On a sunny day, you walked into your office and started planning channel spend for next year. There are two reports lying on your desk, one (see below) with the latest results from channel analysis, and the other on channel spend guidelines for next year.
The spend guidelines from the second report read:
- Total marketing budget in 2016 is $30 million
- Print spend will be $0.4 million at least
- Detailing spend cannot exceed $13 million
Does this case sound familiar to you? How do you allocate the total budget based on the channel analysis insights and business constraints?
Resource allocation in its broad sense refers to the assignment of tangible assets, such as staff and raw material, as well as intangible assets, like knowledge and energy. Macroscopically, economics studies how society manages scarce resources. For a company, or even divisions within a company, resource allocation is still indispensable in that it must support corporate and division goals. In the area of marketing, resource allocation is often equivalent to budget allocation since it is about organization of spend among marketing channels.
When business goals are clearly defined and quantified, resource allocation becomes an optimization exercise via maximization or minimization of certain metrics. For example, the optimization objective could be cost minimization, profit maximization, etc. — optimization scenarios may vary tremendously, depending on the business goals. In the old days when the sales force was the only channel, resource allocation was relatively straightforward. In the multichannel world, however, resource allocation is increasingly complicated and often requires insights on channel contribution, ROI/ROMI, and marginal ROI to aid the allocation process. In addition, the fact that most companies have limits for overall and individual channel spend adds another layer of complexity. The final scenario is the result of proper consideration of mathematical optimization as well as realistic constraints.
Let's go back to the case study at the beginning. The solution calibrates mathematical optimization with business considerations. If, for example, the goal is to maximize profit, the final scenario should achieve the highest possible profit while keeping all spends within limits.
The explosive growth of multichannel marketing calls for greater granularity and relevancy in resource allocation. More advanced resource allocation will answer the following questions:
- Optimization exercise often returns a point estimate in theory while a range makes more sense in reality. How to build the optimization range?
- Optimization range is recommended but may not be achievable. So what is the minimal spend in order to realize the impact?
- How to achieve regional level optimization?
- The response curve may vary over time. How do we calculate time-varying ROI and the subsequent optimization?
- Can optimization be made in real time?
- How to roll up optimization from a single product to product portfolio?
Resource allocation is an ongoing practice which calls for continuous improvement to meet ever-changing needs. It is both an art and science and affected by business strategies and analytical findings. The estimated impact of each channel on sales affects how resources are allocated among channels. Insights from channel synergy study further refine resource allocation by re-attributing sales impact among channels. This is a critical differentiator for channel synergy from other insights-rich yet action-poor analyses. As the next step, the implementation results from resource allocation are fed into the next round of analytical studies which update suggestions on resource allocation. This is why this series of blogs on multichannel data covers channel affinity, channel synergy and resource allocation — all are integral parts of multichannel analysis. It essentially becomes a virtuous circle when the three subparts are connected, allowing information and insights to smoothly flow through the feedback loop.
In this loop, resource allocation shall be deemed the implementation goal for the multichannel analysis. In addition, the results out of the resource allocation serve as validation for the multichannel analysis. Multichannel study without such implementation as resource allocation lacks practical implications; resource allocation without insights from multichannel study causes resources to be used ineffectively.
Companies facing these challenges have an urgent need for talented analytical experts with strong skills and domain knowledge. Accurate and timely resource allocation ensures accomplishment of business goals, whereas failure to ramp up will inevitably lead to the loss of competitive edge. Is your company ready? Please share your thoughts on resource allocation.