Why should we treat the Marketing Budget as an Investment?

Whatever we spend in marketing is an investment in future profitable customer relationships. While profit-maximizing might not be your firm's objective at a given point in time, marketers must trade off competing objectives deliberately. The following example illustrates three options for a marketing budget of €100,000. Whenever you decide on one option, you give up the other two options. That’s what we call a trade-off. For example, you can do nothing and save the money, you can invest in advertising, which ultimately increases your profit by €40,000 (which means that the profit goes up by €140,000, and you need to deduct the budget of €100,000). Or, you spend the money on a price promotion (lowering the price by 10% for one month), in which the profit declines by €20,000. Naturally, we don’t know in advance the profit impact of any given option because this depends on hundreds of different variables. However, it is important that we clearly define multiple options and explicitly estimate the profit impact for each of them.

Marketing Measures as “Proxys,” not as Accounting Terms

We want to stress that the way we use terms like Marketing Contribution Impact (MCI) or Marketing ROI is not synonymous with the terms you may use in accounting or your company. For example, if one of the following examples results in a “Marketing Contribution” of $500,000, this number in itself has no meaning, and you won’t find it in any Profit & Loss (P&L) statement in your firm. We use it as a proxy for comparing alternative options and, therefore, for making better decisions.

Another limitation is essential to reassure you when calculating Marketing ROI and MCI. Those calculations are never an exact science and are based on many assumptions about the future. However, we want you to learn, as leaders, to define the business case behind the marketing case. Your marketing becomes more effective if you discuss the underlying assumptions of marketing impact with your team and start measuring and monitoring it.

The systematic approach helps us to formalize causal relationships and assumptions about market developments. If you can add Marketing ROI to your vocabulary, you will start making better connections between marketing and business. It will enable you to have richer discussions at the executive board level.

In this context, let’s look at some measurements that we frequently use Marketing Contribution Impact (MCI), Marketing Return-on-Investment (Marketing ROI) and Breakeven.