Download Restructuring Marketing Spending to Do More

Marketing Practice
Restructuring
Marketing Spending to
Do More with Less
Three Critical Levers for Improving
Marketing Effectiveness and Efficiency
Overview
Although companies have dramatically increased their
marketing spending over the past decade, the impact of
this spend has failed to keep pace. Now, as we enter into a
potentially extended period of slower economic growth, it
is imperative that organizations restructure their marketing spending by adopting a do more with less approach.
This will require the management of marketing spending
as both a cost and an investment.
Our work with clients has identified three critical levers that can
enable marketers to restructure their spending without diminishing their brands’ presence with key customers:
■
Rigorously manage the “input costs” of marketing through
strategic sourcing.
■
Focus spending on the most valuable segment bottlenecks and
leverage the brands’ most distinctive drivers to remove them.
■
Maximize returns across the portfolio of marketing investments by adding focused analytic rigor to often unfocused
budgeting debates.
Marketing spending has grown dramatically over the last
10 years. Indeed, it has grown at a rate of 7.5 percent
per year – nearly four times the rate of inflation – as companies place ever bigger bets on marketing spending to
address their growth needs. As the economy awakens
from the longest period of post-war expansion into a new
age of doing more with less, companies are examining
their marketing spending and asking, “Where did the
money go?”
Increased marketing spending investments went into traditional
activities such as advertising, with even established industries
such as retail growing their spending at 12 percent per year.
Increased spending also went into new technology such as CRM,
which held the as-yet-unrealized promise of deeper connections
with customers – with two-thirds of these investments having little or no impact. Highly speculative big bets were also placed on
sponsorships and alliances, where companies hoped to preempt
competitors by locking in long-term deals on highly intangible
properties. In the last 10 years, more than $2.5 billion has been
spent to secure stadium naming rights alone.
The “Big Three” U.S. auto makers offer an example of how such
spending growth is no longer sustainable. Big Three marketing
spending from 1995 to 2000 grew at a rate of 21 percent per
year – over twice as fast as earnings growth. During this time
the average cost of marketing for each vehicle sold has increased
87 percent, to an average of $2,900 per car. Over the same
period, the Big Three’s combined market share dropped by more
than 4 percentage points, representing $15 billion in lost revenue
for 2000 alone.
McKinsey Marketing Solutions
1
As we enter what is anticipated to be a protracted period of
slower economic growth, marketers can and must do more with
less with their marketing spending. Careful attention must be
given, however, to how spending is restructured so that cuts in
spending do not risk reducing the brand’s presence with key
customers. Indeed, analysis of the last several economic downturns suggests that the growth of companies that reduced
presence trailed the growth of their peers when the economy fully
recovered. Doing more with less will require new approaches that
manage marketing spending as both a cost and an investment.
The three critical levers to increase marketing spending efficiency
and effectiveness are:
■
Rigorously manage the “input costs” of marketing through
strategic sourcing.
■
Focus spending on the most valuable segment bottlenecks and
leverage the brands’ most distinctive drivers to remove them.
■
Maximize returns across the portfolio of marketing investments by adding focused analytic rigor to often unfocused
budgeting debates.
Rigorously manage the “input costs” of marketing
through strategic sourcing
Strategic sourcing of manufacturing or administrative inputs has
become an accepted practice to control costs and improve
profitability. Such efforts typically result in reductions of 5 to 12
percent of spending. For a variety of reasons, however, marketing
spending has generally not been managed as effectively. The marketing and purchasing departments rarely cross paths. Marketing
managers are responsible for defining requirements, selecting suppliers, and negotiating costs for most of their marketing activities,
despite having few or no relevant metrics to manage good purchasing behavior. Furthermore, marketing inputs are typically
subjective, difficult to evaluate, and often purchased on rush
McKinsey Marketing Solutions
2
timing. Finally, marketing spending often lacks purchasing discipline because of a perceived risk to performance that is too often
intangible – “Why should we try and save 2 percent when we
are putting our share at risk?”
The time has come to manage marketing spending just like any
other cost. Fully applying the best practices of strategic sourcing
will not put the brand’s presence at risk. Indeed, when properly
implemented, strategic sourcing is invisible to customers and is
essential to freeing up funds that could be supporting new
marketing initiatives. When companies have applied strategic
sourcing to their marketing spending, they have typically realized
10 percent one-time and 3 to 5 percent ongoing savings. A global
entertainment company, for example, was able to save $180 million by consolidating its vendor relationships across divisions
and improving its internal sourcing and inventory management
process. Similarly, a retail broker was able to achieve a 10 percent
reduction in its marketing budget by consistently applying best
practices in media planning and buying.
Getting the lowest price is just the tip of the iceberg in creating
value through strategic sourcing – there are three distinct levers
that must be considered.
