As an entrepreneur, you know how essential a good marketing campaign is. You want to stay in touch with current customers while targeting new audiences. This allows your company to grow and further develop its brand.
Even if you’re a new business owner, you’re probably also aware of how expensive marketing campaigns can be. They tend to cut into a large chunk of your budget whether or not they deliver good results.
We all want to get the most out of our advertising campaigns. Zero-based budget marketing seems to be the solution many business owners are turning to. So, what exactly is this strategy and how can you apply it to your business in 2020?
WHAT IS ZERO-BASED BUDGET MARKETING?
Zero-based budget marketing involves recreating your budget every year.
The marketing team builds the budget from the ground up. They make sure that every component works towards the company’s goals. By confirming each factor’s relevance and cost-effectiveness, the team ensures every cost is justified.
Note: Zero-based budget marketing does not refer to low or no cost campaigns. Many businesses adopt these strategies to cut down on advertising expenses. While this money-saving approach can be useful, it is not the focus of this article.
Zero-based budget marketing doesn’t just aim to cut back on expenses. While this is usually a positive side effect, the approach is more concerned with allocating funds in a way that will further a business’s objectives.
AN ALTERNATIVE TO TRADITIONAL BUDGETING METHODS
While zero-based budgeting is not a new concept, it is becoming more popular across many different industries. This is large because of the relative inefficiency of traditional methods.
In most cases, traditional budgeting involves looking at the previous year’s numbers. The team will simply take its actuals and adjust them slightly to come up with the new budget.
You might be wondering how they go about adjusting the numbers. Well, they usually just increase it by a few percentage points. This is their way of factoring in inflation and rising wages. They may also consider other factors such as industry trends and what the competition is doing.
WHY ZERO-BASED BUDGETING IS MORE EFFECTIVE
If you aren’t familiar with marketing, you might be wondering why the industry is starting to turn away from traditional methods. After all, they seem like the most logical approach. Why wouldn’t you spend about the same on campaigns as you did last year?
So, what’s the problem with these traditional methods? A couple of the most pressing issues are as follows:
- Last year’s needs don’t always translate to this year’s needs. No matter what industry you’re in, it’s bound to change from year to year. There will be new trends, new competition, new resource requirements, etc. Giving yourself the same marketing budget year after year doesn’t take these changes into account. Whether you end up over or underspending, it will be inefficient for your company.
- The team feels the need to spend it all. Let’s say the department has X amount of dollars to spend on campaigns. The end of the year is approaching, and they’ve only used 75% of their budget. They may feel the need to spend the remaining 25% simply because they have it. They may also do this to ensure that they don’t receive a lower amount the next year. Regardless, this is not cost-effective for the company as the department is spending the money just to spend it.
WHY ZERO-BASED BUDGET MARKETING IS MAKING A COMEBACK
Marketing professionals first introduced ZBB in the late 1970s. It didn’t quite stick because of the lack of efficient planning technology. Businesses didn’t have the tools to accurately model costs and justify expenses.
As we mentioned above, ZBB is making a comeback because of the need for a more appropriate budgeting. This is possible thanks to innovative planning technology.
Now, businesses can use leveraging modeling software to estimate their projected expenses. The streamlined process makes it easy to implement ZBB approaches for every new cycle.
KEY FEATURES OF ZBB
Let’s look a little closer at the key features that make up effective ZBB…
DON’T REFERENCE LAST YEAR’S SPENDING
As tempting as it can be, you should not reference last year’s spending. Past trends shouldn’t dictate your budget for the new cycle.
ACTUALLY, START AT ZERO
Starting with zero dollars in the budget will allow you to optimize your costs. Instead of copying historical patterns, base your new budget on your company’s specific goals.
Ask yourself what your business wants to achieve. Then, be purposeful about defining costs to reach these goals. If you can’t specifically justify the cost, it shouldn’t make it into the budget.
A PRACTICAL EXAMPLE
A good way to think about this is ZBB as it applies to personal finance. Individuals often use this strategy to manage their own money.
So, an individual using the ZBB approach will divide up their paychecks accordingly. They’ll assign X per month for their car payment, Y per month for food, etc.
The idea is that each dollar has a “job.” You are being purposeful about where each dollar is going, as you have to pay your bills and make a living for yourself.
YOUR GOALS DEFINE YOUR BUDGET
This is a very different approach from that of traditional methods. Because you are justifying each expense, your goals define your budget.
With ZBB, you should no longer have an arbitrary budget. This will allow your company to be purposeful about each expense.
Once you justify each cost, attempt to streamline each process.
For instance, let’s say you operate a toy company. You outsource your content writing to an independent agency.
When applying ZBB, you realize that the independent agency is raising its costs every year. It turns out that it’s actually cheaper to have your marketing team create its own content.
So, instead of increasing your expenses to account for the supplier’s rising costs, you adjust it so that your company can implement this change.
