Advertising spend is often a “black box” for finance professionals and when budgets and economic conditions are tight, it can be the first area to be cut.

The correlation of ad spend to revenue is usually not well understood, while spending reductions will presumably flow directly to the bottom line. However, that approach may have the opposite impact intended, as companies watch revenue and profits decline.

When times are good, on the other hand, CFOs shouldn’t automatically stick with current ad spending levels. With the recent federal tax reform and the additional funds that may be available, now is an ideal time to revisit budget allocations.

Is the time right to allocate more resources to revenue growth opportunities, and therefore possibly increase investments in advertising, which is particularly effective when consumer confidence is high?

The key question that a CFO should ask, in good times and bad, is, “Can advertising drive revenue and differentiate our company or brand from our competitors?”

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In any decisions about advertising, it’s critical that CFOs have a better understanding of advertising activity and results. Rather than relying on internal subject-matter experts to make the call, CFOs need to partner with them to determine if an increase in advertising spend is the right move for the business.

Here are a few best practices for CFOs to consider as they take a closer look at their advertising budgets:

advertising budget

Grant Fitz

Improve alignment with the chief marketing officer (CMO). Team up with the CMO to understand some of the basics on where and why money is being spent. Getting a sense of the return on investment (ROI) will help demystify the spend.

To do this, leverage data and analytics to take a deeper look at campaign results and align priorities. Data and analytics can challenge the status quo, revealing which areas should get more or less of the budget.

While all of this might seem overwhelming at first, building successful strategies doesn’t happen overnight. Leaning on the CMO and your data and analytics teams for insights, as well as leveraging technology and media partners, will lead to an unbiased approach to the most effective spending. This opportunity is a sweet spot for CFOs to provide an outside perspective and to ask the right questions to get results.

Understand advertising results and how they impact revenue. When the focus is on short-term, bottom-line results, due to economic challenges or otherwise, there’s a natural tendency for CFOs to cut back on advertising rather than invest. However, when things get difficult, a smart advertising strategy can mitigate the headwinds, lay plans for future growth, and generate enterprise value.

Ultimately, CFOs need to understand and guide the organization between short-term revenue lift or savings and long-term brand building.

For example, after 9/11, GM’s “Keep America Rolling” campaign offering zero-percent financing incentives was very effective. It was a textbook example of a company investing during a time when everyone else was cutting budgets to reserve spend. It kept GM front and center with a theme that resonated with Americans during that difficult time.

Review customer value, consumer confidence, product life cycles, and more to determine budgets. One of the most important elements of marketing is having a firm grasp on the value of customer segments.

Not all customers are created equal — some are price driven, some are loyal, and others readily switch brands. Each segment has different buying patterns and represents a unique lifetime value to the business. Understanding this is critical to ensure an effective advertising strategy.

Many factors determine advertising spend, and consumer confidence is an important one. When it is high, increasing spend will likely have more of an impact on revenue than when it is low.

Finally, product life cycles play a big role in the marketing rhythm. If a new product is introduced, spending will likely increase. If a product is reaching the end of its life cycle, reconnecting with customers and providing a replacement can drive revenue.

A good example of this occurs in the automotive industry. When the average model year of vehicles in the market begins to age, consumers start to sell their older cars and buy new ones. Or, if an individual consumer’s car or lease is getting older, they may be in the market for an upgrade or renewal.

Both of these instances are important times to increase ad spend. Again, however, it is important to be in the know on these insights. That requires marketing alignment as well as partnerships with technology or media companies to gain the needed level of knowledge.

Leverage key events, such as tax season and holidays, to shift investment throughout the year. Most CFOs have a pretty good feel for anticipated spikes in revenue and how far out to shift investments accordingly to generate revenue. Taking a deeper look at slightly more obscure holidays or seasons — like tax season — can help identify additional opportunities.

When you do not see an obvious hook for ad campaigns, rely on data and analytics to help identify opportunities using the right channels. From there, marketing teams can pilot a campaign before investing more broadly.

The test results can provide actionable insights for next steps, such as rolling out the campaign messaging to other markets, if it was successful, or taking it back to the drawing board, if it wasn’t. Test and learn.

Grant Fitz is CFO of Valassis, a media and marketing services company.

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