Skip to content

How to Rightsize Marketing Investment

2012 August 8
by Greg Satell

Over the past decade, marketing has become increasingly ROI focused.  Generally, that’s been an enormously positive thing, but as I’ve noted before, there has been some reason for concern.

One of the chief problems is that metrics often obscure value.  Business success occurs in the marketplace, not in Excel or in Powerpoint.  It’s easy to get so caught up with key performance indicators that you forget about performance in the real world.

Managing a business is different than managing a budget.  The outcome of an investment is not solely, or even primarily, a function of efficiency.  It matters where you invest. Resources allocated to a good business will work harder than those that are put towards a bad one.  That’s why it’s crucial to rightsize investment.  Here’s a quick guide.

Building a Portfolio Matrix to Evaluate Category Strength

First, the obvious.  Some businesses are inherently better than others.  A good business makes lot of money and grows rapidly.  A bad business brings in poor revenues and grows slowly or not at all.  That simple truth, more than any fancy math, is key to successful investment (and, curiously, often overlooked in marketing circles).

Fortunately, most business categories are monitored so it is relatively simple to evaluate the overall health of the business and create a portfolio matrix.

The chart above shows a basic template.  The overall category value is plotted against the change in category value (i.e. growth or loss) and centered on the average.  High value/high growth businesses are ones in which you want to aggressively invest while you might want to cut back and increase margin in low growth/low value categories.

Of course, these are just general guidelines and there are often more factors at play.  I, for instance, have a preference for small categories that are growing quickly and will tend to invest more in them.  However, as a general framework it’s a good place to start.

Benchmarking Investment

Once you have evaluated the quality of business categories in the company portfolio, you need to benchmark marketing investment.  Historically this has been a fairly easy exercise, but as I’ve previously explained, there’s good reason to believe that much activity goes unmonitored these days.

With that said, it’s still possible to come up with a reasonably accurate picture by adjusting reported numbers according to known facts on the ground.  Once you do, you can plot media investment onto the portfolio matrix.  The result will look something like this.

Here, it becomes possible to spot opportunities.  For example, category 4, in the low value/low growth sector has a disparately high level of investment while the much higher growth category 2 is underinvested.  Mismatches like these are fairly common as many marketers base their budgets on historical levels which lose relevance over time.

Targeting Aggressivity

The final step is to turn the analysis into an actual marketing budget.  One of the obstacles to effective investment is the use of irrelevant benchmarks, such as historical expenditure or targeting an arbitrary percentage of revenues.  While they may be tidy from an accounting perspective, they have little to do with what’s going on in the marketplace.

One of the most useful guides to setting marketing investment levels that I have come across is the aggressivity index, which helps to align growth goals with market share.  It can be easily calculated as follows:

Aggressivity index = Expenditure share / Market share

All other things being equal, an aggressivity index significantly above 100 will tend to promote market share growth while an index of significantly less than 100 will be consistent with declining market share.

 

Overlaying aggressivity targets onto the portfolio matrix gives us a good guide to rightsizing marketing investment.  Often, marketers who are allocating large budgets to a category overlook the fact that they are not actually supporting their market share just as seeming low budgets can be, in fact, quite aggressive.

I have found that concrete aggressivity targets, combined with more conventional reach and frequency analysis, BDI/CDI analysis and category projections are an extremely effective way to align marketing strategy with business goals.  Moreover, regression analysis has indicated that aggressivity is an effective predictor of marketing success.

Art and Science

In Good to Great management guru Jim Collins found that the most successful corporate performers tend to use fewer metrics not more.  That’s because numbers aren’t nearly as useful in providing answers as they are in helping us ask the right questions.  Creating efficiency and creating value are two different things.

Has there been a technological change that we expect will alter the dynamics of a category?  Were there product launches in the recent past that skew the analysis?  Do we expect the product line to be more competitive in the next year or less so?  These are all qualitative questions that we need to take into account.

That’s why I’ve found the portfolio matrix to be so helpful.  It provides a clear snapshot of the business environment so that we can get to the infinitely more important (and more fun!) discussions of what we want our marketing strategy to achieve and what tactics will most likely get us there.

Strategy, ultimately, is about choices.

– Greg

8 Responses
  1. August 9, 2012

    Hi Greg,

    Good review as usual. In addition to the aggressivity I use the threshold factor. It the amount of competitive investment necessary to make market share move. In the pharma industry it is easily computable with regression analysis based on data from IMS or so. Class C5C for example is wonderful to analyze.

    best

    Greg Reply:

    Jean Louis,

    Ves, that type of regression analysis can be very useful and most major brands do employ econometric media mix modeling, which is based on multivariate analysis.

    – Greg

  2. August 12, 2012

    When it comes to banks and lending for Housing for example, the problem is sustainability.

    The present models in use lack a sustainable business model.

    Their primary role is to keep a balance between the supply of deposits and other funds and the demand for them by borrowers. To do this they need to perform in two ways:

    1. Maintain the asset value of the property market as a whole in a fairly steady state. They cannot do that because they do not know how and the regulators are just as ignorant. It follows as a direct result of the interest rate risk management equations that I have developed.
    2. They must be able to manage their balance between supply of funds and the demand for funds by use of the interest rate mechanism. This feeds into the entry cost which is the cost of the initial monthly payments and that links into loan size and property price stability or instability depending upon which business model is used. Theirs (unstable) or mine (stable).

    The model that they use cannot achieve either of these things. The industry does not have a sustainable model, or at least not a consistently sustainable model.

    Give me the opportunity and I will provide one as explained on my blog
    http://macro-economic-design.blogspot.com

    I can even stretch my model to rescue banks and to prop up the property market by over-lending safely until we have the economy going again. That might plug the hole in the banking sector’s bucket. My blog explains that too.

    Greg Reply:

    Thanks for sharing your thoughts, Edward.

    – Greg

  3. Paul permalink
    September 5, 2012

    Hi,

    Can you give an example of how to use the agressivity index with real numbers and how to interpret.

    Thanks

    Paul

    Greg Reply:

    Sure. If you have 10% market share but are spending 5% of the total ad money in the category, you’re aggressivity index would be

    5%/10% * 100 = 50 and you can interpret that as spending 50% of your market share and you could expect that your market share would decrease.

    Like all analysis, you have to take the numbers with a grain of salt, because you are using two inputs (market share and media monitoring) that are imperfect. However, as a rough approximation, I’ve found it to be effective.

    – Greg

    Paul Reply:

    Thanks. In your article the formula was:

    Aggressivity index = Market share / expenditure share

    In the example on your reply you flipped the denominator. So now am slightly confused!

    Greg Reply:

    Sorry, Paul. I made a mistake in the post.

    It’s Aggressivity index = Expenditure share / Market share. So the more you spend relative to your market share the higher your aggressivity is.

    I’ve corrected it above. Thanks for pointing out the error.

    – Greg

Comments are closed.