October means planning season for many CMOs. Top question typically: What is the “right” budget size? No doubt: This IS important in light of performance & brand goals to be achieved. But in our experience the time spent wrangling for the size of pie is often disproportionate to the difference it makes.
We are not saying advertising makes no difference! But if your goal is to maximize profit, then smart ALLOCATION (=distribution across brands, products, channels…) matters more. Academics call this “Flat Maximum Principle” (Link to original paper below) – proven many times in practice. In essence: As long as you have reached a relevant minimum spend level, even budget size differences of +/-25% have only incremental impact on the OVERALL profit of a company since (a) Higher ad spend is compensated by additional sales while (b) Ad budget cuts and sales losses cancel each other out.
This is why we put so much emphasis on optimizing budget allocation in our work at Analyx. It typically has a much higher ROI than pocketing those x% extra. In times where budgets are under scrutiny, their effective use becomes even more critical.
#MarketingROI #BudgetAllocation #MarketingPlanning
Sources:
- The original academic paper on the Flat Maximum Principle by Tull et. al. can be found here:
https://www.researchgate.net/profile/Tom_Gillpatrick/publication/271690560_Leveraged_Decision_Making_in_Advertising_The_Flat_Maximum_Principle_and_Its_Implications/links/5e3d75a192851c7f7f25daf7/Leveraged-Decision-Making-in-Advertising-The-Flat-Maximum-Principle-and-Its-Implications.pdf - The above graphic was adapted from an original paper by Prof. Bernd Skiera: https://www.marketing.uni-frankfurt.de/fileadmin/user_upload/dateien_abteilungen/abt_marketing/Bilder/Professor_Skiera/Publikationen/Das_Prinzip_des_flachen_Maximums.pdf