Demand Chain - Demand Chain Budget Segmentation, Targeting and Optimization

Demand Chain Budget Segmentation, Targeting and Optimization

Demand chain budgets for marketing, sales and service expenditure are substantial. Maximising their impact on shareholder value has become an important financial goal for decision makers. Developing a shared language across marketing and finance is one the challenges to achieving this goal.

Segmentation is the initial thing to decide. From a strategic finance perspective "segments are responsibility centers for which a separate measure of revenues and costs is obtained". From a marketing perspective "segmentation is the act of dividing the market into distinct groups of buyers who might require separate products and/or marketing mixes". An important challenge for decision makers is how to align these two marketing and finance perspectives on segmentation.

Targeting of the budget is the final thing to decide. From the marketing perspective the challenge is how "to optimally allocate a given marketing budget to various target markets". From a finance perspective the problem is one of resource and budget allocation "determining the right quantity of resources to implement the value maximising strategy".

Optimization provides the technical basis for targeting decisions. Whilst mathematical optimization theory has been in existence since the 1950s, its application to marketing only began in the 1970s, and lack of data and computer power were limiting factors until the 1990s.

Since 2000, applying maths to budget segmentation, targeting and optimization has become more commonplace. In the UK the IPA Awards have documented over 1000 cases of modelling over 15 years, as part of their award process. The judging criteria are rigorous and not a matter of taste or fashion. Entrants must prove beyond all reasonable doubt that the marketing is profitable. It enables marketing to be brought centre stage in four important ways

First, it translates the language of marketing and sales into the language of the boardroom. Finance and profits are the preferred language of the modern executive suite. Marketing and sales strategies have to be justified in terms of their ability to increase the financial value of the business. It provides a bridge between marketing and the other functions.

Second, it strengthens demand chain accountability. In Marketing Departments awareness, preference and satisfaction are often tracked as alternative objectives to shareholder value. In Sales Departments, sales promotion spending is often used to boost volumes, even when the result is unprofitable. Optimization modelling can assess these practices and support more rigorous accountability methods.

Third, it provides a counter-argument to the arbitrary cutting of demand-chain budgets. Return on marketing investment models can help demonstrate where financial impact of demand driving activities is positive and negative, and so help support fact-based budgeting.

Finally, demand-chain profitability modelling encourages a strategic debate. Because long-term cashflow and NPV calculations can show the shareholder value effect of marketing, sales and service, strong arguments can be made for putting the Demand Chain on an equal footing to the Supply Chain.