I just typed the search phrase “setting a marketing budget” into Yahoo and it came back with over 271 MILLION hits. Obviously, it’s a topic that a huge number of people have questions about. If you’re reading this, you’re probably one of those people.
There are as many ways to figure out a marketing budget, but a handful have proven helpful for thousands of other enterprises of all sizes in all manner of categories.
Running a business, non-profit, organization or group is complicated enough. I’ve tried to simplify and clarify these methods so they can be of use to regular marketers — and don’t require an MBA degree or a background in finance.
I hope they’ll help you answer THE question that is on so many marketing minds.
1. Budget a percentage of revenues
Probably the most common way that enterprises set marketing budgets is by using a certain percentage of total revenues — in other words, a percent of your gross sales (or donations, if you’re a non-profit.)
Ah, but WHAT percentage?
The U.S. Small Business Administration recommends spending 7 to 8 percent of gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin is in the 10 percent to 12 percent range.
CMO Survey reports that marketing officers overall report spending 8.1% and 12%. Certain types of businesses spend less, and some spend much more; manufacturers can get away with spending 2.4%, while retail and business-to-consumer companies may need to spend up to 20%, at least in the getting-started years.
Great, but how do you decide if you should spend 2.4% or many times that?
Here are some variables that can affect the percentage you need to invest:
• Are you just starting? Simple physics states that it takes more energy to get an object moving than to keep it moving. The same thing is true of a business or organization. You should look to the high side of the range when you’re trying to get yourself known and established.
• Certain types of businesses, such as retail and business-to-consumer, may need to spend more — up to 20% to break into a competitive market. (Pharmaceutical companies may spend up to 50% to establish a new drug.)
Pluses to this system: It’s simple to compute.
Minuses: If you’re just starting, how do you know what your gross sales will be? Even if you know what you made last year in an established business, will THIS year be the same? 2020 proved that everything can change almost overnight.
2. Budget a percent of profits
A less-aggressive alternative to budgeting by gross revenues is to budget by NET revenues or profits.
Pluses to this system: It’s cheaper — bosses and bean counters will like that.
Minuses: It will give you fewer marketing resources. And, if you’re just starting, are in a very competitive industry, or need to achieve faster growth, it may not be enough.
3. Budget According to Industry Average
Schoenfeld & Associates Consultants of Lincolnwood, Illinois, does an annual study of ad dollars spent as a percent of sales for various product categories. Here are some of their most recent findings:
Apparel 2.14 percent
Investment advice 2.57 percent
Grocery stores 3.40 percent
Furniture stores 5.06 percent
Soft drinks 6.28 percent
Insurance 7.35 percent
Jewelry 8.46 percent
Cosmetics 9.64 percent
Confections 9.64 percent
Loan brokers 40.15 percent
Pluses to this system: It is real-world data taken from hundreds of actual marketers.
Minuses: These are averages — your business, your competitive market, and if you’re new or established will impact whether you need to budget the average industry amount or more or less.
And, of course, there are other marketing costs beside advertising expenditure that a company will need budget to cover.
4. Model Your Competition
If you can discover or figure out what your most successful competitors are spending, you can budget to equal or better their outlay.
Pluses to this system: It’s pretty realistic in terms of addressing your competitive situation and pretty easy to sell to bosses or financial officers.
Minuses: Knowing exactly what your competition is spending — and how they’re spending it — may be difficult to ascertain.
One way is to ask the various media with whom your competitor advertises. They may not tell you the exact figure, but they’ll be happy to draw up a plan to outspend your competitor and you can make some assumptions from that.
If your competitor does a lot of non-advertising marketing — e-mail marketing, social media, PR — you’ll have to estimate that.
5. Go all in
If you’re just starting — or looking to grow fast — you can estimate the expenses you need to keep your business (and family) afloat for a year or so and then invest everything else in your marketing. That’s generally how venture capitalists build a company up quickly.
Pluses to this system: It’s aggressive. In poker, it’s known as “betting the farm.”
Minuses: It’s aggressive. And you may over-or underestimate the cost of keeping your business going for a year. If you over-estimate, fine, plow more into marketing.
If you underestimate, you may need to borrow funds to keep going. And remember that venture capitalists usually play the odds — they EXPECT at least one-third of the companies they invest in to go broke. You probably don’t have their deep pockets.
6. Customer Acquisition Model
If you have a target number of new customers as a goal, you can calculate how much you can afford to spend to acquire them. You take the amount of profit you’d expect to average from each new customer in a year, multiply that by the number of customers desired and then allot a percentage of that to marketing to them.
You can even budget MORE than each customer is worth in a year — IF you’re sure you can keep the customer for subsequent years and make money in the long run.
Pluses to this system: It’s an exact way to budget how much you can actually spend to reach your goals.
Minuses: If you’re not an established enterprise, you may not know your cost of acquisition for customers. You’ll also need to figure in the cost of keeping the customers or clients you already have. Classic marketing wisdom says that it costs seven times as much to get a new customer as to keep one you already have.
7. CYA (Cover Your Assets)
No marketing budget is perfect, nor is setting one ever an exact science. There will always be a measure of guesstimization (an excellent and realistic marketing term I just made up.) Perhaps the best budget-setting method for you will be to try several of these methods — on paper — and then use your good judgment to arrive at a figure that your enterprise can live with.
Remember to build in some flexibility and a contingency fund. I always include a 10–15% contingency in marketing plans because you can never predict what challenges and/or opportunities your business or organization will face in the coming year. (One reason I think five-year company plans are usually a waste of paper.)
Invariably, my clients strike through that contingency line on my budgets. And almost as invariably, they end up spending that contingency amount anyway because of unforeseen circumstances.
I urge you to CYA. Foresee that there WILL be funds needed for the unforeseen and put that in the budget. I hate to be sneaky, but in order to get around the budget cops in your organization, you may need to hide some surplus funds in other projects.