On occasion I give one of my growing children a few dollars to buy something for themselves they say they want very much. I am not surprised to never get an change back. That’s the nature of children, they’ll spend every penny they have. Helping them learn the value of money, the wisdom of saving, managing financial affairs with maturity is part of the process of being a parent. So it should come as a surprise to every CEO when the marketing department manages to spend every dollar it is given. There’s an unstated message there yet in my experience few CEO’s understand it or that the message even exists.

About 30 years ago it became common practice in American companies to set a ratio between sales and the money budgeted for marketing. As is typically the case the idea spread like wildfire through the unquestioned ‘wisdom’ of industry best practices. The new herd mentality dictated that every modern company establish a ratio, usually by following whatever their competition did. This ratio might be 2% or 10% of the budget. This practice has become ingrained in companies and is now widely accepted in business-to-business applications.

What no one did was question the basic assumption. No one, or at least very few, asked if this was the best way for their company to proceed. Most of all, what no one asked was the fundamental question: Why didn’t we do this before if it was so important? It is typical of many companies to set the wrong priorities, engaged the wrong resource allocation or to misunderstand what really drives their business. The most mysterious consequence of this process is that once marketing is given the money the marketing manager decides how it will be spent. And like my children, he or she spends every dollar to the penny. Consider just for a moment how ludicrous this is. The marketing manager spends absolutely every dollar allocated, every year.

This practice is all but universal yet most CEO’s accept as perfectly normal this absurd state of affairs. After all, that’s how it was when they came on board and that’s the way it is with all their competitors. What they fail to grasp is that the marketing manager genuinely believes he or she must spend all that money, regardless of whether what they did worked or not. This predetermined outcome tends to place blinders on the marketing manager, and encourages him or her not to honestly consider whether or not what they’ve spent the money on actually worked.

From the marketing manager’s perspective they’ve done the right thing. There is never any questing of saving money. Survival within the company dictates the outcome. This is a result of the two dirty little secrets of corporate survival. The first is that marketing managers believe they must spend all that money because if they don’t, they’ll get less the following year and their judgment about how they spent the marketing budge will be called into question. What this means is that money is spent whether or not it has any positive impact on the company.

The second secret, which I consider to be a challenge for the CEO, is to ask what specifically works for his or her company in terms of marketing, not what the other guys are doing. In a typical situation a company might have a total marketing budget of $10 million. From this $2 million is allocated for advertising, a million for public relations, $3 million for Pay-Per-Click, with $5 for the major trade shows. All this because that’s the formula for the company’s industry the CEO read in one of the trade magazines and it’s what the marketing manager says he should do. But is this the right formula for the CEO’s company? Maybe.

In actuality the CEO’s responsibility is to ask what really works for his or her company. Who are their customers? Where are they buying? What are they reading? Who is most likely to buy? What is the best vehicle for communicating the brand to them? If the CEO allocates the marketing budget by some artificial formula none of these questions are asked, let alone answered. He or she misses a tremendous opportunity to define the company message and vision on which that success ultimately depends.

The source of the problem, in addition to the best practices fiasco, is that the CEO has asked the marketing manager to do the wrong thing. He or she has asked marketing to spend, rather than invest the money. This is also a reflection of the CEO’s tendency to view marketing in the same why as they do their accounting department and to a certain degree this is understandable. Marketers tend to be analytical by nature and make frequent use of charts, graphs and Power Point presentations. They present what they do as a science and are taken aback when their boss expects them to be measured like a science.

The notion that the marketing budget is an expenditure rather than an investment that must yield specific metrics is simply an error. It misses the point of marketing entirely. The consequence is that most CEO’s see their marketing budget as a line item expense. This is the primary reason why when business declines he or she finds it so convenient to cut marketing. It’s an expense and like all expenses there is money to be saved by reducing it. So the logic goes.
But in truth the marketing budget should be viewed like all other investments the company is making.

The CEO should consider it the same way he runs operations. The reason most CEO’s don’t do this is because they cannot quantify the results that come from marketing. They don’t know which half works and so are managing in the dark. By engaging in a corporate culture in which significant money is spent on an essential unction without meaningful metrics the CEO is setting him or herself up for failure. The CEO will tend to see the marketing budget as overhead, that is, as a money pit. This disregards what should be self evident, that marketing is the engine that drives sales and at some level, without effective marketing, there will be no company. The CEO must challenge the marketing manager to produce metrics that matter. Your company is unique and what everybody else does is worth knowing but not necessarily worth doing. Your company has its own special challenges and needs and what works for you doesn’t necessarily work for others, or vice versa. For example, one company might suffer from customer relations problems while another has product reliability issues. Each should invest the marketing budget differently.
The conventional wisdom I’m challenging is the one in which CEO’s blindly accept best practices. If the CEO accepts the CFO’s view that the marketing budget is simply another expense and treats it as an accountant would, that is the road to ruin. The tools for meaningful metrics exist but the CEO must be involved in establishing them. Then he or she must determine what marketing efforts best work for you and from that establish a dashboard of the five or six things that really matter. What is revolutionary here is the concept that it is the CEO who must do this. All the books, all the seminars teach that he or she understand her or his people, create teamwork, get all the staff on the bus, get the cheese, motivate them to make it all good, but when it comes to marketing none of the Cum Bi Ya works. If the CEO doesn’t get it right, then it will cost growth you will never know you missed.

It is my belief as well as my experience that most CEO’s intuitively know these things, even if they haven’t sat down and laid it all out. They know something is wrong when it comes to marketing, they know the answers they’re given simply don’t cut it.