Zero-based budgeting hurts long-term brand-building, while advertising-to-sales ratios are entirely arbitrary. There’s a much better, ‘two-speed’ way to set marketing budgets.
“Some may say that it’s not a disaster and thus better than feared – we’re not yet in that camp.” That was the gloomy verdict from Goldman Sachs analyst Ken Goldman as he surveyed the latest results from struggling food giant Kraft Heinz last Thursday.
It was another dire week for Kraft Heinz, in a year of dire weeks that has seen the company’s share price fall by a third. Last week, there was more disappointment as Kraft Heinz reported weakened sales, a further write-down of its businesses and an even more gloomy forecast for the rest of the year.
With increasing frequency and vehemence, marketers have a particularly negative narrative they like to tell about Kraft-Heinz and its current predicament. You know how it goes.
The company was partly acquired by 3G, a famed private equity firm. The stereotypical private equity firm is all about ensuring a quick and lucrative exit before it will even consider an offer for a business, and that leads to overriding short-termism. That short-termism runs counter to long-term brand building.
When a private equity firm, like 3G, buys a branded business, like Kraft Heinz, there is an initial flush of profit as costs are cut and the company coasts along on the fumes of former marketing investments. But eventually, reduced marketing budgets cause the business to splutter and then dive. The declines in salience and brand equity caused by under-investment manifest in lower revenues, greater price-sensitivity and increased vulnerability to private labels.
Much of the criticism of the private equity approach to brands focuses on one of the sector’s most beloved instruments – zero-based budgeting (ZBB). It has been part of the private equity tool kit from the very beginning.
A firm takes control of a floundering acquisition and immediately subjects it to full ZBB. In what is usually the organisational equivalent of an airport customs search, a company’s expenditures are stripped bare, cavities are examined and everything is pared back.
HOW BUDGETING WORKS
ZBB is not just applied to marketing; it originated in the broader business operations of the White House in the 1970s and has been used to radically rethink almost every aspect of corporate expenditure. But it is a particular anathema for marketing people. That’s partly because most marketers rightly believe in longer-term investment and also because many, quite shamefully, don’t really understand the financial implications of the work they do.
ZBB has certainly been the straw man for the current plight of Kraft Heinz. It’s rare to read an account of the company and not encounter the budgeting approach being blamed for most of its problems. According to the retail strategy author and speaker Jan Benedict Steenkamp, Kraft Heinz’s “terrible shape” is a direct result of the “chronic under-investment in its iconic brands” driven by “slash-and-burn zero-base budgeting”.
Kraft-Heinz CEO, Miguel Patricio, disagrees. He has gone on record to praise the discipline of ZBB and believes that without the approach his company would be in an even worse state. But in a call to discuss his company’s parlous performance last week, Patricio also made it clear that “setting short-term targets publicly won’t be productive as we set and work to deliver against our strategic directions and priorities”.
I feel Patricio’s pain here. On the one hand, as a marketer, he knows he needs long-term, incremental brand-building investment to rescue Kraft-Heinz. But on the other hand, he likes the discipline and focus that ZBB provides.
And let’s add another factor into the mix – the usual alternative to ZBB is a total load of cock. I appreciate that more than 90% of companies set their marketing budgets using advertising-to-sales ratios, but the approach is so ridiculously amateur and non-strategic we are almost better off using ouija boards and numerology to derive our marketing budgets for the year ahead.
Never forget the madness behind almost every marketing budget. First, a finance executive looks at the last few years of revenue performance and calculates a compound annual growth rate. Next, that growth rate is applied to this year’s revenues to arrive at an expected sales figure for the year ahead. Finally, an entirely arbitrary percentage of sales is allocated back to marketing.
All the critics of ZBB might want to take a long, hard look at the dominant alternative of advertising-to-sales ratios before they reach for their pitchforks because it makes little, if any, strategic sense.
Why should a finance executive who knows nothing of marketing, markets or brands be put in charge of the process? If we already know how much money we will make next year what is the point of marketing and, indeed, the marketing department? We have already booked the number before they even start work.
And what’s with the arbitrary percentages that we apply to sales to derive the marketing budget? Why is it 5% and not 4% or 8% or 2.5%? Nobody knows.
