Of all the traditional or legacy systems that need changing for the new sales coverage model, the budgeting process is the most important. With- out money, our world doesn’t go around! Since, historically, marketing communications did not assume a truly important role in achieving sales results for B2B companies, the budgets were not only small but also improperly developed. Here are some of the traditional budgeting meth- ods I’ve encountered in the last twenty years. How many of these are all too familiar to you?
• Last year plus or minus some percentage (usually 10 percent).
With no real analysis having been completed, the budget for this year is based on last year, with an adjustment for the company’s overall results:
poor results—a deduction; good results—an increase.
• Set percentage of sales. At some point in history, it was said or dictated that marketing could or should spend a set percentage of the fore- casted sales revenue. In B2B this percentage usually varies between 1 per- cent and 3 percent—a low rate compared with consumer marketing budgets, which can top 30 percent. The rationale is that sales does the real work, so why spend any real money on marketing communications?
• “Gut” budgeting. Usually someone without any experience in marketing but who is in a position of authority just “feels” that the mar- keting budget should not exceed a certain amount. When pressed, this individual defends the dollar decision by stating, “That’s all we can afford.” Of course, the “affording” part is based on the person’s gut feel- ing or insecurity about spending real money on marketing. This, at times, is coupled with the sad fact that if the marketing budget were significant, someone would ask for a justification or, worse yet, a measurement of what was achieved with the dollars. Since advertising and PR are histor- ically impossible to measure, it is best to keep them at low levels so no one will ask.
• Copycat budgeting. The question asked is: “What are the com- petitors spending?” Once this is determined, it is easy to just copy their budget, adjusted for the relative size of the company. The implied hope is that the competitors are smarter, and even if they aren’t, it is a plau- sible defense of the budget amount if asked.
Clearly, there is a need to establish budgets that bear some correlation to achieving results. The good news is that with the direct marketing process now leading the way, there are several new approaches that are far more logical. Here are the three basic inputs to establishing more soundly based budgets:
1. Breakeven analysis.To understand just what is at stake and how much can be spent on a marketing campaign, the first number to establish is breakeven. Simply, it is a calculation of the amount of sales revenue (at gross margin) that must be achieved to pay for the
campaign. First, establish the revenue of an average sale that is at stake.
For example, here’s a recent client situation in which the average sale was worth $100,000 and the gross or contribution margin was 40 percent, or $40,000. Based on this margin, how many sales would it take to pay for the entire cost of the campaign? The campaign was calculated to cost $47,000 including all agency fees. Therefore, the number of sales required to fully liquidate the campaign cost would be slightly more than one. The question then to answer is: Is one
reasonable to achieve? Well, the target comprised 504 hospitals in California, and it was very reasonable to assume that at least one sale would result. Remember that the sales required to reach breakeven is not a goal or objective of the campaign. It’s just an evaluation of the reasonableness of the budget.
2. Allowable cost of acquisition.This common direct marketing calculation is a judgment regarding how many dollars we can afford to acquire the customer. On the cost side, it calculates the cost of not only the campaign but also the lead-qualification effort and the follow-up effort by the sales group. On the revenue side, the calculation also values the customer beyond the initial sale and, while not full lifetime value, usually adds up the yearly potential. The resulting budget then is shared by both marketing and sales, and measurements are taken against this “allowable” cost. In the preceding example, the client had additional revenue for services and a cross-sell opportunity. As a result, the total yearly customer revenue added up to $175,000. At 40 percent gross margin, the margin was $70,000, and the director of sales and marketing felt that the company would support $10,000 to acquire this customer revenue and margin. Now we’re talking some real dollars for an integrated campaign.
3. Expense to revenue, or E/R.The reason for this measurement is that few companies really calculate return on investment. They talk about ROI a lot, but if you ask an accountant to calculate it, the formula becomes too complex for marketing purposes. So, the E/R calculation is a placeholder for ROI. It’s simply the number of dollars spent on the entire campaign as a ration to the number of dollars in revenue generated. Normal ratios in B2B are between 1/10 and 1/20.
Over 1/20, you’re doing extremely well. In the ongoing example, we expected a 10 percent qualified-lead rate, meaning the percentage of
leads that result directly in a sales presentation. Our experience with hospitals was that for every three sales presentations, one close would occur. Here are the numbers:
504 hospitals 10 percent lead rate 50 sale presentations 50 presentations 33 percent conversion 16 sales
16 sales $100,000 in revenue $1,600,000 and $640,000 in margin
Campaign expense of $47,000/$1,600,000 revenue 1/34 E/R Sure looks like a winner to me! That aside, the point of presenting all these budget approaches is to arm you with practical tools so that the budget- ing process will be based more on what’s at stake versus the old and badly outdated systems of establishing the budget.