1. Pay less for what you buy. Marketers can achieve rapid bottom-
line improvements by consolidating suppliers to obtain volume
discounts, renegotiating fees and commissions based on industry
benchmarks and/or pay-for-performance metrics, and experimenting with new lower-cost suppliers. By more effectively
managing vendors and making the cost equation more transparent, a company can become a price “shaper” rather than a price
“taker.” For example, when a large HMO implemented a competitive bidding process for the printing of its collateral materials,
the increased supplier competition led to an ongoing cost reduction of more than 20 percent.
McKinsey Marketing Solutions
3
2. Redefine what you buy. Companies can significantly reduce their
total cost of ownership by challenging historical requirements
and critically evaluating their marketing purchases, searching
for less expensive substitutes, and providing less stringent
specifications on the materials purchased. In one case, a bank was
able to reduce the cost of promotional materials by over 30 percent by standardizing brochures, eliminating excess production,
and relaxing unnecessary requirements on paper quality and
color scheme. Similarly, a sports beverage brand made its
significant investment in sports sponsorship more productive
by determining which games and athletes would advance its
enhanced athletic performance message, rather than just reinforce
its already significant awareness.
3. Work with your vendors to reduce shared costs. Although often
the most challenging sourcing lever to implement, revamping
your core marketing processes often results in the biggest
improvements in efficiency and effectiveness. For example, a
media company that diligently pursued all three strategic sourcing
levers found that more than 70 percent of the value it identified
came from improving the way it worked with its vendors
(see Exhibit 1). Marketers can uncover value by critically examining whether to develop an internal capability, or to outsource
all or part of several marketing functions. Marketers have also
captured substantial cost improvements by conducting a detailed
review of the processes and economics they share with their more
important suppliers. For example, a youth marketer was able to
cut its copy development time in half by putting aside its existing
bureaucratic process in favor of a clean-sheet approach. This
allowed the company to reduce its advertising agency’s time
commitment and organizational strain, and achieve direct and
indirect cost savings resulting from the streamlined process.
McKinsey Marketing Solutions
4
Strategic Sourcing Opportunities – Media Company Example
Exhibit 1
$ Millions
1.
Pay less for
what you buy
2.
Redefine
what you buy
Price is just
the tip of
the iceberg
–
In this
example
more than
80% of the
value comes
from other
levers
3.
Work with your
vendors to reduce
shared costs
Consolidate printers/film suppliers
0.9
Negotiate contracts with quick printers
0.8
Standardize paper
0.7
Reduce storage cost and wastage
(print-on-demand)
0.5
Reduce fulfillment and distribution costs
0.3
Standardize delivery lead time to sales
0.4
Reduce product development time and complexity
– Upfront production team input
– Specification guidelines for ad agencies
4.0
Retrofit creative pieces in-house
2.5
Total 10.1
Source: McKinsey analysis
Focus spending on the most valuable segment bottlenecks
and leverage the brands’ most distinctive drivers to
remove them
The complexity of the marketing function has increased exponentially in the last 10 years, as segments, channels, and marketing
activities have fragmented into dozens of touchpoints that need to
be managed. Marketers have attempted to minimize their risks in
this environment. Some have “covered their bases” – spreading
marketing dollars too thinly across too broad an array of
marketing objectives and activities. Others have overinvested
in marketing issues and activities in their “comfort zone” – for
example, increasing sponsorships to drive awareness – whether
they needed to or not.
McKinsey Marketing Solutions
5
In this environment, marketing spending must focus with laserlike precision on unlocking the critical brand bottlenecks that will
release the greatest long-term economic value. Against these bottlenecks, marketing dollars should be strategically concentrated
on the brand’s distinctive “drivers” to accelerate impact.
Focus on the most valuable segment bottlenecks. While everyone
recognizes that not all customer segments are created equal, it is
remarkable how many marketers set marketing spending objectives based on aggregate measures of brand performance. A major
global brewer, for example, used a robust needs-based customer
segmentation to define its brand strategy, but then reverted to
aggregate measures (e.g., males 21 to 29) when building its
spending plans for its largest brand – Brand A. As a result, its
marketing failed to address two separate bottlenecks for two
distinct customer segments. The product was not widely available
in hip bars among the “vanguard” customer segment (which
represented the largest economic potential), while the brand’s
image was becoming too exclusive for customers among the
brand’s other target segment, “frat boys.”
When understood at the segment level, brand performance challenges become much easier to address. But identifying these
bottlenecks is not enough. There must be a means of focusing
finite marketing dollars against the bottlenecks that are blocking
the greatest economic value.
