ROI-Based Planning: The Antidote To Zero-Based Budgeting

Data-Driven Thinking” is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Jay Friedman, chief operating officer at Goodway Group.

Zero-based budgeting is the new buzzword in our industry. It even comes with a snazzy acronym: ZBB.

Last month, Verizon said that it would adopt ZBB in an effort to cut spend by a mind-boggling $10 billion across its operation. WPP’s GroupM and Publicis Groupe’s Zenith have lowered their ad spend forecasts partly due to their CPG and retail clients adopting ZBB.

Zero-based budgeting is a technique in which budgets are built from $0 rather than from a previous year’s budget. If cost-cutting is the objective, it might be a good approach. However, cutting costs isn’t the primary driver for marketers – or at least it shouldn’t be. The primary driver should be achieving measurable return.

Back when print, radio and TV ruled the world, marketers had a difficult time accurately measuring return on ad spend because there was little data to go on. With little data, advertisers had to continue increasing budgets in the hope that it would produce more results. There was no knowledge of what worked, what didn’t and why.

Media costs mirrored this attitude. Year after year, TV reps said rates were going up because it’s an election year, the Olympics or both. But then they’d say that rates were going up again the following year even, when there was no election or Olympics.

Digital changes this. We can now actually see what’s working, what’s not, why and how much we really should be spending.

Lift-Based Budgeting

Rather than starting from zero, let’s focus on lift. Lift-based budgeting is identifying the true lift that occurs when money is spent in a certain channel or with a certain publisher. Most marketers are still not applying lift-based budgeting to create ROI-based planning.

Between walled gardens and cross-channel attribution woes, there are challenges for getting accurate data and thus determining lift. This problem is compounded by multiple marketing disciplines within an organization often taking credit for so many conversions or sales that they add up to three to five times the total number of sales that actually occurred. This doesn’t mean, however, that it’s so difficult that it’s not worth the effort.

By sifting through the data and identifying the true lift each channel or major partner delivers, some of these problems can start to be addressed.

ROI-Based Planning

To get out of the big-budgets-for-the-sake-of-big-budgets cycle, marketers should apply a new, ROI-based formula for budgeting. This means segmenting budgets with specific goals like general brand awareness, newsletter sign-ups, in-store foot traffic, actual product sales, et cetera. Approaching budgets in this way allows marketers to work toward measurable results that directly impact the bottom line.

Take Apple, the world’s most valuable brand, for instance. If Apple didn’t run any advertising for one day, would it really impact general brand awareness? Would it impact the number of phones Apple sells? I don’t think so. A week? Probably not, and certainly not dramatically less. After a month? A year? At some point, sales will be affected and the residual brand value will decline, leaving a brand with a consumer recognition, trust or consideration deficit.

Maintaining brand awareness and consideration is a separate metric than selling product today. Marketers should know what it costs to maintain their brand metrics or lift them a point. Marketers should also know what it costs to create a sale that otherwise wouldn’t have been made. This is directionally calculable today in digital, and we’re not far away from it being possible across all media.

When marketers can do this with real math, securing a fair budget for next year should be a fairly easy choice for the CEO.

Follow Jay Friedman (@jaymfriedman) and AdExchanger (@adexchanger) on Twitter.

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  1. ZBB isn’t a cost-cutting exercise. It is, by definition, a ROI-based exercise. You look at what’s worked, how the performance might change with a different media or creative mix, and cut the stuff that doesn’t work. You bucket your efforts in continuation, re-test, and test buckets across both media channels and creative and make sure you’ve allocated enough dollars to test incremental and breakthrough efforts.

    All along the way, you assign an ROI to every effort. So how’s that not ROI-based? I’m confused.

    • Mark – you’re right. ZBB and ROIBP should be identical. But that’s not how the press treats it. The articles all focus on ZBB as a) cost-cutting, and b) the practice taking agencies by surprise and harming their revenues. My point is that if agencies used ROIBP the whole time, there wouldn’t be any surprises.