Improve Your Spending Effectiveness

Once the competitive frame is understood and an effective, differentiating positioning is created, top companies turn their attention to improving spending effectiveness. Some companies use blunt instruments such as "share of voice" to determine spending level. The shortcoming of this approach is apparent given our discussion of the cheese cracker brand above.

So, if that fictional food company had used the "cheese cracker market" as the relevant frame of reference, it would have found that little to no spending is required to win. However, by knowing the brand is part of much larger frame that includes big salty snack brands, the company not only understands the true size of the potential opportunity, it also knows the level of spending necessary to compete.

Of course, companies that "control the controllables" know much more than just the total spending level required based on the Market Structure. They also know the optimal spending of each element of the marketing mix; that is, advertising/consumer/trade promotion. That's because the analytical framework used to create the Market Structure can be combined with a brand's P&L to determine the total spending level and mix that maximizes brand profitability.

For example, the cheese cracker brand discussed above has an enormous competitive frame comprised of millions of usage occasions, including all flavored salty snack occasions, not just cheese cracker occasions. This is a very broad pool of potential occasions to source volume from. By understanding the precise flow of volume that has occurred historically between cheese snacks and flavored salty snacks due to different types of spending (advertising, consumer and trade), our fictional food company can accurately predict the mix of spending that will grow volume from available usage occasions until marginal profit becomes negative.

This level of precision provides operating managers with a high degree of confidence in and control over their decisions about both spending level and mix. No longer are these critical decisions based on simplistic benchmark ratios like share of voice or historical percent of gross revenue. Instead, managers can make decisions based on the ability of each type of marketing expenditure to maximize profit growth.

This is particularly helpful when evaluating the tradeoff between advertising and trade spending. With the advent of retail scanner data 25 years ago, the impact of trade promotion on short-term sales became eminently measurable, resulting in a mass migration from equity-building activities to trade promotion tactics. The result is that most companies we work with are over-spent on trade promotion, and substantially under spent on advertising. But because they do not have a fact-based and uniform way to understand the impact of trade vs. advertising spending, they often feel powerless to make significant changes.

A Market Structure analytical framework can help here as well. Best-in-class companies are able to precisely identify the mix of promotional and advertising spending that maximizes total marginal profitability for their brands. If under-spent on advertising, they can choose to increase equity building spending with incremental funds, given the confidence they have in the volume this spending will deliver. Or, as is more often the case in our experience, they can choose to fund equity-building activities by shifting spending away from trade.

Since companies know the point where trade spending becomes unprofitable, they know precisely how much trade money they have available to be repositioned to advertising. They can therefore begin redirecting that trade spending confidently without risking significant losses in volume. That is because the Market Structure is created via analysis of millions of individual occasions. It can be used to pinpoint exactly the types of trade promotion activities that create brand switching, vs. those that simply reward loyal users.

With this knowledge, managers can maximize the trade tactics that create switching and minimize all others, enabling much greater trade promotion effectiveness with fewer dollars in spending. Thus, the inherent risks of reducing trade promotion spending are confidently mitigated and managed. For top companies, moving a brand to optimal advertising spending can be done with great speed and a high degree of confidence.

This level of operating control is contingent upon the knowledge provided by the Market Structure. Without it, the fictional food company in our example could not have known in the first place that volume flows between crackers and salty snacks; nor would it have had a way to calculate how much of that volume flow is profitably driven by advertising vs. consumer vs. trade spending.

While results vary from category to category based on the size of the competitive frame, we have found that brands can expect another 2-3 % revenue growth and 1-2% profit growth by moving spending to optimal levels behind a precise positioning in the competitive frame.

With just two of the levers in the "control the controllables" approach, companies have achieved significant revenue and profit growth from their core businesses (in our next newsletter we will detail the other three levers: Improved Innovation Productivity, Strategic Pricing, and Customer Strategies like assortment, merchandising and promotional tactics).

Now this growth does not come easily. It requires a new expectation for growth from mature businesses and demands a new level of accountability from marketing and sales management. It requires a few new tools including Market Structure. Perhaps most significantly, it requires a commitment to the arduous work of long term brand-building, quarter after quarter, year after year.

In short, Controlling the Controllables is a strategic and organizational paradigm shift for many companies. Not surprisingly, success is highly correlated with direct sponsorship from top operating managers, quite often including the CEO, CMO and other senior executives. But for those companies that have ventured down this path, the rewards have been significant: more consistent, volume-driven earnings growth, sustainable competitive advantage in any economic environment, greater level of management confidence, and, not least importantly, a higher degree of employee satisfaction, as line managers take firm control of their own destiny by "Controlling the Controllables."