Marketing is critical to growth and consumer engagement, and its costs can account for more than 10 percent of revenues in many consumer-facing businesses. Yet few companies have fundamentally changed how they measure and assess marketing’s impact—often resulting in budgets and programs that are close cousins of years past. And few marketers are confident about identifying the real return on investment (ROI) of their marketing spending, or the impact of trade-offs.
This apparent paradox derives from a time when the bulk of the marketing budget was concentrated in above-the-line channels such as TV and radio, which are characterized by more limited measurability of outcomes than are typical of below-the-line activities such as search-engine marketing. And, since most companies build budgets based on the previous year’s spending levels, it has taken a long time for deep discussions of marketing ROI to reach the boardroom and become an executive-level priority.
In recent years, the proliferation of technologies that can process massive data sets, combined with the growth of digital advertising channels—which are inherently more measurable—has unlocked a massive opportunity to measure the performance of marketing investments. Even though analytical tools have become more widely available, our experience suggests that few companies apply the same level of scrutiny to overall spending in marketing categories. In fact, more than 60 percent of Fortune 1000 chief marketing officers claim that they cannot quantify the impact of marketing in both the short and long term.1
To gain a more detailed view of marketing and sales expenditures, organizations must overcome several barriers. First, marketing budgets are often separate for each business unit and country, which limits visibility and comparisons. Second, the multitude of spending categories can make it difficult to identify the highest-value opportunities. Last, companies tend to use media agencies to manage, or at least intermediate, a significant share of their marketing spending—and agencies are often more interested in maintaining historical spending levels and allocations than challenging past assumptions to achieve savings. All of these challenges are underpinned by an entrenched, reactive mind-set when it comes to setting priorities and budgets.
These very obstacles, however, also make marketing and sales spending categories especially ripe for cost savings. Zero-based marketing—a comprehensive approach that extends zero-based budgeting principles to marketing categories across the enterprise—can uncover opportunities for savings worth 10 to 25 percent of spending in certain categories, and these funds can be reallocated to higher-value areas. In fact, with the rare exception of industries that are in a global state of decline, a well-executed reinvestment in high-ROI opportunities will deliver a greater return than “banking the savings” will. A recent McKinsey survey revealed businesses that are methodical about investing funds unlocked through zero-based budgeting and other programs into growth—either proven winners or future products and services—outperform the market. Notably, often more than 50 percent of these savings can be achieved in the first 12 months of a zero-based marketing effort, allowing for a very rapid reallocation.
Gaining a granular view of spending and opportunities
Zero-based marketing requires commercial leaders to pause and ask five critical questions.
1. Based on bottom-up analyses, what are realistic but ambitious targets for our company?
Companies need clarity about the fundamental drivers of their value creation, but often the drivers are not consistently understood or thoroughly applied when the strategy is developed. Business value is created by improving return on invested capital or top-line growth (for example, increased market share, positive market momentum, or a combination of both). Hence it is crucial to set targets that are consistent with the life stage of each area of the business in relation to consumer demand and preferences. These targets need to be defined through bottom-up analysis of revenue pools and growth drivers.
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For example, the leadership team at a fast-moving consumer goods company could consider reallocating marketing dollars from products in its portfolio that have sizable market share in a low-growth category to products with the potential to gain share in high-growth categories. Although this action sounds intuitive, companies with cost-plus budgeting often don’t have a culture that enables conversations about such resource allocation.
Zero-based marketing establishes the lines of communication across business units and functions as well as the cadence for growth discussions. These efforts help to avoid underfunding areas with limited potential and instead free up resources to invest in high-ROI opportunities that might be overlooked or left with the crumbs after the demands of historically larger business areas have been satisfied.
2. How do we understand what is driving marketing costs?
The many marketing spending categories that exist are driven by different factors. To thoughtfully reduce, reallocate, or increase marketing spending across various categories, it is essential to establish a baseline where every dollar can be linked to a driver (or set of drivers) that determines why that money is being spent.
For instance, we can separate media spending into two categories: working and nonworking. The former is shaped by the reach, frequency, and quality of the advertisement the company deploys to communicate with customers; the latter is determined by the amount of creative, production, and research activity performed to create assets such as a TV ad, and it is not directly driven by how many customers will see or react to the asset. Therefore, the logic by which each of these media spending categories will be assessed is very different. In most cases, this approach would go one or two levels deeper to identify much more granular factors. For working media, examples are the number of customers acquired (or retained) during the ad airing period and the recall rate of the ad among target customers; for nonworking media, factors could be the reuse rate of existing ads and creative assets and the average production cost per asset, among others.
Establishing a common currency, where every dollar spent can be compared against others and decisions can be linked back to objective drivers, is fundamental to zero-based marketing.
