February 2006

Activity-Based Marketing PlanningSM: A Key Tool for Improving Planning Effectiveness
By Adrian Ott, Exponential Edge, Inc.

Today, marketing cost estimates are inconsistent and inaccurate. Senior marketing executives tell us that they have difficulty comparing and prioritizing initiative proposals because "apples-to-apples" comparisons don't exist. "Padded" budget requests are common. Applying activity-based costing minimizes these issues.

Although the concept of activity-based costing is familiar to other corporate functions, applying these concepts to marketing is new and has unique attributes. When combined with marketing planning methodologies, this creates a process we call Activity-Based Marketing Planning^SM.

Most marketing managers at Fortune 1000 companies assemble budget estimates for strategic initiatives from "gut" or "back-of-the-envelope" calculations. Estimates vary based on where the marketing manager sits in the organization and his or her personal experience. Sometimes Finance is approached for assistance but increasingly Finance is overwhelmed with compliance issues such as Sarbannes-Oxley. Marketing doesn’t have access to consistent cost data or expertise to build its plans.

Moreover, with cost information contained in marketing employee heads, and in distributed teams, knowledge may be lost when turnover occurs. No mechanism exists to improve the initiative costing process.

What is Activity-Based Marketing Planning?

Activity-Based Marketing Planning applies consistent costing standards to marketing activities to develop better strategic initiative estimates. It develops corporate-wide marketing component costs such as the cost per page of collateral, the marketing headcount per product or the marketing cost per lead. It also sets a baseline for improvement in initiative planning and other marketing processes.

For example, assume a new marketing initiative requires:

• 50 pages of collateral and
• 5 web pages
• 100 qualified leads to meet revenue targets¹

These initiative requirements are multiplied by the cost standards for each of these areas and grouped with other costs in a basket of cost drivers to develop a total initiative cost. So, if the cost standard:

• per collateral page is $100, and
• per web page is $1,000
• per qualified lead is $1,500

then this initiative would cost:

$160,000 = (50 pages collateral *$100/page) +
(5 web pages * $1000/page) +
(100 leads * $1,500/lead)

Key steps to Activity-Based Marketing Planning include:

• Identifying marketing cost drivers
• Developing standard marketing component costs
• Creating a knowledge repository for standard marketing component costs
• Creating tools that enable initiative costing
• Defining a process to review and calibrate standard cost data.

Identify marketing cost drivers

First, identify key components across the marketing organization that drive costs. Usual candidates are cost per page of collateral, cost per advertising page, cost per web page or cost per lead.

It's important to look broadly across the marketing organization to understand cost flows and apply what's relevant to your organization. To do this effectively:

• Take a holistic marketing view, not a silo view.
• Focus on activities that generate 80% of costs vs. striving for 100% precision.
• Limit your component cost drivers to two to three per key area.

Develop standard marketing component costs

Once cost drivers are identified, standard costs are developed for each component based on actual and projected costs. For example, if the average cost per page of collateral last year was $100 and we expect 2% inflation, then the component standard cost is $102 per page for next year.

This step requires considerable management judgment and skill. It's important to review actual data in financial or Marketing Resource Management (MRM) systems and to interview marketing stakeholders.

Another area of judgment and skill is the allocation of fixed overhead costs that best reflect reality but don't convolute the model.

Create a knowledge repository for standard marketing component costs

Once established, standard component costs (e.g., cost per page of collateral = $102) need to be collected into a knowledge repository. The purpose of this is threefold:

1. to give the marketing organization access to the latest cost data to generate budget proposals and cost estimates, and to support other marketing processes and modeling
2. to document these costs for the organization and thus not lose knowledge when turnover occurs
3. to develop a foundation for improvement of the model.

This repository could be an MRM system or some other suitable electronic format. The key is to document and make the data available to those in marketing who need it.

Create tools that enable initiative costing

Electronic tools should be created that facilitate development of the initiative budget based on the standard marketing component cost data in the repository. For example: "How many collateral pages are required?" "How many web pages are required?" "Is this an 'A,' 'B' or 'C' priority product?" "How many leads do we need to generate to meet revenue targets?"

Define a process to review and calibrate standard cost data

As with most marketing operations processes, Activity-Based Marketing Planning is a journey and not a destination. Continuous improvement via review of the cost components and standards on a periodic basis is critical to success.

Summary

Activity-Based Marketing Planning provides for consistent costing of strategic initiatives based on actual organizational costs. This enables your organization to better estimate the true costs of an initiative. These costs are set on a periodic basis and are available to the entire marketing staff involved with planning.

By establishing common cost standards across marketing and combining this information with other planning techniques, budget planning becomes more predictable. More realistic planning and apples-to-apples comparisons are possible.

Cost knowledge is documented into a model for continuous improvement and is available for other operational planning and modeling activities. Because of these benefits, leading companies are adopting activity-based costing methods into their marketing operations.

©2005, Exponential Edge Inc. All rights reserved.

About the Author: Adrian Ott is President of Exponential Edge Inc., a strategy consultancy that assists medium to large high-tech and communications clients with marketing assessment, planning and operations services. She has written many industry articles and has been interviewed on CNBC and PBS for her work in the high-tech community. To read more articles on this topic, please visit www.exponentialedge.com. Adrian can be reached at adrian.ott@exponentialedge.com or 925-243-1500.

¹ This initiative example has been greatly simplified; most initiatives include a longer list of cost drivers.

Activity-Based Marketing Planning is a service mark of Exponential Edge Inc.