Budgeting Bliss or Marketing Miss?

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Shortly after retiring from a career in academics, acclaimed economist, author, and professor emirates Michael Jensen wrote:

“Corporate budgeting is a joke, and everyone knows it. It consumes a huge amount of executives’ time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages managers to lie and cheat, lowballing targets and inflating results, and it penalizes them for telling the truth. It turns business decisions into elaborate exercises in gaming. It sets colleague against colleague, creating distrust and ill will. And it distorts incentives, motivating people to act in ways that run counter to the best interests of their companies.”

This is the first paragraph of his 2001 article in the Harvard Business Review entitled, “Corporate Budgeting is Broken–Let’s Fix It”. In this article, Jensen discusses the corruption and mismanagement of corporate budgets, who's at fault, why they’re at fault (motivations) and how continuing to ignore these problems will “threaten the integrity of your entire organization.”

So how did 2001 “Corporate America” get to this place of such failure? According to Jensen, the problems are actually hiding in plain sight. “The budgeting process is so deeply embedded in corporate life that the attendant lies and games are simply accepted as business as usual, no matter how destructive they are.”

“The budgeting process is so deeply embedded in corporate life that the attendant lies and games are simply accepted as business as usual, no matter how destructive they are.”

Jensen goes on to talk about how certain incentives for managers – those whose role it is to determine how the budget impacts daily operations – are what’s to blame for mismanagement, and ultimately a loss in both productivity AND profits.?

This article is nearly a quarter of a century old, so in between 2001 and now have we fixed it? This crisis with how to manage the managers managing the budget? The simple answer is, no.?

Of course there are always nuances – those who finally “get it” or some portion of “it.” The term compassionate capitalism comes to mind. This term has been popularized in the last 10 years by those who are looking to balance out the individualistic incentives of capitalism with a humanitarian approach, i.e., making profits while trying to minimize harmful impacts on the planet as they go about it.?

According to a 2022 report synopsis by Accenture, a global information technology and consulting company, “Most companies now recognize that ESG (Environmental, Social and Governance) metrics are linked to performance not just compliance.”

This has a direct impact on budget, steering some funds away from personnel performance/incentive-based tactics, but the struggle for most companies is real. And the truth of it is, that no matter how big your business, whether you’re part of a large chain, a small mom-and-pop shop, or somewhere in between, the common issue of how to exactly manage the budget persists.?

This is a discussion I often have with my clients when it comes to marketing. There is a lot of confusion about how to determine the actual marketing budget.

There is a lot of confusion about how to determine the actual marketing budget.

According to the U.S. Small Business Administration (SBA):

• Small businesses with revenues under $5 million are advised to allocate about 7-8% of their revenues to marketing. This recommendation aligns with the necessity for small businesses to establish a strong market presence and drive growth, despite often operating with more limited resources compared to larger enterprises.?
• Larger companies with revenues ranging from $5 million to $100 million, might spend a slightly lower percentage of their revenues on marketing, around 6-7% according to the SBA guidelines. The lower percentage of revenue allocated to marketing as company size increases is a reflection of the broader range of resources and established brand presence that larger companies typically possess, and therefore may not require as aggressive marketing spending to maintain or grow their market position.?

Actual marketing spending varies quite a bit from the SBA ideals. According to The CMO Survey, a research project that has been collecting and disseminating the opinions of top marketers since 2008, businesses under $10MM are spending 19% of their revenues on marketing, while businesses with revenues between $26-99MM are spending 9.1%.

Still confused? Of course you are. The numbers don’t smell right. Why are businesses spending significantly more on marketing than what’s recommended? I’m willing to bet that few of us can name many small businesses spending upwards of 20% of revenue on marketing. Even as someone who has spent close to two decades working with small and midsize business owners, that number shocked me when I first saw it.??

So let’s try to make sense of it.

First, the recommended SBA guidelines aren’t a one-size fits all solution. They are more like guardrails for those that don’t know where to start. Just applying an arbitrary percentage without taking into account all the nuances of the individual business can do more harm than good.?

We see this in our personal lives all the time. What if you said that a nice family vacation should be budgeted for X% of the total household income? That sounds great until you realize that, even with identical incomes, a family of three, for example, can afford a lot more vacation on that budget than a family of five who will spend 67% more on airfare and food than the family of three, double on hotel rooms, and who knows how much more on things like rental cars, souvenirs, and other trip related expenses.?

The same sort of imbalance exists when you tell a retail business with low profit margins that they should be budgeting for marketing the same as a consulting business with large profit margins. The deviation from the recommendations is a reflection of this. Different companies have different constraints and different competitive dynamics.??

Another reason for the variance from the SBA guidelines is that while the SBA can say, “spend 6-8% of your revenue on marketing,” they don’t specify exactly what expenses that budget should cover. In practice, companies can differ a lot in what expenses are paid for as part of the marketing budget.? Wondering what might be included?? Here’s a little peek into what others are doing per The CMO Survey.?

This graphic is very telling. Many businesses pay for most or all of the needs expressed here but we do not have overwhelming agreement on which of these expenses should be covered by the marketing budget and what should be covered by other departments.?

My Opinion: The numbers aren’t apples to apples as we look at spends across different business sizes and the differences are going to be felt more intensely by smaller companies. For example, if a $5MM company is including all of their marketing and sales salaries in their marketing budget, those expenses alone could be 10% of revenue, putting them above the 8% guideline before they actually produce anything like an ad campaign or a website.?

Still confused? Probably a little. So what’s the solution??

Have an “adult in the room” when it comes to marketing budget and finance. What I mean by that is, have someone on your marketing team who understands your company’s financials, and who can help you understand how profits are created in your business. Someone who can tell you what spending is happening where, what you’re actually buying, and what, per company history, success you should expect to receive in exchange for your money. Someone who doesn’t just know the numbers, but knows what the numbers mean.

Someone who doesn’t just know the numbers, but knows what the numbers mean.

In the past I have talked about the idea that marketing teams are often staffed like basketball teams, with a few superstars who drive success, but are run more like soccer teams, where the weakest player on the team, the one who makes the one bad pass can cause a mistake that negates all the good passes that came before it.

My advice: Staff your marketing team like a soccer team and focus on improving your weakest links. If you don’t have a person on your team who understands the nuances of budgeting and strategy, that’s a bad pass on the field, you’ll lose momentum, turn over your progress to others, and possibly end up losing the game. And keep in mind that I’m not talking about a dedicated marketing employee to dig into the financials, but a full-time or fractional CFO, controller, or director of accounting who understands that this is part of their role.?

Well, we’ve come a long way from the beginning of this article. But I’d like to finish it with another thought from Jensen. “Organizations don’t change overnight, particularly when the very frame through which we see the business is involved.”

So, don’t give up. Budgeting for marketing is hard and the process is different for every company. Get the right people in place, keep putting the work in, understand what it is you’re looking at, and the results will come.

Erik Wolf is the Founder & CEO of estound, a Denver-based marketing agency. He has also written three books, taught as an adjunct professor at Metropolitan State University, and is a speaker with Vistage Worldwide, a coaching and peer advisory group for CEOs. Connect with Erik on LinkedIn.