B2B Marketing Myth #1: 60:40 is a golden rule for B2B marketing budgets

This is the first in a planned series of posts that look at B2B marketing myths. Follow so that you don’t miss the next in the series.

TL:DR

There is no magic ratio for allocating a B2B marketing budget. The 60:40 advocated in Field and Binet’s “The long and the short of it” has limited relevance for the extensive range of out-of-market, funnel and pipeline activities a B2B marketing budget must support. Instead, B2B budget allocations should be made based on three factors:

- The strategic aims of the brand

- The financial needs of the company

• Careful analysis of the effectiveness and efficiency of sales and marketing

The Long and The Short of “The Long And The Short”

A little over 10-years ago Les Binet and Peter Field analysed many years’ worth of entries into to the IPA’s Effie Awards and published “The long and the short of it”; the seminal father of a million blog posts.

Binet’s and Field’s report made several observations about the effectiveness of advertising. I’m not going to reproduce them here (Tom Roach has a great collection of their key charts) and you can buy the updated report from the IPA website.

The observation that is best known is their 60:40 rule though the latest version is an oddly precise 62:38. This says that you should spend approximately 60 percent of your advertising budget on brand building (long-term) and 40 percent on sales activation (short-term). According to Field and Binet, this ratio is the most likely to achieve what they call “very large business effects” such as growth in profit, sales, market share, penetration, loyalty and reduction in price sensitivity.

“The Long and the Short of It” has come in for criticism from several commentators. Professor Byron Sharp of the Ehrenberg-Bass Institute for Marketing Science went as far as to say it “really is terrible, very misleading”. Indeed, as a scientific study it does have several problems:

· It relies upon a skewed sample; submissions for awards are based only on successful marketing campaigns. Failures are never entered and consequently aren’t included in the dataset.

· It covers a limited number of segments and markets.

· It relies on conjectural groupings; how can you tell if a campaign is brand or activation oriented without a universally agreed definition of each? Indeed, is any campaign ever entirely brand or solely activation?

· The study did not consider contextual factors such as penetration, saturation, pre-existing brand equity, competition competence and so on.

· As the IPA dataset is focused on advertising campaigns it is unsurprisingly focused on advertising effects.

· The data was collected over a long period of time. Much pre-dated 2013 and it does not consider changes in advertising media, technology and consumer preferences.

· There is very little data (and certainly not enough to achieve statistical significance) about B2B campaigns.

That said, and all weaknesses aside, the report is hugely significant in the field of B2B marketing. Largely thanks to Professor Mark Ritson’s support and promotion by the LinkedIn B2B Marketing Institute it has caused more B2B marketers to put more thought into how they allocate marketing budgets than probably any other work in history. No bad thing!

In short, the 60:40 ratio should serve as a great reminder that while in some markets in some segments some marketers seem to have succeeded using something like this ratio, most B2B marketers will need a different ratio.

Should you allocate your B2B marketing budget using the 60:40 rule?

Emphatically, no.

“The Long and the Short of It” was not designed as a B2B marketing case study. It takes one communications channel — advertising — in a primarily B2C world and looks at it as a largely binary — brand or activation — activity. What it does not try to do is to reflect the importance of investing in middle of the funnel activities in B2B marketing.

This also highlights a shortcoming of generic benchmarking. Building your B2B marketing budget around the results of unrelated brands in unrelated segments in unrelated markets will not get you the same results. Your brand is not those brands.

Your B2B brand has its own unique strategy, set of circumstances, demands and — probably most importantly of all — financial situation. Compare two extreme scenarios:

· A start-up that is scrambling to cover next quarter’s costs and payroll. If you are about to go belly-up, there is no point investing in long-term brand building. You need cash now and that means full focus on end-of-funnel short-term sales activation.

· An established brand in a mature and steady segment with healthy cash flow and a strong, well activated sales pipeline. You should look to build brand memory over the next inter-purchase period, awareness in out-of-market prospects and middle-funnel engagement to keep the sales pipe full.

Any well-structured B2B marketing strategy must include more than just brand and activation. Indeed, any mature B2B marketing strategy must be based on a carefully researched customer purchase funnel with choices and decisions about which channels and tactics will be employed at each step.

Your job as a B2B marketer is to determine the right strategy (yes, simply surviving can be a strategic aim) and allocation of marketing budget through the funnel, given your unique situation.

Start with profit and cash

While most marketers are willing to spend days trying to prove campaign and budget ROI, even very senior marketers lose the link between what they do and their impact on profit and cashflow.

These are not just finance problems. Profitability generates cash for re-investment but cashflow keeps the lights on while you generate profit. Well-funded companies fail because they burn through their funding without ever generating sufficient cashflow or hitting profitability.

If you work in a quoted company, you need to also care about future cash flows (money that you will generate in future thanks to your increasingly powerful brand). CEOs and CMOs who can’t reassure shareholders and the stock market about future profitability and future cash flow lose their jobs every year.

