Business Development Director
In this article
Most approaches to budgeting fall into one of two categories: top-down and bottom-up, each with their own pros and cons. Keep reading to learn about helpful tips to help you decide on your budget strategy.
As a financial marketer, planning your bank’s marketing budget is one of the most strategically valuable tasks you perform.
A thoughtful, well-designed budget ensures that your marketing dollars are allocated to the most effective projects. It justifies your marketing spend by clearly illustrating how that spend drives growth. And it communicates the value of marketing to senior leadership in terms they care about: dollars, cents and return on investment.
But the art of budgeting can also be a challenging one, especially given the rapid pace of change in the financial marketing landscape. What’s needed is a general framework that provides structure while also allowing space for rapid adaptation.
This approach typically begins with the CFO or CMO, who determines marketing investment targets for the year and divides the available dollars into a few major buckets of spend. Then, mid-level marketing leaders take their allocated budgets and split them up in a way that makes sense for their respective departments – such as by marketing channel or functional teams. Finally, individual marketers or marketing team leaders receive these budgets and populate them with the highest-ROI programs, campaigns and activities they can identify.
Most banks organize their top-down budget structures in one of three ways:
- By Business Unit: Commonly seen at banks with highly diversified product lines. Examples of business unit classifications include savings accounts, credit cards, private wealth management, and investments.
- By Region: Appropriate for banks operating across multiple jurisdictions or with a strong geographical focus – such as rural banking networks.
- By Functional Area: This involves organizing budget allocation along functional lines, such as sales, marketing, compliance and treasury. Marketing budgets might be further sub-divided into events, public relations, digital, and so on.
Many banks also employ some combination of these three structures.
Pros and Cons
The advantage of this budgeting approach is the clarity and structure it brings to the budgeting process. In practice, senior leadership determines the bank’s overall strategy and allocates capital accordingly. Middle and junior management, who are well-equipped to understand the unique challenges and opportunities facing their specific departments, manage the programs according to senior leadership’s decisions. This provides a single point of responsibility at every step of the budgeting hierarchy, which helps to coordinate activities across the entire organization.
The main downside of this approach is its lack of agility. Once budgets are set, it can be difficult to get approval on more funds for time-limited opportunities that emerge over the course of the fiscal year. This rigidity also incentivizes departments to advocate for the largest possible budget at the beginning of the year, potentially resulting in inefficient capital allocation.
Bottom-up budgeting resolves this weakness of top-down allocation by obtaining input directly from the frontline.
In a bottom-up process, each marketing team puts together a wishlist of ideal programs for investment. This list is then submitted to the mid-level marketing managers, who work with the team leaders to prioritize the most promising programs. Finally, these recommendations are presented to senior leadership for approval.
Bottom-up is not a synonym for “undisciplined.” A well-conceived bottom-up approach will always be tied to clear marketing goals and metrics. Hence, frontline marketers are required to have an even firmer grasp of their numbers than a top-down approach, where the budget is passed down from on high.
The fundamental formula for a goal-driven marketing budget is as follows:
Variable Costs + Per-Piece Costs + Fixed Operational Costs
Variable costs are the easiest to calculate, and also the most preferable costs from a financial standpoint. These include any marketing channel that is purely pay-for-performance, such as affiliate marketing or PPC campaigns. The formula for variable costs is:
Cost Per Acquisition (CPA) * No. of Goal Conversions
The beauty of variable costs lies in their simplicity. If you know in advance exactly how much each customer is worth in lifetime value (LTV), then you can simply scale up your variable costs to the point where the CPA is no longer cost-effective for that LTV.
Per-piece costs account for channels that cannot be tied as cleanly to conversions, such as content marketing or display ads. For these channels, establish an average cost for each conversion generated by a given piece of content, using this formula:
Cost of Creating One Piece Of Content / No. of Conversions
Once you have this number, you can then multiply by your conversion goal for that channel and get your total per-piece costs for the budgeting period.
Fixed operational costs encompass all costs you have to pay regularly to keep your marketing machine running. This includes salaries, software licenses and subscription fees, team education and professional memberships.
Add these three components together, and you’ll have a rock-solid budget to send up the chain.
Pros and Cons
The main strength of the bottom-up approach is its grassroots focus. Marketing teams “on the ground” are typically much better placed to identify emerging opportunities in their respective markets. Thus, they can contribute a level of tactical granularity to the budgeting process that would be absent in a purely top-down approach.
Engaging frontline staff in the budgeting process also helps to cultivate operational buy-in throughout the organization. Since they contribute to the budget’s design, staff will be more likely to take ownership of the plan and feel responsible for executing it successfully. While qualitative in nature, such a boost to staff morale can often make a major difference in the overall performance of the organization.
The primary disadvantage of a bottom-up approach is its difficulty in scaling, particularly for large, complex organizations. Many major banks are likely to find a pure, bottom-up process challenging or infeasible to implement due to administrative costs. For such banks, a top-down approach complemented by bottom-up feedback might make more sense.
The Golden Mean
When it comes to budgeting, purity is overrated. The most effective bank marketing budgets incorporate elements of both top-down and bottom-up approaches to find a golden mean. Now that you’re familiar with both approaches, you have all the tools you need to go forth and budget wisely.