Adding it up: you can save time by trying one of three short-cut approaches to an annual budget. But for the maximum marketing benefit, a fourth technique is preferred above the others.

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Yes, it's that season again. Oh what fun! I'm not talking about the holidays. I'm referring to creating next year's marketing budget.

Whether you are drafting a budget for one specific business line or for the entire bank, you will need to think both proactively and strategically if you expect good results.

In this article, I will discuss the four common approaches used to develop an annual marketing budget and the advantages and disadvantages of each. I will explain which method is better than the other three. Also, I will include some practical observations about the creation process from two marketers.

According to Bruce Clapp, CFMP, author of the ABA training book, "Marketing Financial Services," the bank marketing budget generally includes expenditures for five core activities:

* Advertising.

* Sales promotion.

* Marketing research.

* Sales/customer service training.

* Public relations.

The latest ABA survey of bank marketers showed that the three major expenses were: advertising, 53 of the marketing budget; public relations, 23 percent; and sales promotions, 16 percent.

There are at least four recognized methods of determining a financial organization's marketing budget. These are:

* Percentage.

* Competitive parity.

* Incremental.

* Objective-and-task.

Percentage method

Some banks base their advertising expenditures on the size of their assets or deposits. For example, a bank may decide to spend 0.1 percent of its total assets, or some percentage of its assets or liabilities (deposits), on advertising.

Although this is a common benchmark number for a marketing budget, this percentage method has several flaws. First, it is based on the bank's past performance rather than on its objectives for the future; it proposes a budget based on current assets, not where the bank is heading. Second, it views assets or deposits as the "cause" of advertising, rather than recognizing that increases in these variables might be, to some extent, the effect of advertising. Third, it discourages aggressive advertising and reduces advertising expenditures in periods of economic slowdown.

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Competitive parity method

This method might also be called "follow the leader." A bank determines what its competitors are spending on advertising and simply follows their lead. This method is based on the erroneous assumption that the market responds in the same way to the same volume of dollars spent by different banks. It fails to take into account the effects of variations in creativity, different uses of media, the various internal capabilities (or lack of capabilities) at various institutions, the timing of campaigns, and a bank's image and recognition level in its market area. Furthermore, a bank's competitors probably use no more of a rational a system for determining their advertising expenditures than does the bank that is following their lead.

Incremental method

Using this method, a bank simply increases its advertising budget by a certain percentage each year. The percentage may take into account the rate of inflation or the growth rate of the bank, or it may be dictated by a planner or budgeter whose primary objective is to make the bottom line show a targeted return on assets.

Whatever the percentage increase, this method does not take into account the desired objectives of advertising and the most cost-effective ways to attain them. If the increase is based on the rate of inflation, the bank is making the implicit assumption that achieving its goals will require the same effort year after year. This does not encourage the marketer to question the techniques being used or to take a fresh look at the bank's objectives. Further, it assumes that the market and competition are likewise growing at the rate of inflation.

Objective-and-task method

Using this method, the bank bases its advertising budget on what it will cost to meet the marketing objectives it has defined for the entire organization and rolled into the strategic marketing plan. The bank then weighs this cost against the expected net benefit of the new business, to ensure that the cost of advertising will not reduce the profit margin beyond acceptable limits on the newly acquired deposits or loans. This is an exercise in leveraging capital. The higher the return that can be proved, the higher is the capital leverage and the better the odds that the budget will be fully supported internally (or at least supported to a higher degree).

This method also has its drawbacks. While it works for specific promotions that have immediately measurable results, such as increased deposit or loan volume, it cannot be used to determine the level of advertising necessary to build and sustain the bank's image and level of public awareness. A bank that advertises only when it has a specific promotion to talk about may be out of the media for considerable periods of time. Most marketers agree that some maintenance level of advertising, either product or institutional, is a necessary investment, simply to keep the bank's name in front of its public and maintain its viability as an alternative for a product or service need.

Despite its drawbacks, the objective-and-task method is the most professional and rational method for arriving at an advertising budget. It may involve more effort than the other methods. However, as with any planning effort, it helps set the direction and increase the value of the bank's advertising expenditures.

Below are some thoughts on the budget-making process by two bank marketers.

Connecting With the Plan

Sara Watkins, CFMP

Executive Vice President, Director of Information and Corporate Services Group

Sandy Spring Bank

Olney, Md.

$3 Billion in Assets

Watkins recommends connecting with the bank's strategic goals and plans. "When you match your budget with the bank's strategic plan ... people can see how money is spent in alignment with the bank's strategic goals. Marketing is so misunderstood. Unless management can understand how marketing plans, goals and the budget match with the strategic plan, then it will always be an uphill battle ..." says Watkins, who is a past president of ABA Marketing Network, co-chair of the ABA Marketing Conference and currently part of the faculty at ABA Stonier Graduate School of Banking.

When Watkins presented on the topic of marketing budgets at last year's ABA Marketing Conference, she found that most bankers attending her session used the incremental budgeting method, but showed interest in moving to the objective-and-task method. Over time, she found that once marketers are able to show evidence of the value of their marketing expenditures, they will be able to move into the objective-and-task method. She has found that the proof is in the pudding.

For example within her own bank, Watkins will run a pro-forma on a specific marketing campaign, calculating the return on marketing efforts based upon the factors surrounding a campaign. She wants to show senior management how she spent the money last year and its return. By being proactive instead of reactive, she is able to show how the bank's marketing efforts are able to align with the banks goals.

You have to use strategy in getting a marketing budget successfully approved. Marketers need to act like lobbyists to get buy-in from stakeholders throughout the marketing budget development process. Key stakeholders need to be identified, such as business line or product managers. These are ones who will benefit from marketing's involvement in helping them meet their sales goals. A marketer's goal is to obtain needed buy-in from senior management and stakeholders prior to the final budget presentation. "This will help build supporters behind you. If you help meet their goals, you gain supporters" notes Watkins. Preparation and buy-in is needed to help build your case. "You don't want to go in and surprise anyone," says Watkins.

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Watkins further advises that marketers should also prioritize their marketing plans as well as budget. If extra money becomes available during the year or if money has to be cut out of the budget, that prioritization will quickly identify which objectives within the marketing plan need to be enacted or deactivated.

Being Realistic

David Kreiman, CFMP

Senior Vice President, Director of Marketing

Glenview State Bank

Glenview, Ill.

$880 Million in Assets

Most marketers have their budgets predetermined for them, Kreiman observes. Although marketers agree that the objective-and-task method is the ideal, it is not a realistic possibility for most. Kreiman, a banker as well as an online instructor for American Institute of Bankers "Financial and Business Planning for Bank Marketers" class, encourages his students, "To focus on taking baby steps from what you do now, to what is perceived as the 'ideal' process." He recommends, "Don't just create a flowchart of the perfect system ... try to map out your current process and make it better by doing a few small things differently, things that you may realistically be able to change within your bank without ruffling feathers."

Being proactive and thinking through the process all year long instead of a few weeks out from the budget's final due date is ideal. Kreiman recommends keeping a running list of various things that may be increased the following year or things that a marketer would like to add. "If I want to include a large initiative the following year, I begin breaking down the costs of the initiative. This allows me to be proactive ... when it comes time to submit my budget," says Kreiman.

Overall, in developing a budget, remember to connect the dots by developing one that is supported by your marketing plan and fits neatly into the bank's strategic plan, he adds.

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Brenda Marlin, CFMP, is a former bank marketer and the former associate director of the ABA Marketing Network, Washington, D.C. She currently resides in Colorado Springs, Colo. E-mail [e-mail]