The biggest misconception with Zero Based Budgeting 

Have you noticed how defensive some marketers can be whenever the topic of zero based budgeting comes up? Why is that? It seems to me that zero based budgeting makes a lot of sense in most circumstances. And in the fast-changing world we live in, more scrutiny of investments surely makes sense. Part of the defensiveness is completely justified – some companies have used zero based budgeting in unscrupulous ways, using it as a device to cloak cost-cutting initiatives. But in recent conversations another issue has become clear. There are a lot of marketing and sales professionals who misunderstand zero based budgeting. If we could clear up some of that misconception, perhaps more marketers might be open to the concept – may even embrace it?

What is Zero Based Budgeting?

Zero based budgeting is, at its heart, a simple concept. In each budgeting cycle, all budgets (think marketing spend or trade spend) are reduced to zero. Each brand team, or sales team, then needs to justify that spend. That is all there is to zero based budgeting, in principle. Nothing more, nothing less. What is wrong with that? The alternative (which many companies still employ) is to start with last year’s numbers, or to start with an industry benchmark (brands in our industry typically spend x% of revenue on advertising, for example). Using last year’s numbers merely bakes in last year’s errors, and risks ignoring the reality that the world of consumer, shoppers and retail has moved on. Perhaps, when the world of consumer goods moved slowly, this might have been forgivable. But when we live in a world when 20% or more of your sales can migrate online in a period of a year or two, last year’s practice is a less and less useful input to the process. And industry benchmarks? Where is the competitive advantage in doing what everyone else does (or what we believe everyone else does!)?

When zero based budgeting is used as a force for evil

As I mentioned in my introduction, some of the concerns around a zero based budgeting approach to marketing or trade spend are justified. Sometimes zero based budgeting is used as a cover for blatant cost-cutting. Financial benchmarks are used to pre-evaluate activities, and anything that doesn’t deliver is cut. There is a danger that activity that delivers longer term, harder to measure value (such as brand equity) would be culled because it doesn’t deliver short term profit. But that’s not a reason to resist ZBB. Like any force, zero based budgeting can be harnessed for good or evil. Zero based budgeting can be used effectively to ensure that activity delivers value

The biggest misconception about zero based budgeting

The biggest misconception with regard to zero based budgeting is that it is about purely financial evaluation, rather than about ‘starting from zero’. Evaluating anything, especially marketing activity, purely on its financial return is highly dangerous. Evaluating marketing activities in this way alone is a bad thing, with or without zero based budgeting. The problem here is not with zero based budgeting, but with evaluating marketing activities based on a narrow set of criteria. There is plenty of evidence of long term equity value (how many advertising jingles from your childhood can you still remember?) There is a grave danger that a ‘short term activity’ only pays back today because of long term equity built up over decades. Hard to measure, but a huge risk to ignore.

But that isn’t what zero based budgeting is about, technically. Zero based budgeting merely says ‘start from zero’. How activity is evaluated is then up to you (or whoever makes the decision in your business. Activities can be evaluated against any set of criteria you like – some financial, some less so. Surely that has to be better than just doing something because we always do it, or because everyone else is doing it? And it is possible to manage zero based budgeting in a way which is responsive, strategic and fiscally responsible.

 

 

Why zero based budgeting, understood correctly, is a great thing for marketing

Framed in this way, zero based budgeting is a powerful tool for marketing. It creates many challenges, but also many opportunities to break paradigms and molds, and move marketing forward.

Why ZBB should be applied to trade spend too

And of course, zero based budgeting should also be applied to trade spend. Sales teams often squeal even more than their marketing colleagues when challenged to adopt zero based budgeting. ‘We have to spend the money; our customers demand it’ is a common refrain. And that is OK too. Investing in an important customer to preserve a relationship may well be justified. But in a time when trade spend is escalating, retail and shopper dynamics are changing rapidly, and retailers are getting more demanding, zero based budgeting makes sense. Taking a step back, starting at zero, and working out where best to invest makes huge sense. As long as the decision is made across a broader set of KPIs than merely short-term return on investment.

As an industry, now is the time for marketing and sales professionals to step forward and embrace accountability in the way they spend monies on behalf of their companies. The world of consumers, shoppers and retail is in too much flux for lazy shortcuts, and spend is under so much pressure, we can no longer afford the inefficiencies that historic practice creates. Perhaps if marketers and sales leaders were more proactive in embracing this accountability, and then being proactive in creating a meaningful set of KPIs which will protect brands, and customer relationships, as well as delivering key financial goals, then there might be a chance to head off the evil version of zero based budgeting before it comes after us!