Topgrading Marketing Spend

As I noted in my post To Cut or Not to Cut?, this is a smart time for most companies to reduce marketing spend, notwithstanding desperate pleas from marketing services providers that you double-down in the downturn.

Is there a smart, systematic way to do this?  Probably, but it's elusive, as confirmed by the many stories I hear of the across-the-board, arbitrary 10%, 15%, 25% cuts many marketers are trying to cope with.

A recent white paper from former colleagues at Deloitte Consulting prompted my writing this post, so let's look at their approach, which they call Structural Cost Cutting.  

The premise of the Deloitte's Structural Cost Cutting is that the big opportunities for big near-term reductions in spend come from challenging basic assumptions about the business and how marketing supports it.  The savings will emerge from multiple categories of marketing spend.  The Deloitte hit list of areas to examine are:

1. The brand portfolio (the white-paper is focused on CPGs
2. The marketing mix 
3. Pricing from vendors 
4. Trade promotion 
5. The marketing organization 
6. Improving marketing systems 

These all seem like good ideas, apart from the last one (do you want to be the guy having a "we need to spend money to save money" conversation with the CEO?).  For a more general application of the idea of rationalizing the brand portfolio, think about the portfolio of customer segments instead.

Here's a different idea that is probably more tactical near-term, but if done every year as an annual pruning exercise becomes way to organize and force strategic decisions about marketing investment.  We call it Topgrading Marketing Spend.

Topgrading is a principle from talent and HR management, and one of the tools is a forced ranking of all employees.  Often the bottom 10% are culled from the herd -- one of the practices instituted by Jack Welch at GE.

Without opining on whether this is a good practice for managing people, it can be a fabulous practice for external marketing spend.

Applied more narrowly, topgrading is at the core of what we do when we use analytics to improve the targeting of direct marketing.  With predictive models we identify the least likely to respond to a campaign and cut the bottom 10%, 20%, or 30% from the list.  Depending on the effectiveness of the model, we can more than double the return on that marketing investment.

Instead of that narrow approach, force rank all external marketing spend into deciles and cut the bottom 10% or 20%.  In addition to using analytic disciplines around targeting and assessing marketing ROI, you’ll want to have done some basic customer segmentation and valuation. 

When you've learned how to do it once, do it every year as part of the budgeting process.  Not only is the time to start this ripe because of difficult economic conditions, but big changes in consumer behavior and marketing options make it unlikely that the bottom one or two deciles of spend aren't investments in obsolete and unproductive strategies.

What a firm does with the investment freed up by the topgrading exercise is a separate decision.  It could be a near-term tool for intelligently cutting expenses, or an ongoing way to fund investments in new ideas.   Or to fund a structural cost-cutting initiative.  But in any case the healthy annual pruning will quickly strengthen the contribution from marketing, and the process will boost confidence in the strategic value of marketing investments.

Comments

[Ekaterina Tsvetkova]

I think quantifying and measuring the value of marketing programs and investments will stay among top challenges and priorities for CMOs in recessionary times, which will help to strengthen their relationships with CEOs. Using analytics to improve the targeting of direct marketing is a great approach, but how do you ensure you are reaching the right audience? I think it comes back to measurement, circulation auditing and other accountability strategies .