How to cut your marketing budget wisely

We’ve all been there.

Sales targets were missed, and now the CFO is asking you to reduce spending. It’s a “It’s not you, it’s me” kind of situation.

But what do you do now? Do you kill the campaign you’d planned for the next month, or perhaps reduce media spending indiscriminately?

Whatever you do, it’s a tough decision, and some people won’t be happy. Luckily, there are ways to be smarter about budget cuts in marketing that will not kill your growth trajectory.

And if you read this article, you’ll know exactly how to do it.

Assess the situation: Weather the storm or change tactics?

Whether budget cuts are a temporary response to market shifts or part of a larger need to rethink the strategy greatly influences how you should approach budget adjustments.

A slowdown in demand means both you and your competitors are struggling. And you might see some of them cutting down on any spending not considered as contributing directly to revenue.

But this is a mistake.

Let me repeat, this is a mistake.

An economic slowdown is a natural part of business cycles, and demand will bounce back. And when it does, you want your customers to be more likely to go to your company than the competitors.

So, while they might have reduced their branding investment or offered heavy discounts to maintain sales, you should concentrate your advertising budget on building the brand. This means cutting spending for demand-driven channels like paid search, product ads on social media, and promotions.

But what if the demand slowdown is not temporary? How do you cut spending in the long term?

Understand your unit economics

The biggest reason for sudden decisions to cut spending is over-ambitious sales targets. Ambition isn’t bad when the numbers are still sound on a unit level.

If your total expected lifetime value of a customer is €100, you cannot pay €150 to acquire them.

However, if marketing budget planning were that simple, everyone would get it right. The factors you need to consider are:

• Fixed vs. variable costs
• Long vs. short-term contribution
• Customer loyalty (or lack of).

Looking at fixed vs. variable costs to understand true profitability

The most basic, yet under-utilised analysis in marketing is identifying how much it costs to sell an item/subscription/service and how much it costs to keep the lights on.

It’s something your CFO cares about and is often neglected by us marketers.

If 90% of your revenue is financing your product sales, your Cost of Sale (CoS) target cannot exceed 10% or you’re losing money on every transaction.

The mistake marketers make when looking at the variable cost is forgetting the indirect costs.

What if T-shirts are returned 80% more than shoes? Or if customers call support 5x more when buying a specific service? Those costs may not end on the P/L, but they are real and they are serious.

A strong marketer understands the cost structure of all their categories and manages spend according to the expected profitability. They focus investments on activities supporting products with better unit economics and communicate to the organisation to fix the cost structure per unit sold before increasing spend again.

Balance long- and short-term investments

The curse of marketers is the unmeasurable nature of our work.

Yes, a marketer equipped with Marketing Mix Models and attribution solutions makes better decisions, but it’s still only an approximation of the truth-based correlations between investment and outcomes.

When the CFO negotiates a deal to reduce supply costs by 10%, that’s a tangible result. When we launch a campaign and sales increase by 10%, that can be due to a demand shift, competitor pricing, product updates, or the campaign launch.

This means we cannot be lazy when making budget cuts and do it “the easy way”. You can look at the bigger picture by assessing long-term contributions to sales using econometric models. Or you can run targeted experiments to identify low performers. Either way, you need to think through your budget costs and estimate performance using something else than Last-click Attribution.

Build customer loyalty

One critical aspect often overlooked in marketing budget decisions is the impact of customer loyalty.

While acquiring new customers is essential for growth, retaining existing customers and fostering loyalty is equally vital. Customer loyalty not only drives repeat purchases but also influences brand advocacy and word-of-mouth referrals, which can significantly impact revenue in the long run.

Therefore, when evaluating marketing ROI, it’s essential to consider the contribution of loyal customers.

However, it’s crucial to remember that customer loyalty isn’t guaranteed and requires ongoing maintenance efforts. Even loyal customers can churn due to reasons such as changes in preferences, competitive offerings, or dissatisfaction with the brand experience.

As you reassess your marketing budget and strategy, remember that most customers need to be reacquired at some point. This highlights the importance of investing in strategies that not only attract new customers but also nurture existing relationships to ensure long-term loyalty and sustainable growth.

Conclusion

If you want to cut your marketing budget, making strategic decisions is paramount to preserving growth and ensuring long-term success. By assessing the situation and understanding your unit economics, you can navigate budget constraints without sacrificing your brand’s momentum. Remember, a slowdown in demand doesn’t equate to a permanent decline, and investing in brand building during tough times can position you for success when demand rebounds.

Additionally, prioritising customer loyalty alongside acquisition efforts is crucial for measuring true ROI and sustaining growth. By investing in strategies that foster loyalty and nurture existing relationships, you can stay resilient to economic fluctuations.

So, as you face tough decisions about marketing budget cuts, remember to prioritise efficiency, strategic planning, and the long-term health of your brand.