Why The Annual Marketing Plan & Budget Should Be More Than a Paper Exercise

So it’s that time of year again: time to justify a small increase in next year’s marketing budget – or, more likely, minimise the reduction in budget precipitated by the crisis year that was 2020.


In B2B marketing, this is often a bit of a game, with CMOs asking marketing departments to build a ‘bottom up’ plan while the ‘top down’ plan, driven by sales goals is still in motion. And why is it a game? First because Marketing is unable to show cause and effect for the budget spent in the current year – a clear return on investment – and second, because the top-down and bottom-up plans always result in figures which are miles apart.


This can lead to disillusionment – or simply the acceptance that marketing is a discretionary cost that will always be one of the first to be cut when times are hard. A bitter pill to swallow when a 'cost realignment' means people lose their jobs and those that are left are expected to do more, but with greatly reduced execution budget.


Strategy, Plans and Budgets

In the tech industry, which is fast-moving and follows a survival-of-the-fittest mantra - driven by top line growth (ARR, CAGR) - quarterly targets and annual results dictate share price, investor confidence and short-term fiscal planning.


The emphasis given to short-term financial targets can often lead to an over-reliance on lagging performance metrics, such as revenue, rather than leading indicators, such as web conversions, MQLs and sales pipeline. In B2B enterprise software sales, for example, this means that next year’s targets and budgets are often set based on this year’s results - particularly Q4 results – and yet sales cycles are 6-9 months to close.


If you add in the earlier stages of the buyer journey, before sales is involved and where marketing is responsible for most of the heavy lifting, the sales cycle can be 12 months or more. in its 2019 B2B Buyers' Survey Report, Demand Gen reports that buying decisions are taking longer and involving more decision makers.


Failure to look at predictive metrics for performance and an over-reliance on historical performance can therefore lead to the wrong conclusions – and the wrong decisions with regard to marketing investment.


Market-driven Strategy

The annual financial plan and budget should be embedded within the business strategy - usually represented by a 3-year plan. This plan will incorporate an assessment of the macro-environment (PEST), the company internal, industry and competitive environment (SWOT), growth expectations and major investment plans, new product/service offerings and so on. If a company is planning to penetrate new markets, extend its product portfolio or open new offices to achieve its business objectives, this will clearly impact on Marketing.


These types of strategic changes need to be assessed as part of the marketing plan as they will be treated differently from business as usual (BAU) planning and budgeting. If achievement of the targets for next financial year have significant dependencies on the strategy – e.g. opening a sales office in a new country – then these need to be reflected in the marketing budget.


For annual planning and budgeting it is important to take into account break-through strategies that need to be supported as part of the overall business plan as well as BAU marketing activities and costs, whether fixed or variable in nature.



Marketing Budgets: fixed, variable, discretionary

The marketing budget usually contains fixed costs, such as staff, software licences, agency retainers and other annual licenses (e.g. data); variable costs relating to marketing execution (content, paid channels, events etc); and discretionary expenditure. Any project or one-off spend associated with strategy break-throughs would usually be budgeted separately – e.g. a website refresh and localisation to support the new international sales office.


Headcount costs may or may not be included in the fixed costs considered in an annual budgeting round - with decisions often driven at a company level - but can often represent 40-50% of the total marketing budget. This ratio of fixed to variable costs is an important indicator of agility and therefore responsiveness to changing market conditions – such as Covid-19. However, it is also subject to the 'pendulum effect' of decisions about centralisation vs decentralisation; and in-housing vs outsourcing services.


In this digital age, marketing operations can come with a significant fixed cost component: think marketing automation, website and other software-as-a-service licenses. But often this can be partly or fully offset by reductions in other external, variable costs if considered as part of a broader ‘build vs buy’ strategy. There is often a direct link between headcount costs and digital platform costs as specialist resources are hired to plan and execute hands-on campaigns. However, these fixed cost increases are offset by a reduction in agency fees and other outsourced services which would otherwise come out of the variable budget. These are strategic choices relating to agility, competencies, knowledge transfer/ retention and other issues, often driven by the company culture. The right strategy for such decisions is influenced by the 3-year business plan and objectives.


Just adding a blanket 10-20% to this year’s budget will no longer cut it.


Funnel Modeling, CPL and CPA

The sales funnel is a concept used to visualise the roles and responsibilities of sales and marketing in achieving the annual sales target. A funnel can leak, so not all of what is poured into the top comes out the bottom; this much is clear. And this leakage may need to collected and recycled back to where it leaked from.


However, it is still useful to consider funnel stages and what is happening at each as a way of relating marketing outcomes (and the activity that drives them) to revenue or order targets. Using reverse-funnel techniques, this approach helps to quantify what marketing and sales should be generating at each funnel stage and therefore what it will cost to achieve the result.


But of course, the world is more complex than a simple funnel concept can grasp. Not all business starts at the top of the funnel (TOF/U) and works its way down. What about business with existing customers; business sourced by Sales or channel partners; business which comes through referrals? If marketing is going to show ROI then the sales funnel model needs to take these things into account. This is a good place to start to get alignment with sales and agree how demand will be sourced and how difference sources turn into business – who does what. Without this, how meaningful can marketing budgets be? Doing a lot of stuff and hoping we somehow hit the target – ‘and then magic happened’ – is not going to convince anybody to give you more.

Historic data on key marketing metrics such as CPL, CPA and CLV are important in determining whether the expected sales outcome expected from marketing is realistic for the budget assigned – as well as how these will be tracked and defined for your business specifically. Only by understanding how marketing will be measured, how performance data will be collected/ interpreted and what level of variable marketing budget can sustain the expected outcome, can marketing hope to build a budget that will deliver an acceptable ROI.


Planning shows the way

Marketing, like all business functions, is about inputs, actions and outputs – with budget and resource representing Marketing’s key inputs, campaigns of one kind and another representing the core activity and sales representing the primary output sought for commercial enterprises. It’s not rocket science.

Why then does it sometimes feel that marketing is asked to make decisions with out knowing the full facts: what we are trying to achieve; how marketing is intended to contribute; how success will be measured; the quantitative relationship between inputs and outputs.

If you find yourself looking at the annual planning and budgeting round as a paper exercise, not connected to reality or anything you really care about doing, try zero-based budgeting, or what Gartner calls zero-based prioritisation, to determine what really matters and how marketing can justify/ substantiate its contribution to clear business outcomes. This approach ignores any historical spend or commitments and treats all expenditure requests equally based on their contribution to business goals. Marketing should expect to stand up and be counted along with everyone else.


Are you ready for that?

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