Top down or bottom up budgeting – which approach is best?

This post was updated on October 24, 2018 to provide further insights into Bottom Up Budgeting, which is also known as Zero Based Budgeting (ZBB).  While ZBB has been around for decades, it is making a resurgence in popularity for setting marketing budgets and therefore we have included further references and resources on the impact of ZBB on Bottom Up Budgeting.

 

This post is by Darren Woolley, Founder of TrinityP3With his background as analytical scientist and creative problem solver, Darren brings unique insights and learnings to the marketing process. He is considered a global thought leader on agency remuneration, search and selection and relationship optimisation.

There are two basic approaches to developing a budget:

  1. Top down – This is where you develop or set the total or top budget and then break it down into the component parts within that budget.
  2. Bottom up – This is where you start with a list or plan or schedule of the things you want to do and then cost it up to get the total budget.

But which is the best way of developing a budget? Well it depends on a number of factors, but for advertising and marketing I want to share a few examples of the different approaches and then let you decide.

Top down budgeting – agency style

We were engaged by the client, a FMCG marketer, to benchmark the agency retainer, because each year the retainer went up between 8% and 11%. This had been going on for as long as anyone could remember.

But in this particular year the actual advertising budget and the corresponding scope of work had effectively decreased, and yet the agency was again maintaining an increase. The marketing director was unsure of the reason for the increase, but the agency was able to show that each year the number of resources required (excel spread sheets from timesheets).

We took a bottom up approach, taking the scope of work for the previous year and the proposed scope of work for the coming year and calculated the resources required across account management, strategy, creative and production. The previous year resources where almost 30% higher than the benchmark level and the rates were on the benchmark. But for the coming year the resource level was more than 70% over benchmark, because of a significant cut in the scope of work due to significant budget cut in that year.

The agency had basically trained the client to accept a cost of living plus adjustment year on year as a standard practice, which helped the agency with their budget predictions to head office.

No matter what the scope of work, the agency was taking a top down approach – what was spent with them last year, plus a suitable increase. This approach is more common than you may think, as it plays to the growth expectations of the agencies and is easy to justify where the retainer is linked to resources only and not to what those resources are producing.

Bottom up budgeting – marketer style

The financial services marketing team developed their marketing plan with the business as part of the annual planning in the three months leading up to the end of the financial year and the approval of the budgets. Once the marketing plan was in place, the marketers were using a Zero Based Budgeting (ZBB) approach and provided the plan to the agency for their input on the cost of the various elements, including media spend, production and fees. They would then use these costs to calculate the budget required for the year.

This appears on the surface to be completely reasonable. But the fact was that the agency fees were developed without the details of the actual task being defined. Because of the uncertainty, the agency pricing was significantly buffered, to cover unseen contingencies in each job. When you then added these up, the additive effect became a multiplier effect adding to the overall cost.

The budget was calculated and presented for approval. There was the inevitable pressure from the business to reduce the calculated budget, but it was simply trimming the edges as the agency was hesitant to cut too deeply into their contingencies. The part that was missing from the ZBB approach was that the individual agency cost elements were never considered against the value they represented to the marketing budget. This would have gone someway to limit the contingencies within the budget estimates.

After the first year we were engaged to review the agency fees and the production costs in particular. There was an almost consistent 20% over the benchmark in the creative and digital spends, luckily the media trading was performing particularly well. But the bottom up approach meant that the incremental buffers in the individual parts multiplied to become particularly inefficient.

In the following years we developed a value pricing or output based agency fee model that allowed the marketers to translate their marketing plan into an agency budget using a bottom up or ZBB approach without the agency providing a estimate of costs. If you are still unsure of the bottom up or ZBB approach, we have created a Golden Minute video here that explains this in plain language. 

Top down budgeting – marketer style

An automotive client was struggling with the budgets for their models that had smaller sales volumes. You see the marketing budget for the client was based on the previous year’s volume and the predicted volumes and relative value of those sales in the coming year.

This meant that their high volume models had huge budgets, compared to some of the other smaller selling or lower margin models. So, increasingly, the brand team on these smaller models with the lower budgets were limited in their advertising options.

This situation was exacerbated by the fact that the agency was working with a pricing model based on the assumption that an output was an output, no matter what the overall budget. That is that the agency would say that the budget for a television commercial (or campaign) would be between $1 million and $1.5 million if it was a top selling model or a more niche model. It meant that the smaller models quickly could not afford television, still one of the fastest ways to build awareness.

In a conversation with the marketers, we discussed the possibility of having a tiered approach to their agency costs. Looking at the typical budgets for the various models, we identified three tiers or brands of budgeting. Against each of these we then developed a new tiered-approach to the agency budgets and fees to take into consideration the total level of investment for the model based on the top down approach.

For the agency it set new budget expectations and the brand team and the agency continued to live up to and deliver the quality and performance expectation.

Bottom up budgeting – agency style

Most agencies will use the bottom up approach to cost the production of a campaign and this approach is increasingly popular in setting the retainer or agency fees based on the scope of work.

But there are situations caused by this bottom up approach which can have a negative impact on the overall budget. This is because it provides an incentive to do more, when often it is more important and of more value to do more of the things that work and much less of those that do not. (But more on that another time)

A beverages company was struggling with budget over-runs across most of their brands. The fact was that while there were brand budgets set, the category was highly competitive and the company had a long history and reputation for finding money to defend their market share.

This was a fact that it appears their agencies were well aware of and took advantage.

We were engaged to review the production costs initially as this was the most obvious area of budget blow out. The fact was that the agency was actively suggesting and promoting extensions to the ideas and concepts.

This is easily seen as simply being proactive and responsive to the client needs. But in actual fact most of these were developed and approved without budgets being prepared and approved, creating incremental budget creep and revenue increases. Also, without approved cost quotes, the costs of these additional extensions were not being held accountable.

What was in this for the agency? This is when our role suddenly changed to looking at the overall agency remuneration, as the agency presented the fact that their hours under retainer had blown out with all of the extra work and they had a claim for several hundred thousand dollars.

Which approach is best?

Each approach has strengths and weaknesses, but in actual fact both work together. The top down approach using historical spend data is ideal to set the budget for particular projects. But the bottom up approach means you build the budget up from zero and places a focus on what needs to be done and for how much and not just what can be done for the budget.

Too often marketers and their agencies will use the a top down approach alone, which is simply based on the historical cost, without the focus on value. While the bottom up approach, while focused on value delivered, needs to be used with some flexibility.

Simply applying a formula, without taking into consideration the variables, such as brand or product maturity, market conditions and the like, means that you can miss the opportunities.

So what do you think? What is the best approach?

Top down? Bottom up? Or both?

To find our how TrinityP3 Marketing Management Consultants can help you further with this, click here.