Budgeting for Profits
Every time NASA sends up another space probe, I wonder why.
Each time the space shuttle is launched from Cape Canaveral, I ask myself what benefits we are getting from this extreme amount of energy and effort and money that is being spent.
I wonder if we took the same amount of energy and effort and money and put it into providing food for those who need it around the world ... or eliminating all human conflicts that cause pain and misery ... wouldn't we be a lot better off?
When I remember some of the original thinkers. Aristotle. Mme. Marie Curie. Thomas Edison. George Washington Carver. Jules Verne. Leonardo de Vinci. Isaac Newton. Albert Einstein.
These people thought ahead. They were ahead of their time. And because of them, all of us enjoy some things we wouldn't otherwise have.
Maybe now it is time for some original thinking about Marketing Budgets.
Not too long ago I saw a cartoon which showed the outside of a movie theater. The name of the movie was "The Budget". The caption underneath said "I don't know ... I think it's a horror film".
Budgets are horrible. I don't know anybody who really likes them. Even the financial people who have to work with them really don't like them. They may enjoy the process of budgeting ... but working with budgets is just plain not fun. They are so limited!
The down side of budgets
Traditionally, budgets have been put in place to control costs. However good this intention, frequently it produces negative results.
Why? Because the budgets are put together before all the facts are known. And certainly before the results are known.
Budgets are built on assumptions ... and assumptions in marketing never produce the same results twice. Similar -- but not the same.
So we're building a budget based on history and some assumptions about the future. For marketing, this isn't the way to do it. For marketing, budgets should be built on results.
Based on results
Marketing should produce income. Profitable, bottom line income. It is the only expense designed to produce profitable results.
There are two basic ways to tell your story:
The purpose of advertising is to inform. To educate. To create awareness. To create an image. To position. To urge action.
The purpose of marketing -- sometimes called merchandising -- sometimes called sales promotion -- sometimes called direct marketing -- is to get a response. A result. A bottom-line action. A purchase. To generate cash flow. To make a sale.
It makes perfectly good sense to allocate a specific and fixed amount of money for advertising. It may be based on a percentage of sales for last year or on the projected amount for this year. This makes sense because you can not specifically measure what happens dollar for dollar on sales with advertising.
It works for advertising ...
This is not bad. Why? Because without education, without awareness, without image, without positioning, a product will not sell as well as when their audience has been educated. When there is an image and awareness level. When people do understand what the product will bring to them. They do understand the benefits over the features. They understand what they can gain.
Advertising and marketing should work as a complimentary team. And advertising can be very successful working on a fixed and exact budget.
... but not for marketing!
Marketing works better on a flexible budget! Why? Because a fixed budget for marketing will limit your ability to gain some very profitable results. If you have a fixed, specific, detailed budget for marketing and don't allow any flexibility ... what happens when you are successful? You run out of budgeted money!
The idea for this article came as a result of my two previous database retail articles published by DIRECT MARKETING. What I learned in my research about databases for restaurants was really very simple. It can be summarized this way:
If you spend advertising money to drive prospects into your restaurant to become customers, and then do nothing to build upon that, all you will do is advertise again and again, over and over.
On the other side, when you use advertising to drive prospects into your restaurant to become customers, and then use marketing to maintain them, to hold their hand, to reach out and touch, to build a relationship, you will enjoy a higher level of profit.
Easy theory, hard budget
This is where the budgeting gets difficult. It is easy to budget for the advertising part ... it happens every day all around the world.
It is much more difficult to budget for marketing ... because you really don't know what's going to happen until it happens.
Let's give an example from the restaurant trade. You have been advertising for a period of time. You are building a database of those people who have responded to your advertising. You are establishing a marketing program to invite those customers back to become better customers with you.
You probably have a birthday program, possibly an anniversary program, and a frequent diner program so your guests earn rewards by frequenting your restaurant.
For the purposes of this example let's assume you have 7 restaurants. Approximately 1500 people have registered in each of your 7 restaurants each month.
If you plan to mail to these people a birthday card during the month of their birthday, an anniversary card during the month of their anniversary ... at least one promotion each quarter, here is an example of what might happen over just a 3 month period:
7 Restaurants in this group 1500 New customer registrations each month at each restaurant 10,500 Total registrations per month for all 7 restaurants 33% Average redemption from offers made (a statistic from history) $24.25 Average sale per redemption (a statistic from history) ***************************************************************** Expected Results for 1 Quarter of Direct Mail Promotions to this known database of customers 31,500 Mailed offers (3 X 10,500) 10,395 Guest visits/Redemptions (33% X 31,500) $252,078. Revenue generated ($24.25 X 10,395 visits) ***************************************************************** Costs $62,370 Gift meals from offer ($6 X 10,395 for this group) $19,750. Mailing and service charges for all 7 restaurants $82,120. Total expenses ***************************************************************** $169,959. Net Sales after Direct Expenses $ 59,485. Net contribution to profits at 35% (Restaurant industry figure)
How many businesses enjoy profits at this level? Certainly not very many!
Database marketing does just that!
Break the fixed budget
Why would you want to have a fixed budget with opportunities of this sort?
The real question is how much advertising would it take to earn almost $60,000. in net contribution? I don't know. And the real answer is nobody knows!
In marketing we do know!
Clearly a program of this sort, where a database of customers is massaged to encourage additional visits is exceptionally measurable and profitable.
Limiting promotions limits profits
So, can you budget for this type of a program and put a limit on it? Absolutely not! Why? Because it makes so much sense to invest in marketing programs that produce on-going measurable results. Measurable results which are clearly profitable to the bottom-line. Such as inviting and re-inviting your customers back again and again and again.
There are additional benefits to database marketing, too. These are in some cases invisible ... because you don't really know they happen. They're very much like advertising. In other words, what I'm saying, is that marketing can also and is also an advertising tool. What are some of these other benefits:
Why, with all these benefits, and some bottom-line results, would you want to have a fixed budget?
Budgeting for profits simply means you're not locking yourself into a number. Instead you're locking yourself into a concept. And as your customer base grows and the opportunities to communicate with them grow with it, flexibility in your marketing budget will allow you to enjoy some more take home pay.
It is really as simple as that.
by ROCKINGHAM*JUTKINS*marketing, all rights reserved.