What’s the right marketing budget?

As 2016 marketing planning shifts into high gear, one of the top questions marketers and stakeholders ask is, “What should we spend on marketing? What’s the right marketing budget?” The answer is a bit like Goldilocks: not too much, not too little — spend just the right amount. Marketing and advertising tools can help us find the right answer for us.

Let’s assume you haven’t taken my data-driven digital marketing planning course (though you should). Why do we care about how much to spend? After all, typically we marketers ask for a budget and get a fraction of what we asked for. Shouldn’t we ask for the moon and accept the inevitable outcome which leads us to exclaim, “That’s no moon!”

No. Why? Most marketing channels experience diminishing returns. Every channel has its Goldilocks moment.

We can spend an insufficient amount and not achieve the performance we need to meet our goals.
We can spend the right amount to maximize our ROI, our Goldilocks moment.
We can spend too much and hit diminishing returns.

Our challenge as marketers is to identify the Goldilocks moment for every channel in our marketing mix.

Let’s look at an example using Google’s AdWords advertising software. I’ve got a new book coming out soon about innovation. What’s the right amount I should spend on AdWords? Given my keyword list, here’s what AdWords says is the range I could spend – from nothing to $300,000 a year:

adwords_uncharted.jpg

I find their lack of specificity disturbing. If we look more closely, we see two major zones in the chart above.

On the left, where the line climbs steeply, we are not spending enough. Our ads will not run in ideal position, at ideal times.

On the right, where the line becomes flat, we are spending too much. We will not gain significant new traffic, new customers by spending as much as possible.

Where the line turns from steep climb to flattening out is our sweet spot, where our return on ad spend will be highest:

adwords_charted_out_for_DR.jpg

What if our marketing method of choice doesn’t have a convenient ROI calculator built in? We build one! All we need is a spreadsheet and careful tracking of our data. What we’ll do is spend incrementally larger amounts on each marketing channel and measure the result we get.

Here’s a very barebones example.

roi_example.jpg

In the first column, we list what we spent on any given marketing method at various levels of spending.

In the second column, we list what we earned from our spend at that level.

In the third column, we calculate our ROI. Remember, ROI is a simple math formula: (Earned – Spent) / Spent.

In the fourth column, we calculate our change in ROI, which is the same formula: (New Value – Old Value) / Old Value.

Where we see the big number changes in ROI is our sweet spot. Everything before the change is spending too little. Everything after the change is spending too much.

If you chart out your ROI, as I have in the example above, we see where our ROI jumps and then levels off.

Not every marketing channel will look this clean, this obvious, when we do our analysis. However, we are better off for doing it than simply throwing darts at a budgetary board. Blindly guessing at a marketing budget and getting it right would be one shot in a million at best.

How much should you spend on marketing? Ignore what other companies do, what “the top companies in X industry” spend. Instead, do your own work to find your marketing Goldilocks budget, the amount you need to spend to get it just right.

For a more in-depth marketing budgeting method, take my data-driven digital marketing planning course.


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2016 Economic Conditions Snapshot: Don’t Panic

I shared the dire predictions of the Royal Bank of Scotland for 2016 recently; the TL;DR version was “panic, sell everything, and hide in your bunker“. Is their prediction warranted? Panic isn’t, but caution is.

One of the most important lessons about economics is to do your own work. Download the data, make your own charts, run your own analysis. Don’t rely solely on the words of pundits, especially if they have a vested economic interest of their own.

First, the Dow Jones Industrial Average, 10 year view:

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We’re looking like a top, a plateau. 2015 looks like an inflection point. Is a crash coming? Not super soon, but some losses are inevitable.

SP500_10_year.jpg

The same holds true for the S&P 500.

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Also true for the NASDAQ. 2015 looks like a top.

Let’s check market volatility, via the CBOE VIX. The VIX measures how volatile the market is; the more volatile, the more unsettled investors feel.

VIX_10_year.jpg

The second half of 2015 was rougher, to be sure. However, volatility still isn’t in Great Recession territory, though it is substantially higher than the past two years.

How is the banking ecosystem? We check 30 and 90 day LIBOR, the London InterBank Offering Rate. The more risk in the economy, the higher LIBOR is. The higher LIBOR is, the less banks trust each other and the more they want to hold onto cash.

