To their own detriment, many traditional marketing departments are organized around the annual marketing budget.
Every year the budget is passed to the CMO and subdivided among marketing functions and geographies to meet business and constituent needs. In these traditional organizations, the structure and hierarchy of the marketing team is often organized around the details of the budget allocation.
The problem with being oriented around the marketing budget is that it disconnects marketing from the real business needs. Many companies that focus on the marketing budget view marketing as a cost of doing business and not a measurable investment in growth. The pattern of investment in marketing in these types of organizations mirrors investment in other things that feel like discretionary costs: In tough years the budget is cut mid-year and in good years budget growth is based on based on the CMO’s ability to lobby and build a case for investment.
In today’s era of marketing and “growth hacking,” a focus on the marketing budget is a sign of a weak marketing department. The alternative is to focus on a marketing P&L.
A marketing P&L allows businesses to invest infinitely in the portion of the marketing that drives profitable growth within the financial reporting period
A profit and loss approach to marketing works for the portion of the marketing budget that directly drives near-term revenue. The question comes down to how much a company is willing to spend within a financial period to drive incremental revenue in that period. That number will be different in different businesses: it may be worth spending $1,000 to drive $1,000 in incremental quarterly revenue if that means thousands of additional dollars in future quarters. It may be worth just $50 to drive $1,000 in incremental revenue if your business has low margins and a low rate of repeat purchase or revenue.
No matter what the number is — almost every business has a customer or revenue acquisition cost at which they should buy as many customers or much revenue as they can during any financial period. By limiting spend with a fixed budget and applying budget cuts during tough times, businesses unnecessarily handicap their growth. Instead, businesses should invest infinitely in the portion of the marketing budget that drives profitable growth within the financial reporting period.
Here are examples of types of investments that work perfectly with a marketing P&L approach to investment:
– Search engine marketing expenses to drive profitable online ecommerce transactions
– Lead generation expenses that drive incremental net profit in the financial reporting period
– Expenses that drive profitable incremental absorption of any perishable product such as unsold theater tickets, unsold hotel rooms, unsold airline capacity, open tables at a restaurant, etc
But the list is really endless: the key is that the investment drives incremental profit that is greater than the incremental marketing spend during the financial reporting period.
How to switch from a traditional budget to a marketing P&L
How does this work in practice? the first step is for marketing and finance to split the budget into two categories of spend:
(1) spend that directly drives measurable incremental near-term revenue and
(2) other investments
The “other” part of the budget can remain a traditional fixed budget allocation. But for the spend that drives incremental revenue, marketing and finance should agree on a target return on investment and a timeframe for that return to be realized. Once this is done, smart organizations will let marketing acquire as much incremental revenue as possible at the target ROI without traditional budget constraints.
I’ve seen many profitable, visionary, typically private companies take this further by letting all customer acquisition activities scale without fixed budgets — even if the returns come over multiple future financial reporting periods. If it costs you $500 to acquire a customer in Q1 that will result in a $400 loss during Q1 but $2,000 in incremental profit over three years, you can maximize growth by buying as many of these acquisitions as your cash flow will support. In public companies which need to carefully balance current period earnings and future growth, these sorts of investments are much more difficult to make.
The marketing P&L changes the focus of marketing
As marketing teams align more of their marketing budgets to drive incremental revenue and growth, the way marketers organize and optimize is also changing. Marketing organizations with infinitely scaling acquisition budgets figure out how to drive as much growth as possible within their profitability constraints. By focusing on cost per acquisition and revenue per acquisition and testing multiple acquisition channels to improve profitability and scale, the marketing P&L allows marketing to take the lead in driving long-term growth.