To identify which bottlenecks to tackle, it is helpful to (1) compare how well, versus the key competitor, the brand’s key segment
customers are progressing from awareness through consideration
and trial to loyalty, and (2) understand the profitability potential
of these key segment customers. Competitive gaps along this customer decision funnel can be valued using simple assumptions.
For example, our brewer’s premium beer – Brand B – was faced
with several gaps, or bottlenecks, versus the most popular
premium import. Assuming constant conversion rates at all other
points in the funnel, the brewer concluded that it should focus
on closing a 5 percent trial gap, versus the leading competitor,
McKinsey Marketing Solutions
6
among the “variety seekers” segment because the financial impact
would be greater than investing in improving consideration
among the “prestige seekers” segment by 10 percent.
Setting priorities is, of course, a function not only of the potential
prize that is available, but also of the cost and feasibility of capturing that prize. In the above example, it is necessary to compare
the cost and difficulty of improving trial for one segment, versus
the challenge of improving consideration for another. When the
brewer discovered that its consideration issue among “prestige
seekers” arose from the segment’s preference for green glass bottles – which would require a capital investment of $185 million
to implement – the choice of which bottleneck to address became
much easier.
Leverage the brand’s distinctive “drivers.” After you have used the
bottleneck analysis to zero in on the greatest financial opportunity, you must identify the potential “brand drivers” that can
remove the bottleneck. Brand drivers are attributes of the brand’s
equity that are highly valued by customers and distinctive versus
competitors. Focused spending on drivers leverages the brand’s
differentiating attributes to remove bottlenecks and provides a
sustainable means of growing profitability. When attempting to
remove a bottleneck, a marketer will get the greatest leverage
from every dollar spent if the plans are built on a foundation of
brand drivers (i.e., the brand attribute that, if enhanced, is most
likely to improve overall brand preference).
Our brewer’s primary light beer brand – Brand C – owned a
distinctive driver among its “sociability” segment. For these customers, the brand was the only one that was considered to be
inclusive of women, without becoming less masculine in the eyes
of men. Knowledge of this driver allowed the brand to close a
value gap that arose when other light beers aggressively pricepromoted their brands. The brewer focused customers on why
they choose the brand – by reinforcing relaxed male/female social
gatherings in their advertising and promotion – rather than by
responding with costly in-kind price promotions.
McKinsey Marketing Solutions
7
The objective of identifying brand drivers is to more fully leverage the brand’s strengths. Regrettably, many marketers are not
aware of their brands’ real drivers because their customer understanding is at too superficial a level. If our brewer had limited its
tracking to brand attributes such as “refreshing” or “cool,” it
probably would not have identified the driver it used to build its
brand. Tracking generic attributes often leads to positioning
strategies and go-to-market plans that are focused on “antes” –
“tickets-to-the-game” that the whole category talks about, but
nobody owns (see Exhibit 2).
Exhibit 2
Brand Bottlenecks are Overcome Quickest When Marketing
Spending Leverages Brand Drivers – Beer Company Example
High
Perceptions of
Brand A Among
“Male Bonding”
Segment
Importance to Segment
Antes
“A high-quality beer”
Low
“Refreshing”
Drivers
“Was part of the good times
we remember when we are
together”
“A beer I like to drink with
friends”
“Helps me show people who
I am and what I believe in”
“Hip/cool personality”
“As fanatical about football
as I am”
“Attractive packaging”
Distinctiveness vs. Competitors
High
Source: McKinsey analysis
Improving efficiency with bottlenecks and drivers. While it is apparent that focusing marketing resources on critical bottlenecks and
drivers will make the brand more effective in reaching its performance goals, such focus will also dramatically improve the
efficiency of marketing spending. Spending that is not focused on
removing critical bottlenecks can be eliminated. For the spending
that remains, driver-focused activities and messages will allow
you to do more with less.
McKinsey Marketing Solutions
8
Maximize returns across the portfolio of marketing investments by adding focused analytic rigor to often unfocused
budgeting debates
While focusing spending on drivers will increase spend effectiveness for each brand, improving economic performance across the
brand portfolio requires taking an investment approach to
allocation decisions. In other areas of the company where a portfolio of opportunities must be considered, such as capital budgets
or R&D, allocations are made by understanding the long-term
discounted cash flows associated with each option. Portfolio
allocation of marketing spending is generally less rigorous, with
short-term goals leading to suboptimal allocation of resources
across brands and marketing opportunities. Compounding this
shortsighted planning horizon is the “data-light” environment in
which allocation decisions are often made. Lacking comparable
measures of return, budget allocation decisions can become
politically charged debates with unpredictable outcomes.
In the face of these allocation dilemmas, there has been much
debate about the relative merits of “top-down” versus “bottomup” approaches to portfolio budgeting. It is not an either/or
question, however, as both approaches are needed – top-down
to guide strategic choices and bottom-up to develop individual
brand budgets that leverage the best thinking in the portfolio.
