A New Way To Budget For Marketing In 2016

“I know that half my advertising dollars are wasted, but I don’t know which half”

make your marketing dollars work harderSound familiar?

For decades, companies have tried to make their marketing dollars work harder. They have used concepts such as target marketing, niche marketing and positioning to help build sales by generating leads, reaching decision-makers and even asking for the order. But a problem remains: marketing and sales have never been completely coordinated.

The result is that money is allocated to marketing because everyone knows marketing is necessary. And sales people are told go out and sell because most B2B products and services are sold that way.

This approach has worked in the past, but the changing business climate will continue to force companies to re-evaluate the entire process. To borrow a buzz-phrase, tomorrow’s marketing will have to work − not harder − but smarter.

Instead of basing the marketing budget on projected sales, the sales requirements can be used to establish a zero-based approach

In this way, the actual point when the sale is closed determines what materials and how much should be spent to make the direct selling effort as cost-effective as possible.

Cost Effectiveness of Direct Selling Worksheet

The first step is to determine the total cost for your entire sales force, and then the average cost-per-call and cost-per-sale. (At this stage, do not factor out individual salespeople). The chart to the left will help you calculate this.

The resulting numbers are a measure of your current marketing efficiency, arid will serve as a gauge of the cost-effectiveness of your total future program.

Next, using the chart below, break out your new accounts and those you have had for at least one re-order. Depending upon market factors, you may also want to break out the accounts by region, season, or some other criterion.

Cost Breakdown by Account TypeWhat you are measuring here is the cost-effectiveness of your existing direct-selling effort, looking for the types of accounts which are most profitable and those which are least profitable.
As a general rule, your marketing depends upon the profitability level of each category. Those categories where direct selling is very profitable should have programs designed to support the sales person, helping to either increase the dollar volume per account or lower the average cost-per-sale.

Those categories where the profitability level is low should have programs designed to replace the sales person as much as possible.  This can be accomplished effectively with programs such as automated marketing to lower the cost of pre-qualification inquiry fulfillment.

Once you have determined the coA New Way To Budget For Marketingst-per-sale for each category, you should establish sales objectives. The first is to maximize a sales person’s productivity and to do that requires establishing the prime job function:

  • Developing new business leads
  • Making presentations
  • Maintaining face-to–face contact at existing accounts
  • Trouble-shooting problem accounts

Obviously, some or all of these functions could be present in all categories, but by assigning the sales person a prime function, you are taking the first step in determining:

  1. Better way to budget marketingThe type of program (support vs. replacement) that will result in a lower overall cost-per-sale
  2. The message that each component in the program should carry
  3. The amount to be spent to deliver the message(s)

Given this information, you are now in a position to correlate all your marketing, advertising, promotion and direct selling expenses to sales.

Program effectiveness can now be tracked. And you can begin to consider your marketing spend in terms of its contribution to profits…instead of just cost of sales.

Good Selling!

Are You Investing in the Right Customers?

re You Investing With the Right Customers?You’re funding the activities that support your biggest customers. But do you have a plan that allocates those funds based on other metrics besides just sales volume to determine budgets? Do you have a process other than your instincts or past budgets?

In other words, are you underfunding accounts that – with resources – might be able to grow and contribute to your sales and profitability?

Here’s a customer ranking tool that will provide you with facts to make tough calls and hard choices around who to fund for growth – and who it’s time to cut back with.

Using a 9 Box Approach for Evaluating Customers

sales-forecast-meeting1What’s necessary is a tool that puts all of your customers on a level playing field. To do that, we modified the 9 box grid approach commonly used in strategic planning.

The 9 box approach usually speaks in terms of invest, selectively invest and divest. These aren’t business units being evaluated, they’re customers. Every customer is important and needs to feel special. What we want to do is evaluate our investment in that customer – especially where it comes to driving profitability.

To avoid internal misunderstandings, you may find it useful to rename the customer groups as Tier I, Tier II and Tier III. It defuses the sales team’s concerns around they accounts.

The downside to this approach is that customers are always ranked against each other, so there will always be a top, middle and bottom tier.

Building the Customer Ranking Tool

How to Factually Evaluate Customer Ranking & InvestmentTo effectively place each customer in the appropriate 9 box grid, we needed to find a way to factually plot the performance of each customer.  The best way to do that we felt was to use concrete financial measures over a multi-year period.

First, take a 4 year snapshot of each customer’s:

  • Average Net Rev
  • Average Gross Margin Revenue
  • Average Gross Margin %
  • CAGR
  • % of Net Sales based on your current full year forecast

Now rank each customer by each separate measure.  These ranking are going to be added together in different ways to build the tool.

On the LEFT axis we evaluated:

   Ranking of Average Net Revenue

+ Ranking of Average GM$

+ Ranking of Average GM%

= Sum of rankings

On the BOTTOM axis we evaluated:

   Ranking of CAGR

+ Ranking of % of Net Revenue

= Sum of rankings

Each customer was ranked highest to lowest. Meaning your top customer has the largest rank. Said another way, if you rank 20 customers against a measure, your best customer is a 20 and your worst performing customer is assigned a 1.

Now calculate and plot where each customer lands on the grid. Each axis is ranked low to high.

What Does This Customer Ranking System Mean?

What Does This Customer Ranking System Mean?Some customers will get more investment and resources than they have historically. Others will not.

There will ALWAYS be customers in the TOP, MIDDLE and BOTTOM 1/3 (because they are ranked against each other). Never forget this critical fact.

This will provide you with a tracking tool to use for customer movement over time. For example, after your annual planning and budgeting process is complete, you can evaluate the plan and budgets to show customer movement.

What Does This Customer Ranking Tool NOT Mean?

What Does This Customer Ranking Tool NOT Mean?That you are going to walk away from lower tier customers or that that you are not going to support your customers because they are in a lower tier.

It’s also important to look at different channels or segments by customer and not simply your largest customers overall.

This tool is to help you discover insights about your customer base that sheer revenue can’t. It will ultimately lead to better budgeting decisions that will build your sales and profitability.

Good Selling!