So, what is zero-based budgeting?
Zero-based budgeting; a definition
The base of the marketing budget is zero. That means that each year, the CMO is not given any money (aside from certain operating costs) unless they can justify why they need it.
Where many organisations simply allocate the same marketing budget each year (as an arbitrary percentage of projected sales volume), with anything extra having to be justified, those using a zero-based budget go back to the drawing board entirely.
The marketer creates their plan for the year based on business objectives, they then calculate what budget this entails and what return the business will see. Senior managers review this work and either grant the budget requested or query the plan.
Mark Ritson last year wrote an article about zero-based budgeting, in light of Unilever’s adoption of the technique and subsequent scare-mongering from certain corners of agency land. As Mark points out, zero-based budgeting is simply accountability for marketing – anything else is folly.
While it’s true that zero-based budgeting can involve the re-evaluation of funding by removing expenses and predicting how this would affect performance, it can just as easily involve the addition of functionality; fairly obviously, given the idea is a zero base. Everything is on the table.
The advantages of zero-based budgeting
As Mark Ritson puts it, ‘what happens is that senior managers bet their resources on the better marketers with the better plans and the better opportunities and reduce investment in the crappy marketers with crappy plans.’
Some other things to consider…
Questioning the status quo
Zero-based budgeting creates debate within the marketing team and among senior management. This regular review of activity stops inefficient tactics from flying under the radar and can also bring wider business objectives into question.
The zero-based approach prevents the marketing team from spending their money simply to justify the same allocation next year.
Prioritisation / focus
Planning activity and budget requires the marketing team to define its role. This is the focus Ashley was talking about.
The disadvantages of zero-based budgeting
Time and resource heavy
Fairly obviously, a more strategic approach requires some effort (from marketing team and senior managers), as does anything worth doing in life. Some companies combat this by doing zero-based budgeting every few years.
Estimating costs can be difficult
Some things are difficult to budget for if their results are difficult to measure. Not every activity has an ROI and demonstrating value may be tricky.