An important part of the marketing plan is of course the marketing budget. You need to know how much you can spend on advertising for your business within a given amount of time.
“How much should I spend on marketing?” is a very common question asked by small business owners.
This is obviously a very difficult question to answer because for every type, size, stage of business you will have a different amount.
Ultimately, the ROI on good marketing efforts should be positive so it the marketing budget doesn’t need to be set at a specific amount or percentage.
However for this article to be of any use, let’s look at an example.
Startup Marketing Budget
A new company will obviously be spending a large percentage of its cash reserves on marketing. At the minimum however, as part of your overall marketing plan, you need to establish a set amount of money, a bank if you will, of how much you can draw from and spend in total.
To make things easy, let’s say the new business has a marketing budget of $1000. The next step would be to determine how long that this amount should last. If the business is in a high turnover sector, and the expected incoming cash flow is fast (for example cash payments from customers purchasing your goods), then the marketing budget can be set for a short amount of time. This is because the revenue from the business will be able to be used to increase the original $1000 amount.
If the cash flow from the business is slower then the initial budget will need to last a longer period of time. This can happen when you are a B2B business and don’t expect to receive payments for 30 days after billing for example.
Let’s assume that this initial budget needs to last one month. The revenues after this time period will then be used to continue the advertising.
Now that we have an amount set, and a time period, we will then start to look at ways to advertise the new business. There are many to choose from, but we will pick out a few. Part of the marketing plan will have one time costs, such as a new sign for instance, and other costs may be recurring like a local newspaper ad. In this example, our startup business will advertise in the local newspaper, send out some direct mailings, and buy a yellow page ad.
Now we need to calculate the costs starting the most important costs first. In this case the business believes that the yellow page ad is the most important aspect. Let’s just say that this ad costs $400. That leaves us at $600.
The next step would be see how much the direct mailing would cost, and to see how much an ad in the newspaper costs. A one time direct mailing of postcards will cost us another $400, leaving us with $200 left.
Since our initial marketing budget time frame is one month long, we want to be able to put an ad in each weekly paper. That means that we can spend $50 per week. This amount will determine the size/color of the ad that we can then have.
So, in general, that’s what you have to do.
- Figure out exactly how much money you can spend on advertising.
- Give yourself a projected timeline of when you will be able to use some of your cash flow to replenish the marketing budget.
- Choose the marketing methods to be used.
- Calculate the timing so that your budget lasts the entire projected timeline.
The numbers here are not realistic they are just to illustrate the point. However, once the initial startup phase is done and you have recurring revenues, you will now need to determine what your ongoing budget will be which may be a percentage of your revenues.
The Dollar Approach
We will start with describing what is called the dollar approach. This basically means that a fixed amount of money is set for marketing. Smaller companies will usually start out using this approach since funds are limited, they will have a cap on what they can afford.
Since there are no past records of sales and marketing expenditures in the first year of business, a dollar amount needs to be chosen that fits within the overall budget.
Business Marketing Plan Objectives
In the case where funds are not a limiting factor, the best way to allocate marketing dollars is to follow the objectives of the marketing plan. This means performing all the marketing methods specified in the plan to the full extent that marketing research has determined that the ROI will be positive.
This is perhaps the complete opposite of the dollar approach. Where a cap is placed in the first option, there is theoretically no limit placed on expenditures in this method.
This approach however needs to have its marketing well planned out and researched before it can be adopted for obvious reasons. Spending large amounts of money on untested advertising can be disastrous.
Another factor to be considered with this approach is the ability of the company to deal with the influx of clients. If the business can be scaled up easily, then it makes sense to acquire customers as quickly as possible. If however the company is constrained by how many customers it can serve at one time, then it makes more sense to grow the business more organically and not use as much resources on its marketing efforts.
Percentage of Sales
Many companies determine their marketing budget by using a percentage of sales from the previous year or quarter. This is one of the most popular methods as it is easily calculated. It is used by companies that are fairly stable and can predict with accuracy what their cash flows will be.
There is no right percentage, however most businesses will have a percentage approximate to 10% of the annual budget. Of course, this can vary depending on business sector, special events, etc.
Although financially speaking it is quite easy to determine and work with, a percentage of sales is not necessarily the best approach for your company all the time. For example, if a company has room to acquire new business, keeping a set percentage may be limiting that growth.
The last method to help determine the marketing budget is to match what competitors are spending. Although you will probably never know an exact amount, it is possible to estimate an amount by keeping a close eye on all the advertising that is done by the competition.
By advertising in the same newspapers or magazines, or buying the amount same radio time, you can ensure that you are equally represented in the market.
Using this method requires that your company be somewhat equal in size to the others that you are competing with. It would be foolish to try to match the marketing budget of a company three or ten times your size.
The major drawback to this method is that you are not initiating your marketing projects. Since you are basically copying the competition, there will be little innovation to separate you from your competitors.
Ultimately, choosing the best way to allocate funds to your marketing budget is not an easy choice. There are drawbacks to each method, but ultimately money needs to be spent on advertising and not thinking about how you will determine an amount would be a major disservice to your overall marketing plan.