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Dr Bates' Talkback: How to Handle Budget Cuts Without Losing Sales and Profit
In this day and age it is rare for anyone to get an increase in their sales and marketing budgets, more likely is a budget reduction that must be stretched to still ensure a growth in revenue and profit.
Everyone is being asked to do more with less, and yet expectations of results are higher.
Previously when this happened, marketers focused on historically profitable segments, and geographies with traditional media, while cutting back on riskier new media.
Today, you may find that historically profitable segments, geographies and channels are no longer the key focus for maximum success as customers and markets are being impacted in very specific ways. Marketers, therefore, need to throw out their historical approaches and concentrate on where revenue growth and profitability will give most impact now. In many cases, new media will give more ‘bang for your buck’ than traditional media, especially given how it has developed in the past few years.
Not everything from the past is irrelevant. Marketers still need to examine the value propositions of their brands and look at which channels are giving what returns with specific segments. Not all channels will be drivers for all segments, so marketers need to carefully examine which segments will be most profitable, and which channels are the drivers for those segments, and focus their resources accordingly.
Today’s Pharma environment is filled with uncertainty. Not only is the worldwide economy experiencing a downward slide, one that won’t end anytime soon, but the Pharma Industry is facing unprecedented change. This includes questions about product safety, many patent expiries, and more generic competition than ever before.
In times of economic doubt, company leaders are forced to think conservatively and focus on the short term. The goal becomes protecting revenues and profits that exist now, and worrying about expansion and long-term planning in the (hopefully improved) future.
One time-honored method of doing this is looking for areas to cut costs. CEOs look for areas of spend that are not necessary or critical, portions of the company that continually spend money with little in return. Unfortunately, many CEOs and CFOs pounce on marketing as the ultimate representation of this drain.
A study by the University of Warwick demonstrates company management thinking when it comes to marketing. CEOs in the UK were asked: “If business was under pressure, which budget would you cut first?” The results will be no surprise to marketers who have survived the revolving door of budget cuts. CEOs said they would cut Marketing and Advertising (23 percent), followed by Human Resources (18 percent) and Training (13 percent). CEOs were very reluctant to cut R&D (9 percent) or IT (8 percent).
As a follow-up question, the CEOs were asked: “Which are the necessary investments for long-term growth?” Training and IT came in at over 90 percent, while Human Resources and R&D were over 70 percent. Marketing came in at a low 58 percent.
As several other US studies have confirmed, CEOs view marketing as a company division with little overall value when it comes to company growth, resulting in its position as the first to go under budget cuts. What’s troubling is that this isn’t all that surprising. When management looks to cut areas of the business, they seek out those divisions without good return (sometimes mistaking a high ROI percentage for good bottom-line return), or those that cannot prove return. Since ROI has long been the elusive bane of the Marketing Department’s existence, in times of trouble it’s often the unit that bears the brunt of budget cuts.
Understanding why CEOs demand budget cuts from Marketing Departments helps put things in perspective. It helps point the way towards proactive measures we should take to demonstrate the value of marketing to management and prevent future cuts. But what about the here and now? How do we effectively cut the budget and still meet our goals?
How to Approach Budget Cuts
When marketers receive the call to cut hard and cut now, one common mistake dooms many. After making the effort to create a killer marketing plan, CMOs will often decide to keep this plan and simply reduce the money deeded to each tactic. While this may make logical sense, it’s a major mistake. Instead, the call for budget cuts necessitates an overall change. Objectives need to be rethought, vehicles re-chosen, and money redistributed.
To salvage your marketing plan in the time of budget cuts, you need a two-pronged approach. It begins with determining what you know about your marketing.Studies performed on thousands of integrated marketing programs show the vast majorities have some tactical elements that truly work, some that definitely don’t, and some that could work with a few tweaks. However, often the distribution of funds doesn’t reflect these distinctions.
Knowing what works, and what doesn’t, allows you to take an objective and merciless view of your marketing plan.
- Cut the fat. When examining brand results, one thing that always strikes me as odd is how often a lot of money is being poured into channels that are not driving prescribing change in target physicians. Also, I sometimes see companies will put a disproportionate amount of the budget into one item. Do you have more than 50 percent of your budget in any one tactical area? Typically, this will mean you’ve hit saturation level, meaning diminished returns while spend is still high. Time to cut.
- Focus on the big boys. Short-term returns on each dollar of spend are usually greater for larger brands. Alternatively, smaller brands may have a disproportionate share of spend since they are trying to grow, and less return on investment. Taken together, this means smaller brands are a prime candidate for temporary cuts. However, the portfolio should be carefully examined as the smaller ones may have a lot of growth potential to become big brands and you don’t want to hinder this. Analytics would provide the definitive answer to what to do in this dilemma and how to allocate for maximum short-term and long-term revenue and profit for the company.
