Brand strength or margin? Both!

The chief marketing officer (CMO) takes the elevator from the ground floor. It’s usually empty—but not today. This morning, he bumps into the new chair of the supervisory board. She must have gotten on the elevator in the underground parking lot. The trip up to the executive floor takes only about a minute. The CMO braces himself and asks, “What’s the priority for next year—brand strength or margin?” The supervisory board chair responds, “Can’t we have both?”

Power brands protect against erosion of market share

In the long run, strong brands have proven their worth. This is confirmed by the findings of a recently updated analysis for the new edition of the classic McKinsey textbook Power Brands. But does this also apply in a global crisis like the coronavirus pandemic? Yes—because it is precisely in times of uncertainty that consumers reach out to strong brands.

Strong brands create trust and reduce the risk of wrong decisions. And as new disruptions dominate the media every day, the familiar brand becomes even more important than usual as a source of security and comfort. By treating ourselves to a branded product in difficult times, we are doing something good for ourselves and our loved ones. Waking up in the morning to find familiar brands on the breakfast table, such as our accustomed muesli or spread, is a sign that all is still well in the world—at least at breakfast.

That said, many consumers do feel compelled to adjust their purchasing behavior during crises, as McKinsey’s recent Consumer Sentiment Survey shows. In Germany, a majority of consumers (62 percent) have switched stores and brands to save money during the pandemic alone.

On the other hand, many consumers switch their supply sources so they can continue to afford their favorite brands; German consumers, in particular, are more likely to change a retailer or channel than a brand. Therefore, a strong brand is the best insurance against creeping loss of market share. As such, consumer-goods manufacturers have no choice but to invest in their brands as they transition to the next normal.

At the same time, however, the allocation and control of the marketing budget is becoming an increasingly complicated affair. Numerous manufacturers have set up their own direct-to-consumer (DTC) sales as an alternative to brick-and-mortar retail, which has been closed for months in some cases, and in response to the growing importance of e-commerce. Many companies are striving to increase online sales anyway—a goal that requires marketing support. Large multibrand providers are also faced with the question of how to allocate the budget among the various brands in their portfolio and among the countries and cities in which they are present.

Pressure on margins is growing

The demonstrable importance of strong brands and the complexity described above are causing marketing budgets to continue to swell. In many instances, this increase is based on the thinking that “more is more”—even at a time when sales are stagnating or even shrinking, at least temporarily, due to the COVID-19 crisis.

In some sectors, marketing expenditure has begun to outpace sales growth, a phenomenon that hasn’t been seen for quite a while (Exhibit 1). A recent McKinsey survey found that 78 percent of CEOs are now banking on CMOs to contribute to growth, which means CMOs must translate full-funnel marketing into a budget allocation for brand and margin.

Marketing budgets have most recently outpaced sales due to the COVID-19 crisis, although the gap can be reversed again by 2023 with a strategic approach.

This is not sustainable. And chief financial officers, supervisory boards, and investors are putting the screws to marketing leaders. “Our company has clear profitability goals. It’s my job to help reach those goals. If I fall short, the perception is that I’m part of the problem,” the CMO of one global consumer-goods company told us, for example. But is it really possible to do both? Can the brand be strengthened and margins be improved by systematically addressing demand, transactions, and loyalty?

Yes, it is possible. The problem is that many of the approaches consumer-goods companies have traditionally adopted to manage their marketing budgets (for example, “ad to sales” or “share of voice”) are outmoded. And although organizations have the data for fact-based budget management, it is often not used consistently enough. This is common knowledge among practically all marketing decision makers—many of whom long for simple solutions to navigate these new, complex times. It is no wonder that they are seduced by the sweet whispers of performance-marketing gurus who promise a direct return for every euro invested. They buy software solutions that automatically spit out the optimal budget allocation after defining a few parameters. Or they apply simple rules of thumb such as “40 percent performance, 60 percent brand.”

But it’s not as simple as that. Simultaneous progress on brand and margin requires sophistication and discipline. Successful companies combine three elements in their marketing-spend management: strategic allocation, tactical optimization, and an adaptive ecosystem.

Strategy: Aligning budget with goals

Allocating a marketing budget along strategic brand goals is key to an optimal use of resources. In the consumer-goods industry, the volume and allocation of budgets are still far from ideally aligned across organizations in a way that is consistent with corporate strategy. Often, the goals themselves are also rather vague: reach more women, improve the perception of the brand as sustainable, or expand presence in social media. But what exactly does that mean? Which goals have priority? And what marketing support is needed in each case? Such uncertainty often results in failure to capture growth opportunities.

To counteract this, the size of the budget and its allocation should be geared more closely than before toward strategic value drivers—be it the coverage of important sales channels (brick-and-mortar footprints or e-commerce shares) or the influence of key purchase drivers such as a reputation for being “innovative” or “reliable.” Additionally, it’s a good idea to use major events as platforms for brand campaigns, such as the finals of major tournaments, popular fashion shows, movie premieres, festivals, celebrations, or theme days.

In some sectors, it is also worth committing a large portion of the budget to a long-term horizon—for example, toward sponsorship contracts in the sporting goods sector or toward the engagement of prominent brand ambassadors in categories such as fashion and cosmetics. It is important to keep in mind that such commitments must also be sufficiently actuated by the media for them to achieve their full impact.

In other areas, however, it may make sense to reserve a larger portion of the budget for performance marketing driven by data and analytics. In addition, specific strategic goals, such as the development of a new brand, a new category, or a new market, should be backed with an adequate budget.

Tactics: Testing is key

One of the most important elements of high-performance marketing budgets is the right media mix.

But here, too, complexity has grown considerably in recent years. Above-the-line media such as TV and out-of-home advertising can be supplemented by digital channels and tools such as search engines and social media, as well as with ever-newer platforms—for instance, Instagram, TikTok, Discord, and Clubhouse.

