How to Set a Marketing Budget that Fits your Business Goals and Provides a High Return on Investment
by Caron_Beesley, Community Moderator
- Created: June 4, 2012, 7:47 am
- Updated: January 9, 2013, 9:19 am
Whether you run a small business or a multi-million dollar corporation, marketing is essential to your profitability and growth. Yet many small businesses don’t allocate enough money to marketing or, worse, spend it haphazardly.
I recently got to know a business that was investing heavily in developing a hip, niche product to add to its already very cool product line. Seemed like a sure winner. However, it quickly became apparent that product development had occurred in a silo, while sales and marketing were off doing their own thing. The result? The week before launch, the business found itself with a fantastic product on its hands, but lacked a go-to-market plan or promotional material for the new product.
In a panic, an expensive PR firm, social media strategist, and marketing consultant were all pulled in to help drive awareness of the new product. Within a few weeks, the budget had run dry and the business had to quickly revisit its overall operational and sales and marketing strategy, while moving forward on a shoestring.
Products and services don’t sell themselves. By ignoring marketing until it’s too late, many small businesses risk hitting a brick wall and, quite possibly, failing. A hip and trendy product line shouldn’t rely solely on ongoing product investment and word of mouth.
But how much money should you allocate to marketing? And how can you spend it wisely? Here are some tips that can help you do both:
How to Calculate your Marketing Budget
Many businesses allocate a percentage of actual or projected gross revenues – usually between 2-3 percent for run-rate marketing and up to 3-5 percent for start-up marketing. But the allocation actually depends on several factors: the industry you’re in, the size of your business, and its growth stage. For example, during the early brand building years retail businesses spend much more than other businesses on marketing – up to 20 percent of sales.
As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).
This percentage also assumes you have margins in the range of 10-12 percent (after you’ve covered your other expenses, including marketing).
If your margins are lower than this, then you might consider eating more of the costs of doing business by lowering your overall margins and allocating additional spending to marketing. It’s a tough call, but your marketing budget should never be based on just what’s left over once all your other business expenses are covered.
Spending Your Budget Wisely
Knowing how much you have to spend on marketing is critical; even more critical is how you spend it.
This means having a plan. Your small business marketing budget should be a component of your marketing plan, outlining the costs of how you are going to achieve your marketing goals within a certain timeframe.
To get a sense of what your plan should include, take a look at this article from SBA guest blogger, Rieva Lesonsky: Does Your Business Have a Marketing Plan? Also check out How to Cut Your Marketing Budget and Build Your Brand Profitably.
Revisit Your Plans Often and Track ROI
Once you have developed your marketing plan and budget, remember that it needn't be fixed and inflexible. There may be times when you need to throw in another unplanned campaign or event. At the end of the day, knowing whether it your spending is actually helping you achieve your marketing goals is more important than sticking to your budget.
Have a plan in place for measuring your spending and the impact that activities have on your bottom line. Compare tactics, analyze seasonal effects – was one quarter more profitable than another? Why? Above all, have patience and follow through on all your marketing efforts across the organization – it takes a village to build and grow a brand.
Some tactics are hard to measure, like the efficacy of print collateral, but you need to consider the impact of not having these branding staples in your tool kit before you reign in your graphic design and print funds.
Marketing plans should be maintained on an annual basis at a minimum, and revisited if you launch a new product/service, or if the market landscape changes.
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