As today's savvy businesspeople know, to have a strong business people have to know who you are and what you offer. In other words, you need good marketing. While a marketing plan will give your business marketing goals, a marketing budget helps you figure out practical steps to achieve those goals. How much should you spend? And where should you spend it?
What goes in a marketing budget?
A marketing budget typically covers costs for advertising, promotion and public relations. Each amount varies based on the size of the business, its annual sales and how much the competition is advertising. Depending on the industry, marketing budgets can range from as low as 1% of sales to over 30%. New companies may spend as much as 50% of sales for introductory marketing programs in the first year. Smaller business may just try to match the spending of their direct competitors.
The overall marketing budget should include:
Determine a dollar amount for each of the above categories. Keep in mind, it is usually easier to begin with a base amount for the entire marketing budget, and then divide it into subcategories. Although each business's marketing budget will differ, below are four common methods used to allocate funds:
Allocating a specified percentage of sales revenue is one of the most popular methods for developing a marketing budget. The average allocation usually ranges between 9-12% of the annual budget, while the smallest businesses may go as low as 2%. If a business is launching a new product or service, advertising and publicity needs are greater, so the percentage will increase. The main advantage to using a percentage of sales is that the marketing budget will increase, or decrease, with the sales revenue of the company. The marketing budget will never spin out of control and deplete sales revenue.
The Dollar Approach
Many businesses simply set a flat dollar amount for their marketing budget. Particularly useful for small businesses, they can base marketing budgets on what they think the company can afford instead of the company's sales. Picking a flat rate is usually effective for companies looking at a one-time expense, such as specific public relations marketing or a trade show, and not a long range marketing plan.
Defining a flat dollar amount may be challenging in the first year of a business, since there are no past records of sales and marketing expenditures. Many first-time business owners contact others in the field to inquire about their sales and marketing projections, and from there, estimate marketing costs.
Another method to create a marketing budget is to analyze and estimate what the competition is spending and copy them. This is another simple way to set a budget, since maintaining costs comparable with competitors keeps the business in line with others in the field. However, this method also assumes the competitors are spending the right amount and have a comparable business. If you're a mom-and-pop organization competing with Wal-Mart, obviously you couldn't copying Wal-Mart's marketing budget. When using this method, the revenue of a business should still be taken into account.
Marketing Plan Objectives
Often considered the most effective budgeting method, this method uses the objectives in the marketing plan to determine the marketing budget. The budget is developed by estimating the expenditures needed to achieve the desired marketing objectives. Although this method of budgeting is very realistic as to the needs of a company, it is often limited by available monies, as the desired budget may exceed the monies set aside for a given year. Nevertheless, many believe this method is the most logical for determining a marketing budget.
Whichever approach is taken, a formal budget will help define the marketing needs of any company. Establish a detailed marketing budget prior to the start of each fiscal year, and annually make any changes to parallel the growth or decline of the company. Monitor marketing costs and results throughout the year to better determine the effectiveness of your budget. Manage your marketing well and you just might find yourself in the enviable position of figuring out how to manage high revenues.