Marketing and finance are entirely different disciplines, so it’s no surprise that the CFO and the marketing team have an often contentious relationship. To the CFO, the marketing budget seems poorly planned and out of control; to the marketer, the budget is an unwelcome constraint on creativity.
If marketing and finance are going to learn to live together, they’ve got to find a common language and create a budget that satisfies them both.
Unfortunately, marketing budgets are often created around myths and misunderstandings that confound CFOs. Here are my favorite marketing myths and how to fix them—do any of these sound familiar?
Myth #1: “If we get just one new customer, the advertisement pays for itself”
This is classic “top line thinking”: Spending money to make back the same amount ignores all the costs of delivering your service or product. In other words, if you spend $5,000 on a trade show to find a customer who buys a $5,000 widget from you, you still must pay for the widget.
Instead of comparing marketing expenses to top line sales, use gross margin. Using gross margin is safe and simple—if the gross margin on one widget is $100, then your $5,000 trade show investment will break even with 50 customers (not just one).
Note that if most of your customers tend to buy more items from you over the long term, you could use a more complicated metric called Customer Lifetime Value.
Myth #2: “To get more sales, we just need to spend more on marketing”
Like all good myths, this one has a kernel of truth. Advertising and marketing is an important budget item that should drive sales. But this ignores the key criteria for any budgeted expense: getting a positive return on investment (ROI).
My firm recently bought a print ad in a magazine. Thousands of people may have seen the ad, but not a single person called the phone number we listed there, or asked for the product advertised. So we certainly spent more on marketing, but did not generate any more sales.
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Marketing budgets need to be spent on relevant and effective marketing campaigns, and to pass muster with the CFO, every campaign better include a way to measure results. In turn, the results need to include a calculation for the ROI as measured by the additional gross margin dollars generated. (See #1 above!)
Myth #3: “If I can get $10 in sales for 10 cents in marketing, then I’ll throw our whole budget at it”
When one marketing campaign starts working (and generating a positive ROI), it will be tempting to go all in. If it works a little, why not do a lot?
That’s hard logic to argue, but a CFO will know that there’s real danger in having too many sales too quickly. A company is a complex machine that cannot always react quickly enough to changes in demand—operations, cash flow, staffing, logistics can all come crashing down under the weight of too many new customers. And plenty of companies have gone bankrupt trying to grow too fast.