By Dr Grace Kite

Three data led pointers for budget season

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It’s that time of year. The evenings are getting darker, couples are bickering about whether to turn the heating on, there’s spiders in the garden, and, at work, everyone’s thinking about next year’s budget. How big it should be and how it should be spent.

For 2023, these questions are even more fraught than usual. With inflation running in double digits, businesses and households will have to spend more on the things they absolutely must buy. That means consumers will have less cash for things marketers would like to sell, and businesses less for the tools marketers like to use.

But questions about 2023 budgets aren’t impossible to tackle.

There’s a small army of highly skilled and qualified econometricians analysing money returned for different media budgets. They’ve now been at it for so long that it’s possible to see the patterns. To see how outcomes vary with the size of budget chosen.

And there are consistent patterns in the data. Things that are often true. While these can never point precisely to the right thing for any particular business, the actions they identify are a whole lot better than writing a guess on a blank page.

Right now, it matters where your sector is headed

Most marketers will be familiar with the evidence-based rule of thumb that says being louder than your competitors, so that you have a higher share of voice, will over time lead to you getting a higher share of market.

This is a well-established way of setting budgets. The number crunching proceeds by working back from the growth in market share that you want, to the share of voice you’ll need to get there, and then how much that’ll cost to buy.

This method still works in times of uncertainty, but an additional step is needed before beginning on the maths. That is to understand where your market is going, and so the value of an additional point of market share.

A wide range of economists and analysts are producing forecasts for growth and decline of different sectors next year. If your sector is going to be ok, or even growing, market share is valuable, but if not, a large investment into share of voice won’t pay back.

Looked at through this lens, 2023 budgets should be bigger for FMCGs where purchases are necessary, and travel, eating out, and experiences where there is still pent-up demand post-covid. At the other end of the scale, furniture, expensive electronics and food delivery should save their media pounds until the recovery.

Calibrate your budget to the size of your business

If you are in one of the categories that will be ok, and planning to do advertising in 2023, the evidence shows time and time again that bigger businesses can and should spend more than smaller businesses.

The reason is simple. Products of bigger businesses are more available to more people than those of smaller businesses. That means more people can easily respond to advertising, so it’s worth reaching more people, so it’s worth spending more.

I recently reviewed a range of studies looking for rules of thumb on how budgets should adjust to the size of the business if the objective is to maximise ROI.

And I found something incredibly helpful. That is, across three very reputable sources, the conclusion was very consistent. A good rule of thumb is to spend between 5% and 10% of turnover on advertising for the highest return on investment.

  • This was true in the ARC database – a joint initiative between the IPA and magic numbers to bring hundreds and hundreds of econometrics findings from 6 econometrics shops together.
  • And it was also true in a range of budget optimisations done by Paul Dyson, founder of Accelero, based on his meta-analysis of estimated response curves.
  • And it was true in Nielsen’s 2022 ROI study which looked at 150,000 budget vs ROI observations worldwide.

Consistency like that across reputable meta-analyses amounts to a very serious statistical regularity, and so a super helpful starting point for budget discussions.

Don’t be shy, many advertisers aren’t spending enough

Another consistent finding across the three studies is that most businesses don’t spend 5-10% of revenue on advertising. In other words, most budgets are set too low, most marketing departments aren’t being confident enough in their plans, and profitable opportunities are being missed.

The chart below is from Nielsen’s study of FMCG/CPG cases worldwide. It shows that across all regions, budgets are well below 5% of revenue (maroon blobs). On top of that, the further below 5% each region is, the lower the ROI (pink blobs).

Part of the reason for this seemingly chronic underinvestment in advertising is, no doubt, the risk involved where something that’s hard to control – creativity – has a big impact on returns. Big advertising budgets are not an easy sell when the CFO has much more certain ways to spend the same money.

But a difficult selling task shouldn’t be a barrier to senior marketers. After all, most CMOs and marketing directors got there because they had at least a bit of a knack for convincing people to buy stuff.

When the sell is internal and to the CFO, having evidence and numbers on expected returns is an important step. But it’s also important to have analytics people who can explain and prove the validity to the board in a credible way. Many CFOs understand econometrics, and in our experience at magic numbers, allowing them to look under the bonnet and ask their hard questions often helps hugely.

And if that doesn’t do the trick, start planning now for next Autumn. Take the advice that Mark Ritson collected from CMOs that are getting it done, and work on a year-long campaign to convince your organisation from top to toe.

That way by the time that next year’s leaves are falling off the trees, and your budget request lands again, the ground will be much more fertile.

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