To increase the rigor of portfolio spending decisions and, in
turn, shareholder value, three simple allocation principles should
be adopted.
1. Make top-down allocation decisions based on future value, not
historical returns. A short-term portfolio allocation mind-set
rewards the past at the expense of the company’s future health.
One telecommunications marketing executive conceded that the
company’s marketing budget was primarily allocated based on
share of current revenue – despite the fact that one significant
part of the business had four times the growth potential of the
other units. When marketing spending is evaluated on only a one-
McKinsey Marketing Solutions
9
year payout horizon, it becomes too easy to reward past success,
leaving new brands/segments/geographies without enough funds
to realize their full potential. Applying net present value (NPV)
analysis to portfolio allocation decisions may seem spurious,
given limited information, but it is essential to inform the budgeting process. An NPV approach projects the likely revenue stream
versus the marketing investment, focusing the budgeting debate
on strategic issues such as long-term assumptions about growth
potential, rather than on the distracting minutia of whose promotion plan is best.
To reinforce its strategic approach to marketing spending, a food
company categorized its portfolio of brands into three groups:
“shapers” – category-leading brands that contribute significantly
to earnings and must be protected and extended; “diamonds in
the rough” – smaller regional brands that need focused investment to realize their full potential; and “migrators” – brands that
are targets for consolidation or exit. These descriptors became
shorthand within the company and made budgeting much easier,
as each category implied a very different marketing spending
strategy (see Exhibit 3).
2. Build bottom-up brand spending plans that leverage the best thinking from across the portfolio. Once the strategic allocation of
marketing spending has been completed, it is still necessary to
build detailed bottom-up brand budgets and make finer spending
trade-offs across brands. Knowing that one brand is a “diamond
in the rough” and another a “migrator” is helpful in setting
spending priorities, but line item budget assumptions for each of
these brands still need to be challenged and refined. Determining
the appropriate budget for each brand benefits from shared learning across all brands. Such comparisons are rarely performed,
however, because each brand has different performance issues
and employs different tactics to address them. Rather than getting
bogged down in what is different about the brands when making
McKinsey Marketing Solutions
10
Exhibit 3
Changing Portfolio Spending to a Forward-Looking Strategic
Process – Packaged Goods Company Example
Old Portfolio Allocation ($)
100%
Brand A
Brand B
New Strategic Allocation ($)
100%
“Shapers”
Three category-leading brands
that are the profit engine for
the company
Brand C
Brand D
Brand E
Brand F
“Diamonds in the Rough”
Four high-potential new, or
underleveraged, brands which will
be the focus of future growth
Brand G
Brand H
Brand I
Brand J
Brand K
Brand L
“Migrators”
Five brands that are targets for
consolidation or exit
Source: McKinsey analysis
these comparisons, it is much more productive to begin by finding
objectives and activities which are similar. If built properly, each
brand’s budget plan will lay out very specific customer objectives
such as “increase trial by 10 percent among segment A.” If two
brands share similar objectives, it is fair to assess which brand’s
plan delivers the objective most efficiently. Similarly, brands will
have some common marketing activities that can be compared
fairly. If one brand can achieve its trial goals for 20 percent
less spending than the other brands, why shouldn’t that approach
be adopted broadly across the portfolio? Applying the best
approaches from across the brand portfolio will improve each
brand’s budgeting plan, and turn a competitive budgeting process
into a collaborative one.
McKinsey Marketing Solutions
11
3. Use frequent testing to establish a track record of spending
sensitivity. Data-free budgeting debates make portfolio allocation
extremely difficult. There is no reason to go through the budgeting process year after year without adequate data on the
effectiveness of, and return on, spending activities. Management
must conduct regular tests to understand customer responsiveness
to increased or diminished spending on the brand’s most critical
levers. Does increasing price promotion, for example, really
increase brand trial? Systematically establishing these testing
approaches, and then not interfering with them once they are in
place, takes discipline but greatly adds to the fact base needed for
an effective and painless budgeting process.
Following this approach for doing more with less marketing
spending makes sense for any brand, in any economic climate.
Not only does it offer an excellent means of focusing resources on
critical performance drivers, it does this while reducing overall
costs. Indeed, such a program should be considered more than
just marketing spending effectiveness – it is in fact the starting
point for self-funding brand renewal.
–Gary Singer is a Principal and Chris Halsall is an Associate
Principal in McKinsey’s Marketing Practice
For additional information or copies,
please call (203) 977-6800 or e-mail
[email protected]
McKinsey Marketing Solutions
12
Marketing Practice
03.2002
Designed by Arnold Saks Associates
Copyright©McKinsey&Company
http://marketing.mckinsey.com