2016_30_libor_usd.jpg

30 day LIBOR has ticked upwards noticeably after 4 years of calm conditions. Banks may see some short term risk, enough to consider stockpiling a bit of cash.

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In the 90 day view, we see the same uptick. Banks are being more cautious about the first quarter of 2016.

Are either of these a cause for alarm? Not yet. While rates are ticking up, they’re nothing like they were during the previous bubble, shown just before the dark grey regions of the above two charts.

What about mortgages, the source of the previous economic crisis?

2016_30_year_fixed.jpg

30 year fixed rate mortgages remain at very low levels.

How about jobs? The best data source to look at is the alternative measures of underemployment, which takes into account not only people who are looking for work, but people working at less than full capacity (part time when they were full time), plus discouraged workers:

2016_unemployment.jpg

Overall underemployment looks good. The rate continues to steadily decline, though we might be seeing hints of a bottom.

Let’s turn our eyes overseas to the MSCI Emerging Markets index, an aggregated index of the economies of 23 nations:

MSCI_2016.jpg

MSCI has dropped 23% year over year, 32% off its 2015 high. This is noteworthy, indicating downward market pressures in emerging economies.

What about one of my former favorite indicators, the Baltic Dry Index (BDI)? BDI is the going cost of ocean-borne cargo container shipping rates. Unlike other indicators, it’s lagging; you don’t speculatively buy lots of cargo space you don’t need.

2016_BDI.jpg

BDI remains at crazy lows, indicating that shipping of goods by cargo container continues to be weak.

What about consumer confidence? The OECD assembles some terrific data on this front:

oecd conf.png

Overall consumer confidence around the world and the United States is optimistic; the one big question mark is China. China’s consumer confidence has swung wildly over the last 5 years.

Do businesses feel the same? The OECD’s business confidence index is the place to look:

oecd business confidence.png

Business confidence in the economy has been eroding in the United States, sharply in 2015. Businesses are not as optimistic as consumers.

What about spot gold prices? Gold is where a fair number of investors run in a panic when economic conditions become unsettled.

2016_gold.jpg

So far, investors haven’t panicked into gold. In fact, gold is at multi-year lows.

What about black gold, also known as oil? Oil is essentially a tax; the more expensive energy is, the less consumers and businesses have to spend on discretionary items.

2016_oil.jpg

Oil has fallen off a cliff in the last year. We know this as consumers because the price at the pump is at $2 a gallon or less in the United States. If you drive a car or incur other oil-related expenses, you know this by the extra cash in your wallet.

Finally, a roundup of agricultural products.

commodities.jpg

Most agricultural commodities are at multi-year lows except for rice. Low agricultural prices mean lower fuel and food costs, which is good for the consumer, but bad for some producers and farmers.

What does it all mean?

Panic isn’t warranted, but caution is. We see what look like market tops in the stock markets, slightly increased volatility, and the floor falling out from under several major commodities, from food to fuel to gold. It’s a tough time to be a commodity producer, but a generally good time to be a consumer. Businesses feel caution is warranted; the underlying fundamentals around commodities are deflationary.

For the B2C marketer and business, 2016 still appears to be strong for you. Consumers have cash in their pockets, they’re getting jobs, confidence is rising, and commodity prices (and their derivative goods) are low.

For the B2B marketer and business, 2016 is shaping up to be a tough year. When businesses become cautious, they tend to slow down capital expenditures and investments. Whether businesses pare back hiring is yet to be seen.

To sum, don’t panic. It’s not justified. Be cautious. Keep your eyes open.

Most of all, don’t believe the hype – ever. Use the data sources in this post to do your own analysis. Do your own work!


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End of Q3 Economic Check-In for Marketers

Once upon a time, when I worked in financial services, I checked charts and quotes daily. I watched the world’s markets like a hawk, because macroeconomic issues that could impact my work often had leading indicators days, weeks, or months in advance.

Even today, I still check in, though not nearly as frequently because my day to day work doesn’t depend on it. It’s still important to have a general sense of what’s going on in the marketplace – and even better if you know why.

