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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