Stop Your CFO From Cutting Your Marketing Budget in a Recession: Part 2
This post is the second of a series. In part one, we looked at how marketing leaders can better understand the mindset of their CFOs. We also shared our recommendation for the first three steps to take when proving the value of your marketing budget if it should come under fire due to challenging market conditions.
Now that you’ve covered the foundational concepts, defined a KPI, and identified whether it’s the business (baseline sales) or the media (incremental sales) that is underperforming, it’s time for the next steps.
Step 4: Quantify media performance
At this point, you’ve had the conversation with your CFO and understand what needs to be done. Ultimately, there are two scenarios:
- If it turns out that baseline sales are down, but ROAS(i) is above target, the optimal move is to actually increase the budget, as this is proof that media is contributing to the overall success of the business
- If incremental ROAS - or ROAS(i) - is below target, your job is to optimize by assessing what changes you can make to your media mix and how that will impact your overall media performance. This can be tricky, but the good news is Measured’s Media Plan Optimizer can do this for you!
The goal of this analysis is to determine your max ROAS(i) according to your current budget.
- If this number is above your ROAS(i) target, this likely means there is room to spend more. In this case, determine the maximum spend you could deploy while staying above the ROAS(i) target. Not only will this allow you to hit your goal, but by increasing media spend with a profitable ROAS(I), you will also be contributing to the overall health of the business.
- If this number is below your ROAS(i) target, this indicates media spend is too high relative to the business objectives, and you will need to prepare to cut your budget. In this case, identify which surgical cuts you could make based on your analysis. In doing this, you may be tempted to simply cut high spend/low return tactics (typically brand awareness/traffic campaigns), but these campaigns can often provide the “fuel” for lower funnel campaigns to work well over the longer term. Instead, it may make more sense to focus first on campaigns intended to drive conversion but are performing below the target ROAS(i). Your goal is to identify the minimum cuts required in order to hit the desired performance - start small and only expand when necessary.
Step 5: Make your case
Invite your CFO to be a partner in the analysis. After all, they love data, and, as a smart marketer, so do you! Some of the questions to improve your analysis are:
- How can you improve your assumptions (i.e., return percentage, taxes, processing fees, COGS, etc.) so you know what the real profit impact is of your media spend?
- How does your CFO anticipate baseline sales to change, given the current economic conditions?
If you’ve followed our steps until now, your CFO should understand your methodology to evaluate media impact, be in agreement on a target KPI, and know how media has performed relative to that KPI. All that’s left is for you to make your recommendation, which should include the following:
- What is the problem? Is media really to blame, or are there broader issues at play?
- How should media be optimized? Include a summary of the current budget (ROAS(i) of x) and an optimized version of the current budget (ROAS(i) of y). Indicate if budget increases/decreases/reallocations need to be made and what the business impact of this recommendation is.
- What will baseline sales be? By inviting your CFO into the analysis with you, there should already be alignment here.
- What is the final outcome if we combine baseline sales + optimized incremental sales from media? Does this number land above/below target for the business overall?
Regardless of the outcome, you will have likely earned the trust and respect of the finance team by proving you know exactly how media investment impacts the bottom line. Going forward, they are more likely to see media as a “profit center” rather than a “cost center,” but for now, you will land in one of three categories:
- We can make changes and hit our target without cutting spend
Great! You’ve saved your budget, come out of this exercise with a more optimized version of it, and everyone is happy. Congratulations!
- We can make changes and hit our target, but we need to cut spend
This is not as ideal as the first scenario, but it likely indicates that your media budget needed optimization anyway. Take this as an opportunity to perform more efficiently as a marketing team. Coming out of this analysis, you can position recommendations to surgically cut the budget to only the most impactful changes. (Check out our video on how often you should run incrementality tests).
- We cannot make any changes to hit our target, even if we optimize/reduce spend
In this case, the CFO now needs to prepare company leadership for the fact that they will miss revenue targets. You may not be able to avoid cutting your budget in this scenario, but you do have a responsibility to highlight the revenue impact of doing so. Fortunately, since you evaluate media on an incremental basis, you know exactly what this is, and you can communicate to the CFO that if your ROAS(i) is above your desired target, then cutting your budget will actually accelerate the overall problem.
The relationship between the CFO and the CMO should be a partnership, and the CFO should view media as a profit center. If they do not, it is your job to quantify this for them. When times get tough, keep this framework in mind:
- What is the true problem?
- How should we optimize to address it?
- What is the impact of these optimizations?
When managed appropriately, media budgets are fuel - dollars that go into the machine come out as profit. This means that as long as you are above the breakeven point, it’s counterintuitive for the CFO to cut your marketing budget, and they should look elsewhere for true cost savings.
As a data-driven marketer, this is easy to explain with a tool like Measured, so please get in touch if this is a problem you’re facing.