And the biggest problem with this derisory approach to budget setting is that all marketing strategy dies before it even begins. We are working backwards from an assumed, bullshit forecast from the very beginning and marketing is simply a cost that companies pay without any proper expectation of impact.
Smart marketers realise, early on, that their efforts are fundamentally superfluous because the numbers have already been put in place before they even picked up a marker pen to think through the strategy for the year ahead.
Marketing departments are trapped between the short-term rapacity of ZBB and the abstract passivity of the percentage-of-sales approach. There has to be a better way.
Well I have been working on one and it seems, initially at least, that there is. A few years ago, I read an interesting thought piece by Mark Di Somma about the need for a ‘two-speed’ brand strategy.
The article is short and does not go into any detail but it very nicely challenges marketers to combine “what everyone is chatting about or reacting to in the moment” and “how your brand will look to drive and direct a long-term change”. I filed the idea away, next to my dusty algebra knowledge and partial recall of game theory, in the deepest darkest corner of my long-term memory.
I also liked the natty image that went with the writing, of a tortoise twinned with a hare as if it were a single beast. Surely this is the ideal totem for a properly run brand plan as we head into the 2020s.
I am not as extreme as Di Somma in wanting to combine the immediate and very long-term, but I have been working hard to build a brand plan that would allow a company to combine the rigour and short-term profit focus of ZBB balanced by a longer, brand based approach.
A THIRD WAY TO BUDGET
A word on brand planning. It has become a dirty word in marketing. A stupid 800-slide monster built by someone with a global remit but no experience and no idea how to manage a brand.
By my own estimation of working with multinational clients, across multiple brands, for multiple years I have now lived 1,000 years of brand planning. And most blow. They are over-complex, over-long, illogical embarrassments filled with pointless models like PEST and SWOT and FKWE (Fuck Knows What Else).
But a well-constructed brand plan could cross the chasm between short- and long-term horizons, between mass-marketing and target segments, between ZBB and brand building. And in doing so it might just help brands to grow, sustainably.
The secret to getting it right is to start with a unified plan that covers past performance, research and segmentation as a single document. But once we get to targeting, the plan essentially breaks into different sub-sections.
There is a section for mass-marketing focused on brand-building, which features broader brand positioning and brand codes, and concludes with brand-driven objectives related to funnel stages like consideration or awareness. This section sets annual objectives but is built across multiple years to reach its ultimate objective. It generates some return but usually not enough to wash its face – at least not in the upcoming year of execution.
But there is also room for traditional segmentation, targeting and positioning in my two-speed brand plan. For each target segment the plan splits into distinct sections, with each featuring a more product-based positioning statement and followed by very clear short-term SMART objectives for the year ahead.
And there are usually several of these targeted sections, as the brand plan balances resources with the need to generate as much short-term return as possible.
Finally, the plan comes back together in the form of a unified, zero-based budget. The budget estimates the likely financial performance of the brand if left without any marketing support for the year ahead and then adds, incrementally, all the financial estimates from each of the target segments contained within the plan.
Interestingly, as I work on these plans with clients and teach them to executives, it becomes clear how crucial the two-speed ethos is and how difficult it is to pull off. You really have to commit to 50% or 60% of your budget for the longer, slower tactics to deliver on your brand building objectives. And to do that you have to ensure the shorter, faster half of your brand plan really delivers the cash in the upcoming year.
To master a two-speed brand plan requires a form of strategic schizophrenia, in which you build brand equity with mass marketing and long-term horizons and then harvest it with entrepreneurial and immediate commercial zeal.
And what I like most about these nascent plans that are emerging around me is that they reject the tyranny of ‘or’ and replace it with the generosity of ‘and’. Too often marketers are being forced to choose between short- or long-term. Between the top or the bottom of the funnel. Between performance marketing and brand-building. Or digital versus traditional.
What if these, and most of the other choices forced upon marketers, are false ones? What if we could accommodate both within the same strategic approach? What if two speeds gave you more scope and long-term growth than either one or the other?
A two-speed brand plan. One that builds the brand while delivering maximal short-term returns. It’s possible. Hell, with a decent brand plan its not even that hard.
And if Miguel Patricio wants some help I have just the plan for him and his marketers. Seriously, Miguel, I do feel your pain. I have the solution. Call me. I like beans, man.
This article first appeared in www.marketingweek.com
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