A Practical Guide - Marketing Costs and ROI

Personal view: text by human, image by AI.

I often get asked about my approach to costs, ROI, attribution, and everything in between!

I've put together this guide as a tool and discussion document that I hope others find useful. Every business is different, but I hope it gives some food for thought.

Understanding the balance between marketing costs and return on investment (ROI) is crucial for a chief marketing officer (CMO). Marketing is a game of numbers - awareness leads to consideration, consideration leads to intent, and intent leads to purchase. Each stage of the funnel can and should be measured carefully. Missing a target isn’t a sin; not understanding why you missed it is.

The Importance of Understanding Costs for CMOs

Getting a handle on your department’s finances isn't just about tracking expenses; it’s about making informed decisions that drive long-term success. Digging into the details of your costs is essential for a CMO. This foundation lets you allocate resources wisely, maximize ROI, and guide your team toward meeting your business goals.

Knowing the ins and outs of direct and indirect marketing costs helps you allocate your budget more effectively. This means you can create strategies that meet financial goals and drive meaningful engagement. In my experience, CMOs are set apart by their ability to balance cost management with creative marketing initiatives.

As you lead your team with a clear view of costs, you build a culture of accountability and strategic focus, ensuring that every dollar spent invests in growth.

It doesn't happen overnight. Getting to some of the numbers is challenging, but over time, you get better at seeing the whole picture and understanding what it tells you.

Unpacking Internal Costs

Understanding internal costs is like knowing the backbone of your marketing department. Staff expenses, which include salaries, benefits, and training, are more than just numbers - they're investments in your team’s ability to innovate and execute. To get the most out of this investment, managing these costs wisely is key.

Key Questions for CMOs:

1. What’s the breakdown of fixed vs. variable costs? Aim for a mix where fixed costs (salaries, benefits) don't exceed 70-80% of total internal costs, allowing flexibility. I go lower and aim for 60-70%, but every business is different.
2. What’s the right mix of in-house versus freelance and agency support? In-house talent should cover core roles (around 60-70%), with freelancers/agencies handling specialized or temporary needs (30-40%).

Also, examine your team's activity closely and challenge whether the output matches the desired outcomes. Sometimes, tasks that have become routine might not be adding the value they once did.

Reassess regularly to ensure that every activity effectively contributes to your goals. This involves regularly assessing staffing levels, investing in training to reduce reliance on external agencies, and using technology such as AI to automate routine tasks. This frees your team to focus on being creative and strategic.

Navigating External Costs

Managing external costs requires a strategic approach that balances innovation with cost efficiency. For CMOs, this means building strong partnerships with agencies, media companies, and other vendors to ensure that every penny spent fuels creativity and impact.

Key Questions for CMOs:

1. How do my external costs break down among different vendors and services? Ensure no single vendor takes over your budget; maintain diversity.
2. What’s the fixed vs. variable cost ratio in my external expenditures? Aim for more variable costs to keep flexibility based on campaign performance.
3. What percentage of total marketing costs is spent on activation (activities seen by your target market)? Aim for at least 50-60% of your budget to be directed towards activation for visible impact.

Especially scrutinize event and sponsorship costs. If an event or sponsorship hasn’t generated clear leads or sales within 24 months, challenge the idea that it’s purely a "brand play."

In my experience, events should yield meetings and leads. Question long-running events that haven’t been delivered.

To be fair, I also question long-term media partnerships with the same scrutiny. What are they delivering, and is it as effective as before?

Negotiate with a clear understanding of your marketing goals and budget limits. This helps manage costs and build transparent, respectful relationships with vendors. Encourage open discussions about costs, expected outcomes, and the possibility of scaling efforts based on results.

Effective external cost management extends your marketing capabilities while monitoring ROI. Embrace this challenge as an opportunity to drive value, innovation, and efficiency. Doing so maximizes your marketing investments and builds a foundation for sustainable growth and an impactful brand presence.

Marketing Attribution: Mastering ROI Insights

Understanding marketing attribution is crucial for deciphering the impact of your marketing efforts on ROI. With various attribution models - from first touch to multi-touch - it’s not just about tracking; it’s about gaining insights to inform future strategies and optimize the marketing mix.

Critical Questions for CMOs:

1. Which attribution model best fits my business objectives? Choose between first-touch, last-touch, and multi-touch based on your customer journey.
2. How accurate is my current attribution analysis? Regularly validate your data to ensure precise insights.
3. What percentage of my marketing budget can be directly linked to ROI? Aim to attribute at least 55-70% of your budget to measurable outcomes.

