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Brief

CMO Dilemma: How to Talk to Your CFO as Cost Cuts Loom

With a Covid-19 recession approaching, CFOs will seek budget reductions. Here’s how chief marketing officers can reframe the conversation to protect growth and innovation.

Brief

CMO Dilemma: How to Talk to Your CFO as Cost Cuts Loom
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The coronavirus has officially changed how we live, work and interact with each other and with the companies that provide our goods and services. As companies focus first and foremost on caring for their employees and customers, a second priority will be learning how to navigate the uncertainty that surrounds this pandemic.

One thing does seem certain, however: chief marketing officers will be asked to cut costs.

The marketing budget inevitably comes under scrutiny in a recession because it is (wrongly) seen as largely discretionary. The reality is a good deal more complicated, as CMOs know all too well. If there is a silver lining to the current situation, however, it’s that it presents a great opportunity to rewrite this all-too-familiar script.

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There is no doubt that managing costs will be critical in the weeks and months ahead. But to avoid a major impact on growth, companies still need effective ways to reach and influence customers. Aggressive cuts that ignore this risk can do more harm than good—a dollar saved today may cost the business significantly more in lost revenue, in both the short and long terms.

To avoid that, CMOs need to champion a thoughtful balance between selective budget reductions and strategic reinvestment. Achieving this new level of marketing efficiency begins with forging a new relationship with the CFO, one marked by a common understanding of the returns on and the costs and strategic implications of the many activities in the marketing portfolio.

The impulse to make overly large and broad cuts to the marketing budget stems from several factors. Understanding them is a vital first step in forging a more meaningful conversation between marketing and finance. They are:

  • Marketing spend often has a complex, nonlinear relationship with performance. A number of factors, including shifts in consumer behaviors, fragmentation of channels and rising media and advertising costs make it extremely challenging to correlate marketing expenditures with bottom-line impact. That does not, of course, mean that there is no impact; knowing where to focus is key to maintaining or even improving bottom-line performance while still reducing overall spend.
  • Top-down mandates and the equal spreading of cost targets across the marketing cost base—without consideration for protecting or even doubling down on certain growth priorities, customers or experiences—can hamper marketing’s ability to deliver on customer needs.
  • Often, changes are made around the edges, without reimagining the work or reinvesting in new marketing levers and capabilities that are essential to remaining competitive. This is especially true in the current environment, because for some marketers, previous commitments to sponsorships and events are tied to activities that won’t happen or sponsorships that won’t pay off. An increased focus on digital channels to pick up the slack can be wise, if marketers are prepared.
  • Traditional cost measures are rarely customized for marketing. For example, it’s unrealistic to take a clean-sheet approach to marketing given the difficulty of accurately attributing every component of the budget, the need for in-year flexibility, and other factors.

What’s needed is a new approach to marketing efficiency, one that maximizes the effectiveness of your current investments and processes, freeing up resources to reinvest in activities that propel growth. This approach is guided by four principles:

  • Marketing transformation needs to reinforce business strategy and ambition for growth. Your investment posture should be based on doing more with the same, or less. Focus intently on your priority customers: who are they, and where, when and how do they want to be served?
  • Find value “in the seams” through a careful analysis of both horizontal and vertical spending. This requires visibility into both nonworking dollars (for creative, production, vendor/agency fees, etc.) and working dollars (for media, direct marketing, etc.) Such visibility is needed to make the right tradeoffs within marketing tactics, across marketing investment categories and across different business units and products. By defining a measurement approach to current spending and comparing ROI within and across tactics, you can create a common language for marketing and finance.
  • Efficiency efforts should improve, not jeopardize, spending effectiveness. Look beyond baseline effectiveness metrics to reveal low-ROI activities and spot ways to reinvest those dollars in high-ROI activities to minimize the opportunity cost of reduced spending as measured in lost or delayed revenue. Focus immediate activity on areas where there is high confidence of ROI. Then, form hypotheses and use test-and-learn strategies to explore areas of lower confidence.
  • Reinvest in next-gen marketing capabilities and innovation. Establish a dedicated budget to fund an always-on testing discipline so you can continue to innovate in challenging times as well as good times. And make the most of customers’ strong shift to digital by building a best-in-class customer data infrastructure to better understand your customers’ needs, behaviors and preferences.

This is an opportune time to reboot the CMO–CFO relationship and make a strong case for marketing effectiveness, one that balances budget reductions with strategic reinvestment to spur growth.

Here are a few actions you can take now:

  1. Quickly agree on what to prioritize in the current economic situation: What are the key customers and segments, stages of the funnel, channels and moments that you need to win? What threats require immediate attention and what are the corresponding smart moves you can make to support growth, both in the near and longer terms?
  2. Conduct a targeted diagnostic that looks within and across investment categories to compare the relative ROI of different investments, and prioritize both opportunities to drive efficiency in nonworking and working money categories and areas for reinvestment. Use testing to verify whether conventional wisdom still holds true; odds are, it doesn’t. Testing can reveal new pockets of performance and give you the confidence to put other initiatives on hold.
  3. Decide where to be bold, and build a roadmap to get there. Companies that win in downturns don’t just play defense—they play offense as well. Determine the products, customers and underlying capabilities where doubling down now can accelerate growth during and after whatever lies ahead.
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