There's a formula for finding your ideal marketing budget.
There's a formula for finding your ideal marketing budget.
Curio #34
Morning!
I imagine you’re also working on a reduced marketing budget this year.
Me too.
Come to think of it, I can’t remember ever having enough money for marketing.
Do you?
Somehow marketing budgets are never enough to make a dent in the market.
This being the second principle of effective advertising (the first one is here), the dent we’re after is improving our market share.
How much money do you need to spend to improve your market share?
Mark Ritson’s advice is to spend 10% of your revenue or equal to what other successful brands in your category spend on brand marketing.
But I imagine sending an article from Marketing Week isn’t the objective, fact-based advice your CFO is looking for.
But maybe my favourite economist Dr. Grace Kite’s advice will track better with the C-Suite.
Her advice is to stop yourself from picking a number to overspend your competitor without first matching your spending with how much your industry is expected to grow and calibrating your budget to the size of your business.
Finding your magic number.
The magic number is spending 10 points above your current market share.
And empirical data gathered since 2010 shows that maintaining this Extra Share of Voice (ESOV) delivers between a 0.5% - 0.8% increase in your market share.
Let’s break it down.
Share of Voice stands for your share of the advertising budget of the whole category.
If the category advertising spend is 10 million, and you spend 1 million on advertising each year, then your Share of Voice is 10%.
Share of Market, well it’s your market share.
ESOV was introduced by Les Binet and Peter Fields in their 2010 book, The Long and the Short of it. Since then it’s proven to be a powerful tool for advertising effectiveness in multiple markets and categories.
For example, the ROI Genome Project found that between two similarly-sized brands, if one brand doubles its spending, another brand in the same category with smaller spending can lose 15% of its business.
You wanna see some numbers don't you?
Let's say your current market share is 10% and you want to increase it by 2% this year. Following the ESOV method, your ideal advertising budget should be equal to 20 percentage points more than your current market share.
Simply put, you need to have 30% share of voice in your category.
With these numbers, if the total spend in the market is 10 000 000 € then your new market budget is going to be 3 000 000 € or 30% of the total spend.
Side note #1: I use ESOV myself for setting target budgets. It can provide a reliable benchmark because actual market shares fall roughly around the actual SOV.
My advice is to build a model using 3 to 5 years of real data for you category. And remember to factor in how your category is growing or shrinking in relation to the advertising activity.
Since 2020, adspend in some categories has increased with an increased demand in that category, while in others it's decreased as the categories have shrunk.
Then there are other categories where increased competition is pushing the budgets ever higher.
As Dr. Grace advised: follow how your category is developing.
Side note #2: I've also seen smaller brands gain major lifts e.g. 0% to 3% in one year. That's usually done through aggressive distribution (physical availability), and price promotions.
So, you CAN grow with smaller advertising budgets.
And since there are no free lunches, there's a trade off.
What you're not spending on advertising, you're spending on buying shelf space and loosing on price cuts.
Side note #3: Often market share gained through physical distribution doesn't create long lasting brand strength.
And it becomes unsustainable as the gains only last as song as you can sustain paying for distribution and discounts.
There are no short cuts to building lasting commercial success.
And that's why:
Start talking about your advertising spend as an investment.
Advertising is not a cost.
And that only changes the day you start talking about it as an investment.
Start by showing that like all good investments advertising also drives positive returns.
That’s probably what your CFO wants you to show.
And since we’re talking about investments, let’s not forget what Einstein said:
Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.
Your brand investments compound too.
Maintaining higher ESOV has a smaller effect over the short term (21% increase in growth over 1 – 2 years) and it grows over time (more than 40% over 3+ years).
Maintaining a higher share of voice is practical too.
Most consumers are repertoire buyers. We buy out of habit and pick brands that are top of mind.
And investing in your brand builds future demand.
But what if you can’t maintain Extra Share of Voice?
Ain’t no sweat.
You can use ESOV for calculating your performance marketing budget as well.
I’ve seen brands successfully maintain a higher ESOV on specific channels - where their audience is the most active - and drive exceptional commercial results.
Just not with their brand.
But before you start planning your next campaign, pay attention to this:
Brand and performance marketing aren’t the same.
Invest in performance marketing if your priority is to get commercial results in the next 6 months.
Running short-term brand campaigns isn’t going to cut it.
I’ve seen so many marketers disappoint themselves and hurt future investments in marketing by shoving brand building into 8-week campaigns.
Now that we know how much budget is enough to make a dent in the market and what to do when we don’t have it - let’s do better marketing.
Stay curious, friend!
Aliyar