Mastering attribution means navigating challenges and dispelling misconceptions. It requires analytical skills and marketing know-how to apply the right model for your business goals and customer journey.

Embracing marketing attribution isn’t optional. It’s a critical skill that requires a deep understanding of how different touchpoints contribute to conversion and customer acquisition.

Zero-Based Budgeting: A Fresh Perspective on Cost Management

Zero-based budgeting (ZBB) turns traditional budgeting on its head by reassessing every cost from the ground up each budgeting period. Unlike traditional methods, ZBB requires justifying each expenditure anew, ensuring every pound spent supports strategic objectives. This process illuminates hidden costs and prompts a rigorous examination of the value each activity brings.

Key Questions for CMOs:

1. How do my current expenditures align with my strategic objectives? Ensure each expense is justified and directly contributes to your goals.
2. Are there hidden costs in my current budget? Identify and eliminate unnecessary expenditures.
3. What percentage of my budget can be reallocated to higher ROI activities? Continually optimize and reallocate funds towards the most impactful initiatives.

Implementing ZBB can be transformative. Regular ZBB exercises can identify "rinse and repeat" costs - expenses that haven’t been challenged for years and have become fixed costs. Eliminating these frees up the budget for more strategic investments.

Embracing ZBB is about cutting costs and making smarter, more impactful investments. It's a challenging process, but I do it every three years or so.

Brand Versus Demand: Why Not Have Both?

A common debate in marketing concerns the balance between brand awareness and demand generation. The truth is you need both. It’s not an "either-or" scenario; a successful strategy integrates both. Brand awareness creates a recognizable and trusted image, while demand generation drives specific actions that lead to sales and ROI.

The percentage spent on each will vary depending on your business’s maturity, current brand awareness, new product launches, and competitive pressures. Early-stage companies may focus more on brand building, while mature companies might allocate more to demand generation.

Key Questions for CMOs:

1. What’s the balance between brand awareness and demand generation in my budget? Ensure a strategic mix that aligns with your goals. Typically, an allocation of 40/60 is used, but it can and should vary depending on these factors:
2. How does my business's maturity influence this balance? Adjust spending as your brand evolves and market conditions change.
3. Are there product launches or competitive pressures that require a shift in strategy? Be flexible and adapt to market dynamics.

Integrating both brand and demand strategies enhances your ability to attract and retain customers, creating a cycle of brand loyalty and sustained revenue growth.

Balancing Creativity and Cost Efficiency

Balancing creativity with cost efficiency is a challenge but achievable for CMOs. It’s about harnessing creativity to enhance cost efficiency, not compromising on innovation due to budget constraints. This dual focus leads to innovative strategies that are impactful and mindful of budget boundaries.

Key Tips:

• Use data-driven insights to find cost-effective channels and techniques that align with audience preferences. If someone says it's difficult and can't be done, ask why until you get the answer.
• Think outside the box to find creative solutions that deliver maximum impact without overspending. Smart bucks always outperform megabucks, and let's face it: The days of megabuck budgets are gone. One of my digital marketers found a way to serve our display ads more effectively and quickly than our external media agency. Guess who won the day? And the budget?

Adopting a strategic approach that prioritizes creative excellence and fiscal discipline allows you to craft campaigns that resonate deeply with your target markets. This balance is crucial for driving sustainable growth.

Measuring and Demonstrating ROI

In the quest for marketing excellence, measuring and showcasing ROI is essential. This validates the effectiveness of your strategies and strengthens your narrative within the corporate hierarchy, illustrating the tangible impact of your initiatives.

Key Strategies:

• Use analytics tools to trace the journey of investments to outcomes. Now I know that for each $1 spent on external activation, I expect $8-12 back, and there's usually a four-month timing lag. That one fact can revolutionize your marketing team's kudos with the business, and yes, it was worth putting in the work to prove it.
• Craft a data-supported story of success that resonates with stakeholders, use accurate data points, and be honest when things haven’t worked and why.

A disciplined approach to ROI measurement fosters a culture of continuous improvement, guiding smarter spending and more compelling results. This affirms your commitment to accountability and highlights marketing as a positive contributor to the organization’s success.

Conclusion

Understanding and managing marketing costs is essential for CMOs. By balancing creativity with cost efficiency, mastering marketing attribution, and embracing zero-based budgeting, you can drive significant value and make marketing a net contributor to your firm's success.

A successful CMO blends art with science, creativity with efficiency, and vision with precision. Do we always get the balance right? No! But that’s what makes our roles exciting and challenging.

I wish you the best of luck on your journey!

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