How your company will generate profit, cash and growth is embedded in its strategic plan. Part of your job as a B2B marketer setting a marketing budget is to communicate very clearly to the C-suite how you will deliver your part of that plan.

If the strategy is growth by, for example, new product introduction, new market entry, increased penetration or any one of a number of growth levers, then brand growth becomes important. But since sales must result from brand growth, so does activation. It isn’t one or the other; it must be both.

Balance your B2B marketing budget by analysing your funnels

The bedrock of effective B2B marketing budget allocation is a carefully researched customer buying funnel. This will allow you to understand the behaviour of each customer at every step in their progress towards placing an order. With this in place you will be better able to, for example, plan activities to grow brand preference, middle funnel influence and opportunity generation and closure.

Deciding how you are going to allocate your B2B marketing budget through the funnel requires that you look at both your marketing funnels and your sales pipelines. Bear in mind that these are not the same thing.

Your marketing funnels — you’ll probably have funnel for each category of product or a funnel each segment that you target — describe how your customers buy your products. You could probably group the stages into “out of market”, “start”, “middle” and “end”.

The “end” of any carefully researched and designed funnel is sales (for simplicity I’m ignoring retention, advocacy and flywheel). Your sales pipeline lives embedded in the end of your funnel and should describe how sales, supported by marketing, works with customers to generate an order.

Sales Pipeline First

I always start by analysing the sales pipeline because it makes sense to fix leaks from the end to the beginning. When I’m looking at the pipe I try to understand:

- Sales targets at whatever level of granularity (individual salesperson, country, region, channel etc.) and timescale is most relevant to the way that sales is structured.

- Average order values and win rates at that same level of detail.

- Conversions from one sales stage to the next and the velocity between each stage.

- Average and total order values at each stage in the pipeline.

- Your total flash-to-bang time and your inter-purchase frequency.

- The value and volume of deals that are heading towards a final decision.

With this data you can start to partner with sales leaders to calculate what the volume and value of the pipeline should be in total and at each stage.

As a rule of thumb, better than average B2B sales teams will win approximately 30% of all early-stage opportunities and lose the rest to a “no decision”, a “not now decision” or to the competition. Average sales teams win around 20% of those early-stage opportunities. That means that as a rule of thumb, I like to see the total open pipeline sitting between a multiple of 3X to 5X the sales target.

Middle funnel next

This is where your measurement and analysis of tactics that keep customers engaged and influence their decision making until they are ready to work with sales comes in to play. Identifying the B2B marketing mix and hence budget that will work best through the middle funnel requires careful attribution of the influence that tactical choices have at each stage.

While you do this keep your eye on the big numbers: the value and volume of opportunities you need to generate to keep the sales pipeline at the multiple the sales team needs.

The start should be last

The next step is to look at how effective your marketing team is in identifying customers who are entering the market. It’s now that customers are starting to research and prepare business cases with, initially, minimal direct involvement with your brand.

This category entry point is quite likely to be opaque; it’s unlikely that you will always be able to link an engagement to a specific customer, but you should be able to identify increases or decreases in engagement with marketing assets.

Out of market

Next, you’ll want to consider how much you need to allocate to target the 95% of customers who are not yet ready to start their buying process. Here you will be looking at how customers are engaging with your awareness, salience and start of the funnel activities.

There is no golden ratio for a B2B marketing budget — only yours

With this information at hand, you are now at the point where you can begin to decide what proportion of your marketing budget you want to invest in:

- Filling the sales pipeline and supporting sales with their opportunities (activation)

- Engaging customers as they enter the market (influencing) and

- Creating mental availability before they start buying (brand building)

Inevitably your ratio will have three proportions: one for brand, one for through the funnel activities and the third for sales activation.

If the pipeline is weak and sales performance is poor, you’ll want to invest a larger proportion in opportunity maximising activities while sales leaders address the situation. If the pipeline, velocity and sales performance are on track you can afford to spend more through your funnel on converting category entry into new opportunities. But if you don’t see the volume there that can eventually fill the sales pipeline, you’ll want to invest a bigger proportion in brand campaigns to stimulate more category entry.

Conclusion

A golden ratio for B2B marketing budget allocation doesn’t exist. While the 60:40 ratio has prompted B2B marketers to think more critically about budget allocation, it shouldn’t be adopted blindly. Instead, B2B marketers should tailor their strategies based on their unique circumstances, considering factors such as profit, cash flow, and customer funnels. Analysing sales pipelines, middle funnel effectiveness and category entry points can guide budget allocation decisions. Ultimately, your focus should be on aligning B2B marketing budget allocation with strategic aims and customer funnels to drive profitability and growth. Expect the three proportions that you come up with to be unique to your brand.

If you’d like to consult with me about defining your B2B marketing budget drop me a line at www.vox-publica.com/contact