It’s important that you follow through on your plan. If no one adheres to the roles and responsibilities you set out, then all of the strategizing will be for nothing.
BEST TIPS FOR GETTING STARTED
So, you want to go about creating a ZBB for your business. Here are some top tips for getting started:
HAVE A POSITIVE MINDSET
With traditional methods, most professionals concern themselves with where to cut expenses. This is because they have learned to only care about the bottom line.
With ZBB, however, it’s important to go in with a positive mindset. It’s more than just minimizing your expenses. You cut costs and streamline processes to free up funds for a bigger reason. You want to have adequate resources for all of your business’s important functions.
START WITH THE EASY DECISIONS
Starting with easy decisions makes the rest of your job a lot simpler.
Initially target areas such as the following:
- The larger and typically more steady departments that aren’t yielding expected profit
- The departments where significant indirect costs are not understood
By starting with these areas, you will free up the most resources. This will allow you to fairly allocate funds to other departments.
Starting with these areas also creates the least amount of disruption to the rest of your company.
ASSEMBLE THE RIGHT TEAM
You shouldn’t go about this daunting task alone. For the best results, you should take the time to assemble the right team.
You’ll want professionals from relevant units such as IT and finance. You should also solicit the advice from department representatives. In most cases, a C-level executive will chair these teams.
Many companies seek out a third-party advisor to help with the process. In addition to offering expert advice, they can settle any disputes that may arise. You must almost always make compromises, and it’s ideal to have an unbiased mediator.
USE THE APPROPRIATE PLANNING PLATFORMS
Traditional planning software contains financial data that won’t help you with ZBB.
You need to look at factors such as productivity ratios, activity volumes, and input costs. This is why it’s important to choose the appropriate planning platform.
Most often, this additional data comes from company spreadsheets. This is yet another reason why ZBB is very time-consuming and requires a skilled team.
HOW FREQUENTLY SHOULD YOU USE ZBB?
It might seem like a lot to reset your budget every year. Your team has to set aside time to thoughtfully think about and plan the best approach.
Some companies recognize the strain annual ZBBs can have. Many, therefore, opt to reset their budget every couple of years. This is particularly doable when your industry isn’t as prone to change as others.
BENEFITS OF ZBB
We’ve already touched on some of the major benefits of ZBB, but here are a few more worth mentioning:
CREATES SENSE OF ACCOUNTABILITY
Managers and other team members won’t be able to spend their budget on unnecessary resources. ZBB justifies each expense, meaning you know exactly where each dollar is going.
OPTIMIZE EXPENSES, NOT JUST REVENUE
Instead of focusing on how to make the most money, ZBB focuses on how to best spend your money. This is more efficient and will inevitably increase your profits anyways.
IMPROVES COMPANY CULTURE
As you should realize by now, ZBB is a very involved process. Team members across departments have to work together to come up with an appropriate plan. They focus on the company’s goals, making them have better coordination with each other.
TAKES LEGACY EXPENSES INTO ACCOUNT
Legacy expenses are those assigned by leadership in past years. Because of traditional methods, legacy expenses tend to remain the same from year to year.
By not addressing legacy expenses, your business could be wasting a lot of money. Maybe there is a cheaper way to accomplish the same thing. Maybe you can cut the function altogether.
You won’t know unless you take legacy expenses into account every time you make a new budget. This will make sure that past leadership’s decisions are still relevant. If not, you can make the appropriate adjustments and factor in new necessary expenses.
CRITICISMS OF ZBB
Like with many new trends, ZBB faces some criticism. Of course, there are the traditionalists who just don’t want to adopt a new approach. Some other common criticisms include:
One of the most prominent complaints is the time it takes to create a ZBB. Your team must dedicate itself to analyzing costs and determining what expenses are necessary.
While this requires more work than traditional methods, it can be well worth it in the end. The savings and improved efficiency of your business will eventually help in the future growth.
Determining whether or not your company will benefit from ZBB is part of the cost analysis. Will the potential savings be worth having your employees dedicate time to this project? Also, consider that you might have to hire outside help to create an effective budget.
IT CAN DISCOURAGE LONG-TERM PLANNING
As this article has harped on, resetting your budget every year has its benefits. However, it might discourage long-term planning.
By starting from scratch, it’s easy to only allocate funds for what will make money in the current year.
This can especially hurt departments like worker training or research and development. These units aren’t directly contributing to revenue, but their work is essential to the company. If they receive inadequate funds, the rest of the company is bound to suffer.
Managers might not do this on purpose, but it is an unfortunate consequence of ZBB. They might want more resources for their department and end up manipulating the system to make it happen.
Really, this kind of manipulation can happen with any method. ZBB tends to be most prone to it because of its willingness to reorganize funds every year.
With these criticisms in mind, you should be able to determine whether or not ZBB marketing is right for your business in 2020. These tips will help you successfully apply the strategy and make your business more efficient.