Meanwhile, almost all the growth in global media spend is attributable to increasing investment in digital media. In Germany, according to the market-research company eMarketer, the share of expenditure on digital marketing has grown by an impressive nine percentage points (from 35 percent to 44 percent) in the past three years alone, while print and TV spend is in steady decline. However, it is not uncommon for communication to break down between those responsible for classic brand marketing and the experts in data-driven transaction promotion— whether for historical reasons or because of differences in competences and temperaments. In some cases, agencies also withhold from companies data on the effectiveness and efficiency of their interventions.

That doesn’t bode well in the long run. Tomorrow’s marketing needs media to dovetail more tightly, aside from an integrated, data-driven optimization of spend. The ideal foundation for this purpose is provided by an intensified and more refined use of marketing mix models (MMM), which many companies already rely on to allocate budgets to individual media. However, such models often fail to adequately reflect short-term changes in practice—not because they are incapable of it but because companies use them far too infrequently, typically only once a year.

In addition, there are limitations to the accuracy or granularity of impact measurement. Therefore, it is advisable to supplement and validate MMM use with A/B testing, which tests marketing instruments such as display advertising and paid search in two variants on target groups. If A/B tests are conducted regularly throughout the purchase process, short-term changes, such as fluctuating prices for paid search, can be captured much better than with an annual application of MMM (Exhibit 2).

Integrated marketing mix models use A/B testing to refine and validate their results.

MMM also tends to structurally overestimate the effectiveness of certain tools—especially those on which advertisers spend particularly large amounts of money. Other instruments, in contrast, are often underestimated by MMM. This and other sources of fuzziness can and should be corrected using A/B testing. In addition, the tests are better suited than other methods for deriving causal relationships between expenditure and advertising impact because they largely exclude other factors or reveal their influence. For example, one restaurant chain found with A/B testing that simply changing the order of the dishes in the ordering app increased average sales per order by 5 percent.

Further insights for improving tactical budget management are provided by multitouch attribution models, which measure, for example, the contribution of individual touchpoints to purchase decisions, as well as survey-based analyses of the brand’s performance in the purchase process, or funnel. As a result, it is possible to refine and prioritize the budget allocation between early stages (brand awareness and purchase consideration) and later stages (purchase, repurchase, and recommendation).

Leading companies also use what are known as “driver models” to validate, for example, the size of online budgets based on the development of key metrics such as customer-acquisition cost per channel. If the brand is strong enough on the back of above-the-line advertising, it is sometimes possible to lower investment in transaction-promoting measures. Conversely, such analyses also show that even the best performance marketing cannot compensate for the brand’s weaknesses in important purchasing factors such as quality. The combination of multiple data-driven analytics methods brings to light correlations and permits the optimization of budget allocation.

Ecosystem: Audit, pitch, and own content

A start-up with just one brand doesn’t need an agency network. A group with a large portfolio, on the other hand, will not be able to manage media on its own. The marketing ecosystem has to match the complexity of the task. Adjustments to a marketing strategy should not be taboo. The prerequisite for the optimal use of resources is, above all, the efficiency of the media agency. To verify its reliability, an audit by an independent service provider is recommended. The latter verifies that the agency fulfils the agreed conditions.

However, such an audit does not provide any information as to whether the company is paying too much in principle. This can be determined only in a properly designed media pitch. The corresponding request for proposal should describe both the company’s goals and the capabilities expected of the agency. It also makes sense to draft a brief based on the current advertising inventory as a benchmark for agencies to compare against. In practice, a professionally conducted media pitch can save 10 to 30 percent of the advertising cost without compromising on the quality of the purchased advertising inventory.

Another important trend is the selective move away from paid advertising. Many brands are increasingly focusing on developing their own content, which is then also broadcast via their own channels, such as on the brand’s website, on its social media profiles, and in newsletters. This move is not motivated primarily by savings but more so by fit and credibility.

For instance, Westwing, an online retailer that has been in business for only ten years, does hardly any above-the-line advertising. About 80 percent of its marketing budget goes to its own content, social media, and work with influencers who are closely tied to the brand. The internally developed content is not only entertaining but is also always directly linked to specific products from the company’s own offerings. Westwing has 20 employees who are responsible for its brand image and its range of products on YouTube alone.

The future: Marketing as a profit center

A successful optimization of a marketing budget also hinges on the willingness to put one’s own working methods to the test.

Leading companies increasingly deploy mixed teams with brand management and financial expertise, set clear responsibilities, and use modern planning tools. With advancements in personalized marketing, the relevance of smart data use for budget control and campaign planning has only increased.

The biggest lever, however, is the attitude of the decision makers: the marketing function of the future is not a cost center but rather a profit center. Those who think and act in this spirit will reap measurable rewards (Exhibit 3). One large fashion label, for example, invested the funds freed up by a large-scale efficiency program in capturing growth opportunities with new target groups in major cities and on the overarching theme of sustainability. In another example, one food company launched a global growth initiative by optimizing its marketing budget, particularly with respect to digital media.

Fact-based optimizers of marketing spend have nothing to fear from performance testing.

The experience on the ground in various countries and industries shows that efficiency improvements can save 20 to 30 percent of the budget, which can then be invested in brand reinforcement or growth. Backed by results of that magnitude, the CMO need not fear the next encounter with the chair of the supervisory board.

In uncertain times, strong brands offer consumers security and protect companies from creeping loss of market share. Investing in the brand does not have to compromise profitability; leading companies see the marketing department not as a cost center but as a profit center. Modernizing strategic and tactical management with marketing mix models and A/B testing is essential for increasing spend efficiency.

Explore a career with us