Charting the Budget Course

Itamp8217s a question that lays bare a number of agency shortcomingsFirst the lack of a relationship between the agency and the clientamp8217s Finance Director which is where the majority of any budget decision sitsSecondly the narrowness of the agencyamp8217s expertise focused as it must be on the issue of how different channels work on consumersBack in the last century Carat produced something called The Carat Sphere Guide subtitled The Way We Work This contained details on Caratamp8217s tools and how to access and use themAegis Caratamp8217s parent at the time was led by marketers amp8211 the Guide was their attempt to move the agency towards becoming a highend highfee consultancyOne of Caratamp8217s tools was called amp8216Budget Bearingsamp8217 created by Carat UKamp8217s resident genius Phil Gullen The idea was to gather as many pieces of information relevant to the task of budget setting as possible and plot them within the tool The more information or points of reference the better The more bearings you took the more accurate your plotting of your positionBudget Bearings relied primarily on output measures calculated from available dataIt was a brilliant idea from a time when marketing and within that advertising was seen as a shortterm cost with few if any longterm business success metrics attached to itWhen cuts had to be made marketing was disposableThings have moved on Slowly and unevenly but changes are afootThe analyst Ian Whittaker makes the point that big companies in their earnings statements and calls with analysts are increasingly saying amp8216we believe in the ability of brands to build business to grow revenue and profitamp8217In other words building brands through marketing and advertising is an investment not a costThis shift from cost to investment should be reflected in the way budgets are setFocusing on what others are doing or setting budgets around a task like achieving a certain level of reach is no longer good enoughWhen paid for and measured media forms are taking a smaller and smaller share of the cake basing any financial recommendation around concepts the industry either does not measure or canamp8217t define makes no senseTo persuade the FD we need to learn FDspeak and to be precise and consistent FDs are unaware of the metrics used within planning and buying Theyamp8217re a currency nothing to do with businessWe buy audiences because of the correlation between how many people see and notice the advertising and financial resultsBut the numbers are neither reliable nor accurate We canamp8217t even agree amongst ourselvesWe should use modelling taking in all communication channels Marketing budgets are larger than ad budgets and there is an upside in modelling effectMy Crater Lake colleague and CoFounder of the analytics business NavigationME David Beaton makes the point that in over 20 years building brand models most underspend against their market opportunityDavid believes this is because of a lack of reliable accurate consistent tools not only to measure this underspend but also to predict and optimize the effect of any increasesMany econometric and market mix models limit themselves to attempting to explain paidfor as opposed to all communication formsPlus most only look backwards using limited inputs Most donamp8217t consider consumer research data as if how consumers think has no impact on what they eventually doDavidamp8217s advice to anyone considering modelling to justify budgets isBuild models that cover a holistic list of factors that drive or suppress sales Not only paid media but also earned and owned and baseline factors important to the category and brandInsist that any statistical model can demonstrate accuracy Aim to explain over 90 of variation in sales over the last three years This will help persuade the CEO and FD and reduce the risk of misattribution and poor outcomesThe model must be able to use optimization and simulation to estimate the gains to be had from budget increases These models typically yield a diminishing return curve as spend increases incremental sales lift fallsamp160 At some point any further spend increase yields no sales increase at all this is where marginal benefit equals marginal costamp160 Given the current situation this is the maximum level of sales that marketing communications can driveThis is not the same as amp8220maximizing marketing ROIamp8221 In optimized campaigns marketing ROI falls as spend increases so amp8220maximum ROIamp8221 happens at low spend levels chasing marketing ROI leads to undesirable cuts in budgetCombine both prediction and optimization at different spend levels since as spend increases the channel mix should change as different channels have different effect curvesTest alternatives Work your way up the spend curve over time controlling for both your own spend risk and factoring in likely competitor reactionAgencies and their holding companies like to believe they can do anything related to commsBut this isnamp8217t true when it comes to building complex modelsAn advertisingcentric group will always see advertising as the solution to any question If you call in a plumber heamp8217ll find you a leakThey cannot be considered unbiased Agencies arenamp8217t keen on models that demonstrate that their recommended channel mix failed to deliver a desired outcomeModelling is a specialist area Just as ad creation is best done by creatives so modelling budget scenarios needs specialistsWhen all anyone had was output data the agency could plot the positionNow we have storms choppy seas and an underequipped boat Itamp8217s not the weather to be out with amateursThis piece was originally published in the UK39S 39The Media Leaders39 on February 20 2024Posted at MediaVillage through the Thought Leadership selfpublishing platformClick the social buttons to share this story with colleagues and friendsThe opinions expressed here are the author39s views and do not necessarily represent the views of MediaVillageorgMyersBizNet

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