The Marketing Budget: You’re Doing it Wrong (and How to do it Right)
Your marketing budget is an estimate of the costs involved with promoting your products and services. Simple, right? Marketing is one those necessary evils that nobody wants to spend on, but is absolutely critical in driving your sales engine. It’s the last dollar spent and the first dollar cut. Think of marketing activity as the fuel for your sales activity. Whether you’re a B-to-B with a dedicated sales staff or a B-to-C that relies on selling products online or in-store, you need to properly define your budget for marketing activities. Set your budget too high and the cost of goods sold or your overhead is too high and cuts into your margins, too low and you’ll be scrambling to get enough sales to keep the lights on.
At Ilfusion, marketing is our thing. That’s what we do and we’re damn good at it. Quite often, I run into businesses who don’t define their marketing budget according to any specific calculations, but rather, what their gut (and their bank account) is telling them. This is pretty common practice for businesses who are either starting out, lack experience or aren’t big enough to have a marketing director. Sometimes, it’s the accountants that define the marketing budgets and that typically sounds like, “Well, we have some money left over after doing everything else, so let’s put $X into marketing.” All of these methods are commonplace, but it’s the very savvy business that defines their marketing budget based on real numbers and puts it ahead of buying those extra air-fresheners for the bathroom.
The big question is how do you do it, and are you willing to dump those extra air-fresheners now to afford those cool expensive scent machines later down the road? What do you do to define your business’s marketing spend on an annual, or even quarterly basis?
The trickiest part of defining and keeping a set marketing budget is the part that involves return on investment, or ROI. Everybody wants to know the outcome of the activity before the activity has taken place so they know they’ve made a smart decision going into it. Wouldn’t you love to know if the person you’re wanting to date is going to cheat on you? Then you could decide to spend your time pursuing other activities. Unfortunately, like marketing ROI, it’s tough to predict.
Often, it’s the case that marketing activity does not have a completely direct correlation between marketing and revenue generation. Even companies with a full marketing staff and a top-tier, NASDAQ-traded advertising conglomerate can’t accurately predict the way that people choose to spend their money or sometimes, get it horribly wrong.
Let’s have some M&Ms, no not the tasty hard-shelled candy, some Math & Methods:
Before we get into this part, I’ll assume that you track every penny spent on your business and have a good idea of your average overhead and the cost of goods (or services). sold Of course you do!
Method #1 The “After the Fact” Approach
Simply add up the costs of the marketing activities planned for the next period, and boom! You have your marketing budget. This method is one of the simpler ones and assumes that you have activities that will need to happen no matter what. Maybe you have a trade show coming up and your website and booth need an overhaul before the public sees them. That was simple! Map out the planned necessities and make sure to account for unforeseen costs and ancillary activities required to make the most of your spend. You can add an extra 10-20% to soak up the extras. A trusted adviser, like perhaps, Ilfusion (shameless plug) can help you figure this out.
Method #2 Use Past Success as your Guide
Take a look back at previous activities that have been successful in the past and do that. Add up the cost of these activities and anything you’d like to add for the upcoming period. This can be a good way to get started in planning your budget.
Method #3 Emulate and Beat the Competition
Take a look at what your primary competitors are doing and do better. That’s good advice for anything, really, but in this case, it’s a good way to get an idea of what you need to do to catch up and pass your competition. Of course, it’s not always a simple matter to know how much your competition is spending but you can get a good idea online by setting up Google Alerts on your competition to see what new things they are doing and who is talking about them, as well as talking to customers, shared vendors (be careful here) and looking at trade publications, trade shows and other advertising mediums to get a feel for their spend.
Method #4 – Marketing as a Percentage of Revenue
This is one of the more widely-accepted methods of defining a marketing budget. Typically, it helps if there is a direct relationship to your marketing and your revenue stream. Here’s a clever report from 2011 that shows average marketing spend per revenue dollar for various industries as a start. This is a tried and true method to define a starting point for your budget.
Method #5 – Throw it Against the Wall and See if it Sticks
This is my least favorite and most commonly encountered method of choosing a marketing budget. In this situation, marketing takes a back seat to those air fresheners (you read that part in paragraph 2, right?). Someone on the management team, typically the owner, will arbitrarily decide a number that they are comfortable spending. This is usually in the 1/10th’s of a percentage of annual revenue. A spend like this will typically produce negligible results because of several factors. When you’re looking for cheap, this means cheap bottom-tier marketing companies- typically a freelancer or a “one-man-show” type of company, template designs and little to no market research, experience or trusted advice. If you’re used to doing this method, why not put some research into your marketing spend using one of the above methods? You will spend more in the short run but make gains in the long run. See my last paragraph if you’re switching from Method #5 to one of the better methods.
Method #6 – Some of the Above
Get creative! Use a combination of methods 1-4 (Not 5!) and come up with a budget you’re comfortable with based on research and talking to a trusted adviser or consultant. You’ll be happier with your results and you might just gain a huge competitive advantage over your competitors.
And finally, don’t jump to conclusions! That’s probably the most important lesson in marketing and advertising. Sometimes it takes 6-months to see a real benefit to your marketing, and sometimes campaigns take years to mature and show their real worth. Many times a would-be effective campaign or activity is abandoned before it’s had time to mature and show results. Patience is the key to success.
If you would like help defining your marketing spend for the year, give us a call. This is what we do among other things. If you don’t use us, use someone else that you can trust to maximize your spend. Your bottom line will thank you.Tags: marketing activities, marketing budget, marketing roi, revenue generation, revenue stream