Residue of last years profits – focuses on source of funds, not their use

6.      Percent of gross margin – begs question of cost efficiency

7.      Percent of forecast sales – most common method used

8.      Fixed cost per unit of sales – like % of turnover

9.      Cost per customer/capita – mostly business to business

10. Match competitors – assumes they are right

11. Match share of voice to brand share – like the above

12. Marginal return – direct response approach

13. Task approach : define objectives and cost out how to reach them – best in theory but may require modeling

14. Modeling – the most sophisticated approach: not easy

15. Media weight tests – looks empirical but usually difficult to evaluate or replicate.

Ten years later, Simon Broadbent included a very similar list in his book The Advertising Budget (1989). 

2003 – Harry’s Rules Revisited

In 2003 Gullen wrote an article in Admap where he introduced 5 steps to effective budget setting.  He categorized the budget setting approaches in 5 independent schemes or “budget bearings” as he calls them :

1.      Inertia bearings based on usual practices (ie last year’s budget maybe adjusted for inflation)

2.      Business bearings based on sensible ratios within the business plan (eg affordability, advertising to sales/volume/margin ratios)

3.      Media bearings based on the cost of fulfilling a sensible media plan (eg. Cost of media plan to achieve goals)

4.      Competitive bearings based on the spend of competitors (eg match share of voice to share of market)

5.      Dynamic bearings based on the observations of apparent effects of previous advertising activity (eg. in market tests, econometric modeling)

2004 – Harry’s Rules Revisited again

In 2004 Dyson wrote another Admap article on “How to budget better”.  He outlined 7 categories of methods :

1.      percentage of sales : the ad budget is a proportion of last year’s actual sales, or next year’s forecast sales

2.      objective and task : objectives are set (turnover, profit, growth) and the budget required to meet these objectives is estimated

3.      competitor : the amount spent by competitors is used as a yardstick; a version of this is the well-known rule of thumb that share of voice should be at least equal to share of market

4.      affordability : the budget is the amount left after everything else has been accounted for

5.      historical : do the same as last year, with an adjustment for inflation

6.      executive judgment : basically guesswork, but probably an informal use of one or more of the above.

7.      brand led : a more scientific approach that uses research data and econometric modeling.

2006 – Harry’s Rules Revisited one more time

Finally in 2006 Green published an article on “How much should I spend on advertising?” on WARC.  He said that there are roughly 2 categories:

1.      Task based approaches that start with the financial goals of the brand (eg rules 1-11 in Harry’s list).

2.      Resource based approaches that start with what resources are available or assume that what a company has been doing in the past will work in the future brand (eg rules 12 and 13).

As you can see, the methods for setting the marketing budget haven’t really changed in the last 30 years.  Dyson quotes research that shows that “advertising as a percentage of sales” is by far the most popular methodology (53% of companies seem to use this approach).  That is scary!  But it confirms my personal experience.  Scientific methods, some of which have been around for a long time and are tried and tested, often seem to play only a very small part in the budget setting process.  Marketers tend to stick to the methods they know, even if they know they might be over-simplistic or even wrong.  

Will the current recession force them to adopt more scientific methods?  I think it will.  It has put the spotlight on the marketing budget and there is no place to hide.  But over the last 30 years marketers have created some bad habits that might prove to be hard to break.