Investment in marketing: the allocation conundrum

Ever‐rising marketing budgets are becoming an explosive issue. On advertising alone, companies spend fortunes: Nestlé, $11 billion; Unilever, $8 billion; General Motors, $4.7 billion; Procter & Gamble, $3.8 billion; Sony, $3.4 billion; and Coca‐Cola, $1.7 billion. With no end in sight to escalating marketing outlays, many executives are asking two questions: “Is our company spending the right amount on marketing?” and “Are we spending it in the right places and on the right activities?” To get more bang for your buck, the authors suggest setting aside the first question and focusing on the second.

In this article, the authors explore the limitations of current approaches to setting marketing budgets and then outline five factors that should drive how companies allocate their marketing budgets, namely: the profitability that new revenue from a business unit or product would generate; the responsiveness of customers to marketing; the revenue growth potential of a market; the marketing responses of competitors; and the degree to which a particular type of investment builds longer‐term growth in addition to near‐term impact.

The new approach described in this article produces four main benefits: It provides a more objective, factual basis for determining annual marketing budgets; it improves the quality of discussions and decisions around marketing allocations; it can be applied at all levels throughout the organization; and it can identify the new marketing capabilities a company needs.

The article offers a new, simpler approach to thinking about marketing allocation that helps big companies shift their marketing budget debate from “how many dollars to spend altogether?” to “where to spend those dollars?” While companies should continue their quest to answer the first question with rigor, until they get there, answering the second question can create substantial value.