The Danger of Across-the-Board Cuts
Over the last two years virtually all orchestras have cut spending to balance the budget. In many cases they’ve used across-the-board reductions. This can have the negative effect of further reducing ticket revenues by more than the savings in marketing. There’s a smarter way to decide how large the marketing budget should be.
Why do CEOs continue to use across-the-board cuts?
- It takes time and insight to see past different managers’ statements to an organization’s needs. One manager may be more assertive, another accommodating. Others may relish the budget process as a game to win resources and power. Across-the-board cuts are comparatively easy to implement and they push the decision-making down to individual managers.
- Shared sacrifice appears fair.
- If the same percentage of resources are dedicated to each sector as before, and that allocation was rational, it appears rational to maintain the same allocation.
Yet if across-the-board cuts are so wise, why aren’t there across-the-board increases in good times?
The Economist’s Answer
Economists have a simple, one-sentence prescription for marketing spending:
Increase marketing dollars up to the point that each additional dollar of expense brings in only one dollar of revenue.
We assume here that the marketer knows the returns on each kind of promotion used—and indeed that’s our charge.
Applying this simple rule in itself is better for deciding the marketing spend than other means. Yet life is not that simple—and would we want it to be?
The Financial Analyst’s Answer
Early subscription renewals can have fantastically low expense-to-revenue ratios. Marketing tickets to past single-ticket purchasers has a higher ratio. Identifying prospects and attracting first-time ticketbuyers may have a negative return initially. So should we stop prospecting? By no means! New ticketbuyers are the lifeblood of future audiences.
We know the likelihood that first-time ticketbuyers will come back, and we know the rate at which we’ll retain them year after year. So we can quantify the lifetime value of that ticketbuyer. Then we can slightly alter our original formula:
Spend marketing dollars whenever they bring in more than one dollar of discounted cash flows—that is, lifetime value in present-day money.
How do you discount cash flows? Ask your CFO. If they don’t know or they start talking nonsense about payback, fire them. The method has been best practice for half a century.
I’ll be happy to share how to compute lifetime value anytime. And I’d be pleased to help make your dollars go further. Call me.
The Public’s Answer
Donors and the man on the street would be offended if we spent as much on marketing as we gained in revenue. That would indeed be an abuse of the public trust. Yet what I recommend is that on the margins spending is just less than revenue. In total, spending would of course be a fraction of revenue.
When I started marketing the Houston Symphony our marketing spend including overhead was 51% of ticket revenue. I was disturbed that it was so high, because in the packaged goods firms in which I’d worked our budget was far lower. At the Symphony we grew sales and held expenses constant, bringing the ratio down to 38%. In retrospect I feel we could have grown sales more with higher spending. The public trust demands that we grow audiences and revenues as much as is economically prudent.
I’m convinced that most orchestras—especially smaller orchestras—underspend rather than overspend on marketing. How do you set budgets? How have you handled spending cuts? What wisdom can you share?