- Get rid of weak geographies. In certain locations around the country, or around the globe, where a brand is underdeveloped or in decline, spend may not get much return. For temporary cuts, this may be a good area to slash.
- Consider seasonal cuts. Do you have peak periods in your brands e.g. allergy drugs? Cuts in the off-peak periods can cut down on inefficiencies. These cuts can also protect the overall marketing goals and plan, minimizing risk to overall business.
After making smart cuts, it’s time to revise the overall marketing plan. With a few key changes, you can spend smarter and make your reduced dollars work harder:
- Refine the focus. If you listed two to three big marketing objectives for the fiscal year prior to budget cuts, perhaps it’s time to scale back to one major objective. By refocusing your marketing, you can make each dollar count and increase the likelihood of achieving at least some of your goals.
- Redistribute funds across your channels. Most marketing plans have a strong mix of channels, but the best choice of channels and allocation across channels can be tricky. Most marketing programs have things that work, things that don’t, and things that could work with a little extra attention. Don’t make the assumption that reach and cost are a proxy for effectiveness. You may be able to cheaply reach many people but not influence them particularly strongly. You need to know the impact of each channel for your specific activities within that channel. If you have a good analytics system, this will be easy to do. You can immediately see which the driver channels are and which combination of driver channels will give you the best revenue and profit. So you can cut the tactical elements that don’t work by checking which channels are drivers, and which are not, with your analytics. Also important is to ensure that you’re appropriately funding the tactics that do. Consider changes in frequency that will work within your budget. Look at the analytics for vehicles that would work better. Easy!
- Focus on existing customers. While this may sound like blasphemy to an industry that, for better or worse, spends the big bucks on getting new customers, it’s more practical in times of budget cuts and economic downturns to work with the current customers. Provide more value for existing customers, making it easy and desirable to continue to obtain their drugs from your company. Market to them and listen to them and, in exchange, companies will get more in return. Consider getting more from patient adherence. Pharma companies leave around $30 billion on the table each year from not addressing this adequately. See www.patientadherenceroi.com for a fuller report on this topic.
- Redistribute across customer segments for growth. Look for new opportunities in fast growing market segments.What about different customer segments?
- Break contracts. Ideally you will have an ‘out’ with those direct marketing contracts, tradeshow, website development and other contracts. Although painful, it’s better to accept relatively small penalties for breaking contracts and get some money back rather than spreading budget on areas your analytics has identified as not being effective.
- Redistribute funds across your portfolio of brands. There are so many factors that come to play in planning cross-portfolio budget allocations – price of the brand, size of the market, stage of the lifecycle, competitors’ impact, and so much more. It is not an easy thing to do without powerful analytics.
- Redistribute funds across your affiliate countries. Regional Directors need to make decisions about how to allocate resources, not only within and across their brands in a country but across countries in which they compete also.
Proactive Measures for Prevention
By this judicious combination of trimming the fat and reworking your marketing plan to spend smarter, you can survive the budget cut.
However, you’re not done. The key problem that began this whole mess is still present. Company management still has the perception of marketing as a low-performer with little demonstrated return. When budget cuts become necessary again in the future, and they most certainly will, marketing will again be the top candidate for slash and burn. To prevent future cuts, you need to provide proof of the value of your marketing initiatives. Proactively develop a comprehensive measurement structure to clearly show the financial value each marketing investment creates. Tools and methodologies have advanced to the point where it’s possible to do this, to accurately measure the majority of marketing activities in terms of return and financial gain and compare these so you know which activities will provide the most gain. By doing this, you are establishing sound business reasoning for each investment. You’re giving a clear-cut justification for your efforts, and effectively fighting for your resources.
Another proactive measure to protect the Marketing Department? Use that marketing savvy and skill to market to internal customers within the company and in the upper echelons of management. Market the Marketing Department. Sell the Marketing Department to the CEO and senior management, just as you would to external customers, by first understanding what they care about. Their ultimate goals are to increase share price, satisfy shareholders and save their jobs. To demonstrate how marketing activities will help management achieve these goals, use simple and short marketing plans that focus on success metrics. Rather than creating impressive documents that detail ad nauseum the minutiae of marketing, make it short and sweet, and focus on results. By thinking like senior management, and relating all marketing methods and results to this mindset, the powers that be will be much more inclined to see the value in the Marketing Department.
What’s crucial to remember is that your Marketing Department can survive budget cuts. With clever cuts, savvy rethinking, and proactive planning, marketing can still meet key company goals, create revenues and profits, and even demonstrate the intrinsic value of the Marketing Division. To really impress the C-Suite, analytics can show you how to cut, redistribute and still grow the brand and the bottom line.
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