The whys and hows of zero-based budgeting for marketers
This December 5th, The Drum Network is running a breakfast event in Birmingham dedicated to exploring budget and remuneration models. For more information, click here.
Zero-based budgeting (ZBB), a tool designed to keep costs low and profit margins high, is still a source of debate in the industry. Even its proponents note that timing, company priorities, and even sector can have a huge impact on whether or not it works.
For marketers (as ever) this effectively means adjusting to conditions that favour tighter cost management, adjusting budgets from scratch at the beginning of a year, in line with the following examples of brands adopting ZBB. That necessarily increases the amount of labour required from both brand and agency partner, so understanding why brands choose to adopt ZBB is paramount.
Unilever is potentially the strongest advocate for ZBB marketing, having attributed a strong financial performance in 2015 to having adopted the tool. At the time, Chief executive Paul Polman said Unilever was set to roll out a ‘global zero-based budgeting programme that will look to foster a culture of tighter cost management’.
In doing so, prioritising revenue growth to profit margins, revenue was up 4.9 per cent in the three months to December, spurred by growth in home care and ice cream, both of which have already introduced stricter cost control measures. The company noted, however, that it had initially had difficulty rolling out ZBB due to a fragmented internal structure that muddied the relationship between allocation and return.
The company continued to use ZBB, and has in fact made it a tenet of its 2020 programme, relaying the progress in its 2017 financial statement: “Zero based budgeting is improving our productivity in brand and marketing investment as we reduce the cost of advertising production and increase investment in media channels. ZBB is also eliminating waste in those areas where we have over-saturated traditional media channels, as well as reducing overheads.”
While Unilever’s adoption of the tool was more explicitly in service of protecting margins, snack manufacturer Mondelez uses ZBB primarily in service of prioritising marketing spend around its power brands. The snack maker hired Accenture in 2014 to introduce a severe cost-control budgeting strategy in a bid to deliver $3bn in gross productivity savings over the following three years.
Those savings allowed Mondelez to ramp up the spend behind its power brands, which grew more than 5 per cent in the first full year of using ZBB. It also allowed the company to put more spend behind what it calls “high-return” marketing initiatives to “accelerate revenue and drive share”. As a result, market share steadily improved in the last six months of 2015.
Since then, Mondelez has continued to roll out ZBB, with its 2017 financial statement reporting: “We have embedded zero-based budgeting practices across the organization to identify potential areas of cost reductions and capture and sustain savings within our ongoing operating budgets. Through these actions, we are leveraging our brands, platforms and capabilities to drive long-term value and return on investment for our shareholders.”
P&G and TV
The competition in consumer and FMCG categories means that brands are increasingly adopting ZBB for accountability’s sake, and marketers are often scrambling to find ways to demonstrate ROI when the campaign draws to a close. Tools like the recent Demand Generator from Thinkbox aims to aid brands and marketers to do exactly that: Matt Hill, research and planning director at Thinkbox said: “We hope the Demand Generator will be a helpful springboard for the many brands that don’t already do econometric analyses of their media performance.
“They can tailor it to their exact needs to find the best place to start from when deciding their media mix. With marketers increasingly adopting a zero-based budgeting approach, having a tool like this should provide a great evidence-based foundation on which to build their decisions.”
As brands look to progress spend from mediums like linear television, some marketers in particular are looking for ways to capitalise on increased use of ZBB to demonstrate there is still life in the old mediums. Over the past three years, P&G has “dramatically” increased its media spend, cutting digital spend by $200m and reinvesting the money into areas with “media reach” including TV, audio and e-commerce.
Following on from chief marketing officer Marc Prichard’s famous 2017 “murky at best, fraudulent at worst” speech in which he outlined a plan to cut the Dove owner’s agency roster and eliminate ineffective marketing buys, the fabric care arm of the business took the “drastic” step to begin zero-based budgeting across its entire brand portfolio including Tide, Bounce and Downy. But as a result it’s grown reach, increased its effectiveness and cut waste.
Despite those tools, it’s undeniable that the rise of ZBB is putting increased pressure on marketers, who are increasingly under pressure to justify their marketing budgets with brand-side practitioners often having to justify their ad spend to procurement departments, many of whom are using zero-based budgeting techniques to rationalize overheads. Mid-way through last year, Unilever went on record as stating how using such methods enabled it to cut elements of its overall marketing spend by as much 30%.
Speaking earlier with The Drum, industry analyst Brian Wieser of Pivotal Research explained the rationale behind such budgeting decisions when he said: “This concept of zero-based budgeting or ‘forgetting about everything you did last year and look at everything from scratch’ tends to mean lower spending on marketing and paid media.”
To be a part of a Drum Network breakfast event to discuss budgeting and remuneration on December 5th, click here.