It would seem that marketing budgets are the first to go on the chopping block when performance isn’t what’s expected in Q1. After marketing budgets saw a modest increase in 2017, Unilever announced for 2018 that it was cutting its ads by 30% and that it was slashing the number of agencies it works with by half. P&G made a similar statement, saying it was reducing agency and production fees in its $7.1 billion annual budget.
As two of the biggest advertisers in the world, these announcements sparked more than a little consternation among marketing agencies. If budget cuts become commonplace, agencies may find themselves in conflict with their clients. Why? Because as budgets are dropping, the cost of talent is on the rise.
The Hidden Costs of Budget Cuts
With multinational brands of Unilever and P&G’s size scaling back, things could become unwieldy, so regrouping makes sense. But brands can’t achieve a satisfactory return on investment without efficient tactics, and agencies often play a role in ensuring that brands get their advertising right. An agency’s job is to grow its clients’ brands, which comes at a cost. Ultimately, though, those investments should yield profitable results for both the client and the agency.
When brands decrease their marketing spend, the squeeze extends to their bottom line. For example, Blue Apron Holdings cut back its marketing budget by 43% in response to investor demands. After, it saw a 9% customer decline within a single quarter and shares dropped.
Such losses should serve as a cautionary tale to other brands. Unfortunately, many executives still view marketing as a discretionary cost instead of a return on an investment. Many leaders also fail to recognize the continued relevance of in-person talent. The growing emphasis on intelligent automation, such as smartbots and other “always on” tools, may give clients a skewed perception of the marketing process. They expect agencies to move faster and operate less labor-based models, not realizing that strategy, creative production, and insight extraction are still very much human jobs.
That’s not to say that there aren’t opportunities for cost savings. There are always ways to operate more efficiently. But slashing budgets and demanding faster, more automated work is not a way to increase profits. If anything, it’s a surefire way to watch them fall.
Automation Isn’t the (Only) Answer
One reason for client frustrations is a lack of understanding regarding the manpower needed to execute a successful campaign. Automation is a great tool for enhancing marketing strategies and gathering data. But you need people to develop those strategies, track those analytics, and find patterns in the information being gathered.
Every project requires some level of senior oversight, which increases its cost. But new data-driven strategies demand even more personnel. In addition to the marketing and management associates, you also need data scientists who understand how to use and interpret predictive analytics and other insight-gathering technologies.
A new report shows that creativity doesn’t get brands very far without real investment in these other areas. A campaign might be clever or profound, but its potential impact is wasted if it’s not backed by a realistic budget and smart analytics. Brands that approach their marketing budgets with a short-term view will pay a significant cost in terms of customer retention and conversions down the line. Marketing is an investment, and it should be treated as such.
Coping With Budget Constraints
When agencies and clients have to go back and forth over budgets, they miss valuable opportunities to connect with audiences and drive growth—which is the point of the relationship in the first place. The agency might feel undervalued while the client feels nickeled-and-dimed, and, ultimately, enthusiasm for the campaign wanes. No one wins.
Brands that want to better navigate these sensitive conversations so everyone achieves the desired results should follow these three strategies:
- Outline the budget at the outset
Agencies can be uncomfortable discussing money for fear of upsetting the client, but it’s better to get any issues out in the open early rather than derail a campaign in its later stages. Be clear about the numbers and what those prices include in terms of services and support. Ask clients to be specific about their budgets, and address any discrepancies outright. Talking money at the beginning allows both the client and your team to focus on building an exceptional, results-oriented campaign.
- Hold regular meetings to discuss key performance indicators
After the initial negotiations end, the financial teams for both the agency and the client typically step away. The only time they’re brought back into the loop on KPIs is when it’s time to see whether an incentive was met. However, everyone involved in the contract process has a vested interest in the campaign’s success. Regular meetings to review KPIs not only ensure that everyone is on the same page but they also help you spot potential problems well before they happen. According to a United Kingdom-based study, 62% of clients say they struggle to achieve their KPIs through agency partnerships, and 72% of agencies make the same complaint about their clients. Regular communication can alleviate these pain points and enable both parties to work harmoniously together.
- Emphasize and clarify the ROI
You should be clear on the expected return on investment before you sign a contract. The last thing you want is to realize you can’t deliver on the client’s expectations or that the agreed-upon budget falls far short of your needs. Establish the forecasted ROI, then track spending on these goals as though you were using your own company’s money. When you take on a client’s project, you must take ownership of it, which is why knowing the end game is so critical.
Ultimately, everything comes down to ROI. Brands are wary of spending on agency services because they’ve been burned in the past or don’t see the value. If you consistently deliver results and drive up their profits, brands will continue to spend.