alt="Andrew Challier, international practice leader - effectiveness, Ebiquity" width="100" height="100" />
Right now, many finance directors are being given a secret formula. The big five accountancy firms are telling them that they need to enforce a strict ratio between ‘working’ marketing spend and ‘non-working’ marketing spend.
The basic premise is anything that goes towards direct consumer communication (such as the creation of ads or the purchase of media space) is working and therefore good, while any other spend is, by default, non-working and therefore bad (this could include everything from agency fees to data, research and analysis).
The first problem is this view is arbitrary and simplistic. After all, there is often a substantial level of wastage in ‘working marketing’ or spend that either delivers no business benefit or costs too much for the value it delivers.
The second problem is that reputable accountancy firms are advising boards that there is a ‘correct’ ratio for these two kinds of spend, thereby providing intellectually lazy guidelines.
Sadly, it seems such advice is having an impact. One client recently told us that they had to cut back spend in non-working areas to align their marketing costs to an 80:20 ratio (working to non-working). The result was a reduction in the amount they could invest in improved understanding of marketing effectiveness and efficiency.
This is just plain silly. Why? Because if investment in measurement enables you to achieve the same results for a lower spend, it’s a mathematical inevitability that you will see an increase in the ratio of non-working marketing spend.
Let’s do the maths. Imagine a business spends £8 million a year on working marketing, as defined by the accountants, and £2 million on non-working, thereby passing the 80:20 test and receiving the accountants’ seal of approval.
If non-working spend helps identify efficiencies that enable the business to cut the working budget by £1 million, the result is a working/non-working ratio of 78:22 (£7m: £2m). In order to conform to the 80:20 rule, non-working spend must now be reduced by £250k, or 12.5 per cent.
The only result of this formula is that the company will now be able to spend less finding out which elements of its spend are delivering real business benefits.
Simple rules always have unintended consequences. In this case, they mean the wrong decisions are being made for the wrong reasons with a direct impact on the bottom line.
☛ Andrew Challier is international practice leader – effectiveness at Ebiquity