Executives should focus on how to allocate marketing funds rather than how much to spend overall

Ever-rising marketing budgets are becoming an explosive issue. On advertising alone, companies spend fortunes: Nestle, $11 billion; Unilever, $8 billion; General Motors, $4.7 billion; Procter & Gamble, $3.8 billion; Sony, $3.4 billion; and Coca-Cola, $1.7 billion[1]. With no end in sight to escalating marketing outlays, many CEOs, CFOs and CMOs are asking two questions: "Is our company spending the right amount on marketing?" and "Are we spending it in the right places and on the right activities?"

These days, companies can answer those questions much more precisely than department store pioneer John Wanamaker could in the late 1800s. It was then that the Philadelphia retail magnate lamented, "Half the money I spend on advertising is wasted; the trouble is, I don’t know which half." Using "return on marketing investment" (ROMI) and other approaches, companies today can know with unprecedented confidence which programs are paying for themselves.

But ROMI and similar techniques aren’t easy to use. They require extensive data gathering and analysis, and can take years to implement. To avoid these complexities, many companies adopt much simpler – and sometimes simplistic – approaches: a mark-up (or mark-down in lean times) of last year’s budget or benchmarking against competitors ("They spend 5 percent of revenue on marketing, so we should too"). Yet from our experience, these approaches often generate decisions that have little relation to how much a large organization should actually spend on marketing and how it should divide the pie among business units, product lines and geographies.

An alternative approach has helped a number of companies answer these questions and significantly boost their return on marketing investment. While not a replacement for ROMI, the approach works because it sets aside the first question – how much should the company spend overall on marketing? – and focuses on the second: How should marketing dollars be allocated?

In this article, we explore the limitations of current approaches to setting marketing budgets. We then explain a different approach that simplifies the task and gets to the heart of the issue: determining where – not how much – to spend on marketing.