We’ve entered annual planning season for many companies. As with any other corporate function, marketing teams are developing their plans for the next fiscal year, including lobbying for budget. All too often, the budgets that marketers request are simply based off of the current year’s budget allocations. Occasionally, marketers are more proactive in seeking new budget to test new channels or programs. Perhaps they even piloted a program this year that had some measurable success and are lobbying for expanded investment for next year. But, most of the time, marketers are simply taking the budget that their CFO allocated to the CMO and being told to do what they can within what they’re given.
Why does this happen? Because marketing gets stuck being perceived as an operating expense instead of a capital expense.
Below is a definition of operating expenses from Investopedia:
“An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance and funds allocated toward research and development.”
Below is a definition of capital expenses from Investopedia:
“Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm. This type of outlay is also made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building, to purchasing a piece of equipment, or building a brand new factory.”
The issue with these definitions is that they fail to recognize that sound investments in marketing are investments in growth – in profitable revenues, in asset value and in scope of operations. So, should some marketing expenses be considered CAPEX?
Consider that each marketing discipline has a payback period on investment. Some are longer and some are shorter, depending on where they land in the buyer’s journey / sales funnel. For example, SEO and paid search are going to have a shorter payback period because these are primarily bottom of the funnel disciplines. Good SEO and paid search captures potential customers when they’re looking for a specific solution and have high intent and immediacy to acquire that solution. On the other hand, social media and display advertising tends to focus earlier in the buyer’s journey – driving brand/product awareness. Thus, social media and display tend to have a longer payback period. A marketing department should have a handle on three key metrics:
- Customer acquisition cost (“CAC”): the cost to acquire a customer
- Customer acquisition time (“CAT”): the time it takes to acquire a customer (i.e. the average duration of the buyer’s journey)
- Customer lifetime value (“CLV”): the amount of revenue that each individual customer generates during the entire duration that the customer uses the company’s product
A strong marketing department will also have an understanding of how each marketing discipline / channel contributes to these metrics. This context then gives marketers a foundation to lobby for investment.
How much does your company want to grow next year?
Let’s look at a very basic example: assume we have a $50M revenue business, and we want to grow 20% year over year. That gives us target revenues of $60M for the next fiscal year, which means we need to acquire $10M in new revenues. If our product sales price is $200, then we know that we need to acquire 50,000 new customers ($10M / $200 = 50,000). And, if our CAC is $100, then we know we need to invest an additional $5M (50,000 * $100 = $5M) in order to achieve our revenue goals. (*Note for startups that are still figuring out their business models: your CAC should be less than your unit sales price in order for you to have a sustainable, profitable business.).
Running a basic calculation like this enables you to come into budget talks informed and prepared to make your case for budget based on business imperatives. Equally important is understanding how each marketing discipline – search, CRM, social, paid media, PR, etc. – contributes to your CAC and on what payback period, so that you can allocate your budget appropriately.
Think with Google is just one tool that helps us understand this. The below image shows us the general buyer’s journey to online purchase.
As you can see, each marketing discipline / channel plays its part in driving a buyer (i.e. customer) to make a purchase. Organic search, brand paid search, email and referral are at the bottom of the sales funnel (i.e. closer to the point of purchase). Thus, these channels have a shorter payback period. As these channels are directly driving revenues, they may fit well in the OPEX budget. But, how about those activities with longer payback periods?
Consider social media. This discipline / channel typically plays two key roles in the buyer’s journey / sales funnel. See the sales funnel below:
First, social media builds awareness for your brand. This is earlier in the buyer’s journey. But, social media also enables and amplifies advocacy on the tail end of the funnel / buyer’s journey. Advocacy is where customers share their enthusiasm and support for the brand/product. This advocacy helps in the consideration and preference stages of the funnel, as potential customers value the opinions of people in their social networks and other customers that have experienced a brand. Thus, when done well, social media can increase the value of your brand by lowering your CAC and increasing your CLV. Your brand is an asset to the company. So, while it may take longer to achieve the ROI on social media (i.e. there is a longer payback period), this should not preclude the business from investing in the channel. Also, since social media helps to build the value of an important business asset – the brand – over a longer period, should we consider social media a capital expenditure?
We could think of CRM in a similar fashion. A robust email list of customers and potential customers is a business asset. As you can see from the buyer’s journey image above, email sits at the bottom of the funnel – close to the purchase decision. So, how valuable is customer data that will enable the company to market more effectively and efficiently to drive revenue?
While moving organizations – and, in particular, finance teams – to think about marketing expenses as both OPEX and CAPEX (vs. just OPEX), depending on the marketing activity, may take some time, it’s a worthwhile exercise to consider. First, it will ensure that marketing teams are accountable for their primary objective – driving revenue- and that they are putting the right KPIs and analytics infrastructure in place to measure impact. Second, it safeguards the marketing organization from mid-year budget cuts all too typical in large organizations. It’s never made sense to me why companies cut marketing budgets when they don’t hit their numbers; this is when they should be investing more in marketing. See the Virgin Atlantic vs. British Airways case study that I reference in this blog post.
Another way to think about making this shift is considering the marketing P&L. Paul D’Arcy, CMO of Indeed.com, wrote about this in his blog post “It’s Time to Kill the Marketing Budget and Think About a Marketing P&L.”
Regardless of what approach you take, come to your planning meetings informed with data and couching your budget requests in the context of the business impact to expect to make. Your CFO speaks numbers; be prepared to speak her language.