How much can be cut?

• Author: LaPointe, Pat
• Position: MARKETING

Cutting the easy stuff has likely already been done. So, where does one turn once all the "fat" has been trimmed from the marketing budget, leaving just muscle and bone? How far can marketing spend be cut before it's too far? Here are recommendations for cutting smartly:

* Do not cut everything proportionately. Be selective in what to cut and what remains. If unsure of which elements of the overall budget are driving results, recognize that across-the-board cutting strengthens hidden weaknesses while weakening strengths.

* Avoid cutting longer-term payback initiatives like branding and innovation to retain those yielding short-term benefits. This makes sense for a firm running out of cash, but for one expected to survive, evaluate the net present value (NPV) of the expected payback on each area of investment and continue to invest (at lower rates) in those offering the most attractive returns.

Develop and enforce a standardized business-case process to portfolio manage proposed investments. Cut projects with less attractive returns on a risk-adjusted NPV basis, regardless of time horizon. Consider opportunities to capitalize attractive but expensive projects so costs can be amortized over several years.

* Frame cutting decisions on the company's strategy for competing effectively. Think about the relative value/importance of particular customer segments; product groups; channels; and even geographic regions. Not all customers or channels are equal, nor are they of equal value.

Consider the expected returns of a dollar invested in each one and then rank them highest-to-lowest. Cut ruthlessly from the bottom to feed strong segments/channels.

* Enforce a discipline of educated guesses when lacking data and time for in-depth analysis. There are dozens of ways to credibly apply judgment to get to sound strategies--such as some of the more popular ones, De-phi techniques and Monte Carlo simulation.

* Recognize that the impact of cutting decisions depends upon what competitors do. If they cut expenditures, you may be able to accomplish just as much as before while spending less. But what if they cut less? Or what if they actually increase spending? Exploring possible scenarios with decision trees will help illuminate which types of cuts are smarter, and which leave the firm open to substantial competitive risks.

Cutting may ultimately be necessary, but at least everyone in management will better understand the risks.

Look down the road and...