When working with clients to improve their financial performance, we are often presented with the task of measuring how marketing expenses impact their business. Of all of the expense categories that we analyze, we observe a marked level of debate within companies and business owners as to whether they are:
1) Spending the “right” amount on marketing
2) Allocating their budget toward the most effective marketing endeavors
While we aren’t experts on the ?artistic side? of marketing, Bridgesphere is uniquely positioned to use our financial models to help companies determine whether their marketing expenses are “appropriate” within the context of the financial health of their business.
Looking at Marketing as an Investment:
One of the reasons marketing expenses give rise to confusion is the notion that a portion of any company’s marketing spend is probably an “investment“, versus an “expense“.
Marketing “investment“ is generally considered to be those expenditures that are expected to generate revenue years into the future. For example, investing in new brand identity is an endeavor expected to yield financial benefits for years to come.
Marketing “expenses“, however, are generally expected to yield their benefit during the current year. ?For example, this month’s spend on LinkedIn ads are expected to generate a meaningful benefit to your company in the current month. In the future — you have to spend more money on such ads to continue to derive any financial benefit.
A Pitfall in Analyzing Marketing Solely as an Investment
When management teams rationalize that current expenditures are expected to generate revenues well into the future — incremental spending becomes easier to justify. ?That?s one reason marketing budgets get out of whack. Quite frankly, that is how poorly run marketing teams are able to bleed their companies of the very cash flows they need to preserve their financial health.
A critical exercise in analyzing your marketing spend involves striking a careful balance between marketing investments (cash spent today that is expected to provide long term benefits) and marketing expenses (cash spent today to provide a short term benefit).
How is this accomplished? By optimizing your marketing expense.
4 Keys to Successful Marketing Investment:
It?s true — marketing can be one of the few expenses that (if wisely spent) is also an investment in your business.
In order to optimize marketing expenses within the context of your business’ overall financial health, it is important to consider four things:
1) What is your customer acquisition cost?
2) Is your marketing budget sufficient to support your targeted level of revenue growth
3) How does the growth rate of your marketing expenses compare to that of your revenues?
4) Is your marketing budget being allocated towards the most profitable marketing endeavors?
These four analyses — along with a host of other critical gauges of financial health are metrics we constantly run for our clients. Its part of something we call Business Performance Planning.
Your company’s marketing expense (along with every other category of expense & investment) need to be running in perfect harmony for your business to achieve maximum operating profit and your desired level of growth.
This post written by Chris Catapano of Bridgesphere Consulting.
Need more insight into your businesses? performance? Contact Chris for a free consultation.
