Stop Your CFO From Cutting Your Marketing Budget in a Recession: Part 1
As marketers ourselves, we’ve all seen it before: Revenue isn’t tracking to plan, subscriber numbers are down, or renewals aren’t what were expected. It feels like the sky is falling, and the first reaction is: ‘We need to reforecast!’
The big questions always run along similar lines as CFOs think, ‘let’s take a look at everything’:
- Are there any expenses we can cut?
- We’d prefer to avoid layoffs to reduce expenses; inevitably, this leads to looking at the big mystery line item on the P&L called “Paid Media.”
The knee-jerk reaction is: Everyone knows that stuff doesn’t work! Let’s cut that expense in half, and voila, problem solved.
The truth is, it’s not so easy. Of course, certain media channels may not work for your brand - but if you’re worth your salt as a marketer, you’ve been accounting for this and know that every single dollar you spend is driving incremental profit to the business.
This blog series is your guide to help you navigate through the difficult paid media conversation with your CFO that every marketer dreads - and how to come out the other side with your marketing budget intact.
Getting Into the Mind of a CFO
While we will start by qualifying that every CFO is unique, for the sake of this blog, let’s allow a few generalizations.
CFOs are very analytical and have the very complicated job of managing the company’s cash flow and ensuring the appropriate strategic investments are being made. They can allocate a budget in a lot of ways (product, sales, people, warehouse, marketing, M&A, etc.), and with higher interest rates, things need to be especially impactful in order to justify the risk.
Most CFOs, and frankly even CMOs, haven’t bothered to quantify media performance properly and are stuck on an inaccurate method of measurement (i.e., in platform numbers or Google Analytics), so they don’t have a good baseline of how to evaluate the impact of their media spend.
As a smart marketer, it’s your job to train them, and if you’re thinking about incrementality and deploying an experimental roadmap, you’re already in the 90th percentile of sophistication. The objective? Transform how your CFO thinks about marketing from a “cost center” to a “profit center.”
Step 1: Cover Marketing Analytics 101
If you’re lucky enough to have a CFO who just ‘gets it’ and understands marketing analytics, you can probably skip this. But, if that were the case, they wouldn’t be looking at the marketing budget as the first thing to slash!
Otherwise, cover the basics below. Ideally, do this when times are good, so they’re trained to value marketing, but better late than never.
- Differences between site side analytics, in-platform numbers, media mix modeling (MMM) vs. multi-touch attribution (MTA), vs. incrementality, why in-platform numbers are wrong, how lower funnel is over-reported, upper funnel under-reported
- The notion of incrementality and that total sales can be split into those that are media-driven (incremental sales) and those driven by other factors (baseline sales)
- How you use incrementality to quantify how every dollar you spend on media impacts the contribution margin (the revenue from a sale minus the variable costs such as COGS, shipping, returns, processing, etc.)
If your CFO understands the above, they should start to see that their job is to find you as much budget as possible, rather than cutting it, as long as you can hit whatever target you define as “success.”
Step 2: Define “success”
Sit down with your CFO and confirm the key KPIs for the business this month/quarter/year. This could include, for example, revenue or new customers. You want to align on the business's overall strategic objectives and the ROI level the CFO needs to see from marketing to justify allocating budget there.
Make sure you align on a precise target for media performance that defines success relative to the other possible allocations of capital. Make sure that this number is adjusted for incrementality.
Beware of conflicting goals like revenue and profit or revenue and new customers. It may not always be possible to hit BOTH of these goals, and you need to get ahead of this if you see a conflict within the organization. You’re a marketer, not a magician, and while you might be able to make both things happen, you need to highlight it if it’s not possible and push for alignment on a single KPI. This established KPI is your north star. (Here’s a step-by-step guide on how to leverage incrementality to establish a profitable media mix.)
Step 3: Identify the real problem
Is the problem that the media is underperforming, or is it really just the business? It’s important to separate these two. Given that you’re having this conversation, the business is trending below target, but you need to know how bad the situation truly is.
It’s possible that the business overall is trending downwards, but the media is actually performing well. This would be a situation where “baseline” (non-media driven sales) are down, but media is performing above target. For instance, imagine a scenario where you agreed to a ROAS target (ideally one that accounts for incrementality) of $2, and you’re currently at $2.50. In this case, rather than cutting media, you should be spending more!
Again, you’re a marketer, not a magician. Part of your job is to ensure the media budget delivers profitable returns, but unfortunately, there are other macro factors outside of your control impacting the business in the short term. In this case, the question is: How far off target are you? If the business isn’t going to hit the goal, you need to know how large the gap is. Once you have that, you can make a plan.
Now that you have these steps covered, the next action items are to quantify media performance and state your case to the CFO. Stay tuned, and we’ll dive into details of how to do so in part two of this series.