3. How can the organization establish the right conversations to identify opportunities?
Marketing leaders have to work very closely with finance and other functions on resource allocation decisions. As mentioned before, marketing teams should set clear targets for growth and market share based on value-creation potential.
Then, rather than trying to understand the absolute spending on TV campaigns, for example, teams should compare saturation levels and gross rating points (GRPs) per message to find opportunities. Instead of oversaturating a target group, funds could be redirected to a campaign highlighting new products or brands. Similarly, in digital channels such as social media, data should be presented to quantify the impact on awareness, consideration, and conversion, not just presence or share of voice. In this way, the discussions become more structured and fact-based, allowing changes in direction to be clearly supported and communicated—while also aligning marketing spending more tightly with strategic priorities.
4. How can an organization reallocate funds among the different cost types to ensure it is maximizing ROI?
Commercial leaders very often have all the data they need to assess the relative productivity of various spending categories and their coherence with consumer needs and competitors’ positioning. Zero-based marketing compels managers to rely on factual information to achieve consensus. With data-driven insights, generic statements such as “We should spend more in digital” or “We should continue to invest most of our money in Brand A because it’s our power brand” either become more meaningful or are exposed as myths.
Companies can then make better spending decisions—for example, by allocating less to above-the-line campaigns and more to personalized communications through digital channels or customer-relationship-management (CRM) campaigns. In some situations, the ROI from a secondary in-store display might be greater than that of a price promotion. Such information provides commercial leaders with the tools to shift their spending.
5. What is the best way to track funds freed up in other areas to enable growth?
A zero-based approach establishes a consistent terminology for spending and investment, making ROI and budget discipline the common ground for decision making. At a global manufacturing company, for example, the CEO used the same cost-management tool that had been tracking budgets and spending for zero-based budgeting to plan, track, and monitor growth initiatives. The change resulted in more transparent budgeting decisions about which initiatives to finance and an ability to track and redirect resources during the course of the year to ensure optimal spending. The company achieved the target ROI.
More important than the tools and methodology used, however, is personal commitment on the part of marketing leaders. In all zero-based marketing efforts, commercial executives must provide marketing managers with full ownership of their respective cost areas, along with targets to achieve in the form of ROI, and where relevant, savings and reinvestment. Establishing a governance mechanism to track progress of these owners against their commitments is a fundamental step to ensuring that growth targets are met as a result of the adoption of zero-based marketing.
Impact of zero-based marketing
One EU-based consumer packaged-goods company launched a zero-based marketing program with the goal of redirecting funds from marketing and sales categories to support of new growth initiatives. The management team was skeptical of the cost savings it could achieve, since these categories had been scrutinized already.
As a first step, the team created a database of more than 50 spending categories across business units and regions. It then applied industry benchmarks to set targets for each category. Using this detailed information, the team identified cost-savings initiatives, including removing some components from the media agency contract reducing overall agency fees, and cutting packaging design costs. The zero-based approach created new budgets and a proactive cost-management process for each category.
The impact was significant: a 15 percent increase in spending efficiency, with more than 70 percent of the opportunities coming from nonworking media levers. More important, the process helped to instill an ownership mind-set among marketing and sales managers, enabling cost-reduction efforts to be sustained beyond the initial stages.
In another case, an online gaming operator was in a period of stagnating revenue growth while marketing costs—mostly for digital channels—were increasing year on year due to market inflation and increasing competition. With profitability coming under pressure, management was compelled to take a hard look at the cost of acquiring new customers in relation to their value. By mapping all of the marketing activities and their contribution to new customer acquisitions and then linking them to the behavior and economics of the customers acquired, executives were able to rank their spending categories in order of effectiveness.
They were stunned by the results: 15 percent of their marketing was destroying value by bringing in low-value customers at a negative ROI. In the space of three months, marketing leaders cut spending in those areas and used the savings to finance high-potential channels. One such channel was programmatic media buying, a methodology that allows the marketing function to precisely target specific customers using personalized messages and offers based on their behavior. With the savings, the function was also able to build a rich data set comprising third-party sources of data such as social media activity.
It has never been easier for companies to reassess their level of marketing spending, where funds are allocated, and ROI by category. From greater access to data to media agencies with in-house capabilities to measure the performance of marketing activities, companies have a range of tools and support at their disposal. All that remains is for marketing executives to use those tools to embrace a more analytical, granular approach to spending decisions.
This article is the second in a series about using the principles of zero-based budgeting to improve spending decision-making across an enterprise.
About the author(s)
Jeff Jacobs is a partner in McKinsey’s Chicago office, Roberto Longo is an associate partner in the London office, Björn Timelin is a partner in the London office, and Mita Sen is an associate partner in the Zurich office.