How to determine & set what your marketing budget SHOULD be!
(Note: We've recently published an updated version of this article. Click here to read our 2014 Marketing Budget Blog Post.
One of the most important decisions that a Small and Medium-size Business (SMB) has to make is how much money to allocate for the marketing budget. Prospects often ask, "How much should I spend on marketing?"
The answer: "It varies by industry and business size." It is also based on how much you want to grow, and how fast. Both the Counselors to America's Small Business (SCORE) and the U.S. Small Business Administration (SBA) define the variable for a proper marketing budget to be between 2% and 10% of sales, noting that for B2C, retail and pharmaceuticals can exceed 20% during peak brand-building years.
Most companies under spend on their marketing budgets, thinking that to not spend is to save. This quite simply isn't true. You've heard it before, and it bears repeating: You have to spend money to make money. The trick is to spend your money wisely on a tailored marketing plan aimed at fulfilling your company's goals. Keep in mind that your marketing efforts have a direct bearing on your revenue, so now is not the time to be penny wise and pound foolish.
Marketing / Branding budget-setting guidelines:
Two main things should be considered when setting a marketing budget:
- The development or refinement of the brand and the channels used to promote the brand. These include logos, custom web design, videos, blogs, e-mail campaigns, sales presentations, brochures, ads, etc.
- The ongoing expense of promoting and advertising your brand to your customer base and your prospects. (Search Engine Marketing, Social Marketing, etc)
For most SMBs, the percentage of revenue dedicated to a marketing budget is determined by industry and size. But, in general terms, here is some information we have put together based on several creditable sources.
Adjust your marketing budget for your industry!
Every industry is different, so companies that sell to specific government branches or one that has an ultra-specialized niche may be able to deduct 1–2% from the above figures. If your company is B2B or B2C, you may need to raise your budget by 1–3% to see solid results. Retail and pharmaceuticals lead the spending, with many of these companies spending more than 20% of net sales. The overall average is reported to be 4–6%. Many other circumstances will merit an increase or reduction in your marketing budget as a percentage of revenue. Feel free to contact us to discuss this, or visit http://www.sba.gov/smallbusinessplanner/index.html.
Adjustments for Businesses That Can't Use the "Percent of Gross Sales Model"
Added: 2013. Many of you have reached out with various questions and concerns, thank you for your feedback! One point for consideration is that most of the above guidelines are based on revenue models that average at least 10% net revenue. (After marketing costs, marketing is a cost of doing business (CODB). Some organizations run on MUCH higher gross and very small net....making the above guidelines inaccurate. I recommend two adjustments.
Look at what your competitors that are market leaders are spending and create a budget accordingly. (This can be tough to determine.)
Take a larger percentage of net revenues as opposed to gross revenue. In the end your marketing budget should be properly allocated to position your organization, trump the competition, raise awareness, generate quality conversions and of course increase revenue growth!
Here is a great quote from SCORE:
"Often, small businesses estimate their sales revenue, cost-of-goods, overhead and salaries, and then gross profit. Anything left is considered available funds for marketing support. That's not such a good idea. ... If you are the new competitor in the marketplace, you will have to spend more aggressively to establish your market share objective."
Caron Beesley from SBA.gov has this to say about setting your budget:
"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."
Can I still grow my company with "baby steps"?
Sure. We call this organic growth and it is how nearly every business starts off. Remember washing cars or mowing lawns for a few bucks? Next thing you know, your neighbor wants it done. That neighbor refers you to another neighbor and so on. Many businesses grow their clientele by word of mouth alone and are very successful. But they usually hit a brick wall. That's where building a solid branding campaign helps. When you rely on partial branding or organic growth alone, you risk losing revenue from business you did not get because X% never discovered you or did not have their interest piqued when they interacted with your brand. And you cannot tally the lost revenue from those who perceived your current brand negatively and left your web site without you ever knowing it. This is why it is so important to build the brand correctly. Why risk millions to save thousands?
Why do so many SMBs fail? (HINT: Improperly set marketing budgets!)
One reason is that companies do not allocate enough money for marketing. Successful and highly profitable SMBs know how to allocate adequate funding to marketing each year. SMBs realize that marketing, if done properly, brings back solid returns and vice versa — whereas not allocating enough in your budget for marketing could spell disaster. Think of marketing this way: It is a fundamental ingredient for profitability and growth.
Scott C. Margenau is the founder and CEO of ImageWorks Creative and award-winning web design and branding firm. For more advice on the effective use of your marketing dollars, please feel free to request a proposal or meeting here or call 800-308-8573 x102.
Note!: This article (edited) was published in the newly released book Mastering the World of Marketing: The Ultimate Training Resource from the Biggest Names in Marketing by popular authors Eric Taylor and David Riklan, (Chapter 24) which also features some of the biggest names in marketing such as Jay Conrad Levinson (of the famous the Guerilla Marketing series), Chris Brogan, Guy Kawasaki (Former chief evangelist of Apple), Dan Kennedy, David Meerman Scott, Jack Trout, Allen Weiss, Aaron Wall (of SEOBook) and many more noted experts.
The book is on sale now at amazon.com (http://www.amazon.com/Mastering-World-Marketing-Ultimate-Training/dp/0470888415) for $13.03 for the paperback version. The Kindle version is $9.99.
We’d love to hear your own views on this topic. Why not let us know what you think in the comments below?