Let’s see where things are, now that we’re at the end of the third quarter of the year. The economic indicators I pay attention to are listed out here.

So how are things? First, let’s look at the broad exchanges, the DJIA…

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and S&P:

INDEXSP__INX__1_932_24_-6_52__-0_34___-_S_P_500.png

Broadly, the markets had mostly a good year until recently, with the dislocations in China spreading. If you’ve got overseas exposure to China, you’ll continue to feel it.

We see this in the CBOE VIX:

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Any time the VIX goes above 30, it means that confidence is uncertain, things are less stable than markets would like. For the majority of this year, things were predictable. The China shock is what caused the large spike in September. The VIX is what you keep your eye on if you want to gauge market sentiment.

On the lending front, interbank rates are still quite low thanks to the Federal Reserve keeping effective interest rates at zero. We see the 30 day chart:

1-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.png

and the 90 day chart:

3-Month_London_Interbank_Offered_Rate__LIBOR___based_on_U_S__Dollar©_-_FRED_-_St__Louis_Fed.png

We see that these two lending rates are marching in virtually lockstep pacing, and the spread between them is healthy. While there may be unease in the stock markets, the impact to banking and lending has been a flight to quality. It also hasn’t impacted mortgage rates domestically:

Graph__30-Year_Fixed_Rate_Mortgage_Average_in_the_United_States©_-_FRED_-_St__Louis_Fed.png

Overseas, no surprises here as emerging markets have taken some punishment:

MSCI_Emerging_Market_Index_chart__prices_and_performance_-_FT_com.png

Again, if you have overseas exposure in your business, in your marketing, you’ll want to carefully watch indices like the MSCI Emerging Market index to see how exposed you are. Weakness in the market tends to spread to B2C in a quarter and B2B in two quarters, historically.

We haven’t seen the China shock show up yet in shipping:

BDIY_Quote_-_Baltic_Dry_Index_-_Bloomberg_Markets.png

As you may recall, BDI, the Baltic Dry Index, is the price to ship a container overseas. It’s expensive to do so; companies don’t speculatively purchase space.

We also haven’t seen China show up in gold prices, which typically spike vigorously when investors are truly spooked:

1 year gold.png

Instead, gold is still relatively cheap at the moment, less than half of what it was during the Great Recession.

Geopolitics are also playing a role in commodities. WTI Crude Oil still remains low:

CO1_Commodity_Quote_-_Generic_1st__CO__Future_-_Bloomberg_Markets.png

The reasons why oil is cheap are varied and complex. Some believe that Saudi Arabia is flooding the market to deprive the Islamic State of needed revenue (which comes from oil fields they hold). Some believe that it’s an indirect economic sanction on Russia. Some believe that renewable energy is finally beginning to make a dent in carbon fuel usage. Whatever the reason is, the net effect is cheaper gas at the pump and lower heating costs. If you’re a B2C marketer, this is welcome news because the consumer should have more disposable income not being consumed by energy.

Finally, in looking at corn, wheat, and rice commodities, only the latter is under some pressure:

RR1_Commodity_Quote_-_Generic_1st__RR__Future_-_Bloomberg_Markets.png

Which should be no surprise – when one of the largest economies (China) is feeling disruption, its principal commodity should show that as well.

What does it all mean?

So what does all of this mean for us, as marketers and business people? Right now the world is in fairly unsteady shape, except for America. Between conflicts and refugee crises in Europe and Asian contagion, the flight to quality is coming to America – and that isn’t a good thing in the long term.

In the short term, marketers will find more dollars in America, but no country is an island. In rougher times in other markets, use the opportunity to build and grow your audiences. Ad dollars will stretch further and you may be able to negotiate better deals outside America, especially if your business is being bolstered by American profits. Strategically, make the money in America and invest it in weak markets to seize marketing advantage while you can.

Take advantage of relatively good conditions for the American consumer, with lower energy and food prices. The upcoming holiday season has the potential to be a good one. Consumers tend to spend what they have without a ton of foresight or planning, so if they have more money in their pockets on the days they go to the mall, they’ll spend more of it. Leverage hyperlocal advertising in real-time to make the most of this trend!


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