When Procurement Should Spend More – Marketing Services is a Good Example

Hot TopicOur Hot Topic this month is Buying Marketing Services. One reason why this is one of the most interesting categories for procurement is that the concept of unit cost reduction is meaningless for most of the sub-categories within marketing services.

If I am buying creative services, graphic design work, search engine optimisation, it is pretty much impossible to even consider what “unit cost” might mean. So procurement has to take a more sophisticated approach, its objectives and how it shows that it is delivering value to the organisation. And that is the key word - value.

Procurement’s role is to help the organisation and the budget holders (brand managers, marketing directors, whatever) get better value from their marketing spend. That means activities that help with brand awareness, increase reputation, and untimely drive sales and profit margins.

That also means being prepared to spend more rather than less if that is the right thing to do. And it is no coincidence that we chose marketing to illustrate the basic premise of a recent research paper we wrote. Titled “Three Occasions When Procurement Should Spend More,” and sponsored by BravoSolution, we think it contains important lesson for procurement (as well as some very nice charts). If you haven’t read it, we would humbly suggest you should.

This is an excerpt where we start getting into the particular aspects of the marketing services spend category. And you can download the whole paper here, free on registration.

 

“Marketing spend, up to a point, has a return, we can assume - or presumably no-one would bother with it at all. Each pound, euro or dollar spent on marketing, which for many organisations is heavily focused on third party spend, should bring the organisation some return. If we could measure it precisely, and make the required linkage, that return would most usefully be expressed as shareholder value creation.

That benefit may be indirect however. Marketing engages an agency that can come up with a promotional video for the brand that goes viral and gets five million YouTube views. That is converted to some greater level of brand awareness, or perhaps click throughs to the company website, which creates a higher propensity to buy, which ultimately leads to more sales. So that video might drive an additional 2% sales on a £10 million revenue brand, worth £200,000 in revenue and £100,000 in gross margin. (If that is a sustainable increase, we might even look at a net present value of that rather than just a one-off gain.) Shareholder value has been significantly increased, in any case.

To see how procurement can contribute here, we need to consider the rate of return for any given example of marketing spend, which describes a return curve. Each unit of spend generates some return, and generally, at some point, that curve starts flattening out – we get into diminishing returns, although note that these returns may still exceed the marginal cost at this point. But at some point, investing another unit brings less return than the incremental cost. Now, we have passed the breakeven point. In theory, if we knew exactly where it lies, it is worth increasing spending up to this point because return exceeds marginal cost.

Show more TV adverts for a certain chocolate bar and more people will buy it. Run an advert ten times a day instead of five and you will get a greater return. But 15 times instead of 10? 20 instead of 15? The incremental gain will start declining, and at some point, the cost outweighs the additional return.

Now of course we can’t map this curve exactly, but understanding it as well as possible is key for colleagues in marketing and indeed the organisation generally. And when the spend is with third parties, it is within the procurement sphere of interest too. What it means is that, in principal, we should keep spending money on marketing (or each sub-sector within marketing) until we get to that marginal break-even point.”

(Download the paper to see some interesting ‘return curves’ actually mapped out)!

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