The Most Asked Question in Marketing – How do I Set My Marketing Budget?

by admin | Sep 3, 2012 | Blog

One of the most important decisions that a small business owner will make is how much money to set aside for the marketing budget.

Successful and profitable small businesses understand that they need to allocate adequate funds for marketing their business.

Prospective customers always ask, “How much should I spend on marketing?”

The answer we give them is this:

1.     No matter how much you have it will never be enough! Having worked in large corporate environments our marketing consultants know that companies with $30m budgets these big brands always want more; more advertising dollars, more sponsorship dollars, more PR dollars, more salary dollars for the marketing department and the list goes on.

2.      Marketing Budgets will be much higher in competitive business categories and lower in general in less competitive ones.

3.     The more unique your business or product / service offering, in general, the easier it will be (and cheaper) to promote it IF you are tapping into existing demand as opposed to trying to educate the market, which will always be horrendously expensive and most small businesses just don’t have the sort of marketing budget required to do this. In these unique cases actually having new entrants / competitors may actually be a benefit as together the task of educating the market is made easier.

4.     If you are the new entrant in the market, you will have to spend more to take some share away from your competitors or create new demand in the market.

Here’s a great article discussing the different criteria for setting your marketing budget http://www.imageworksstudio.com/blog/how-set-marketing-budget-your-smb/index.html and a summary for your convenience:

1.     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.

2.     You have to spend money to make money, yet most small businesses are completely under budgeted when it comes to their marketing. Worse still when they do spend on marketing, much of the expenditure is wasted and becomes an expense instead of an investment. 

3.     The article goes on to provide some guidelines based on revenue quoting an average of 4-6% and making the usual disclaimer that many circumstances can warrant an increase or reduction in your marketing budget as a percentage of revenue.

4.     Looking at what your competitors are spending can be useful

5.     In the end your marketing budget should be properly allocated to position your organization, trump the competition, raise awareness, generate quality conversion and of course increase revenue growth and this is the most important point and exactly how a marketing budget should be considered.

6.     On the subject of organic growth – Many small businesses start out and grow their clientele by word of mouth alone and are very successful. But they usually hit a brick wall. That’s where building a powerful brand is critical. When you rely on organic growth alone, you risk losing revenue from business you did not get because a % your target audience were never made aware of your product or service!  And you cannot underestimate the lost sales from those prospects who perceived your current brand negatively and left your website without you ever knowing about it. This is why it is so important to build the brand correctly. Why risk millions to save thousands?

Finally I’d like to use 3 examples we can all learn from:

1.     The highly successful Real Estate Agency Hocking and Stuart entered the market by investing around 20% of the Net Sales back into marketing and became one of Australia’s most successful real estate agencies.

2.     Swisse feels better by increasing its marketing budget! Millions of dollars spent sponsoring sporting events and paying high-profile celebrities to spruik its products has paid off for Swisse Vitamins, which has more than doubled its profit.  

a.     131 % rise in net profit to $8.9 million for the year ended June 2011.

b.     Swisse revenue climbed to $77.2m, up from $45m the year before.

c.      Annual marketing expenses doubled to $26m, accounting for 94% of the total cost of sales at the fast-growing company. In contrast, market leader Blackmores, which made sales of $234m last year, spent just $22m on marketing and sales activities.

So Swisse allocated approximately 34% to marketing as a % of Total Revenue whilst Blackmores allocated only about 9.5% to marketing as a % of Total Revenue.

3.     LinkedIn, the world’s biggest professional-networking website, is expected to reach around $900m in sales and marketing and sales expenditure more than doubling in the last 12 months to around $76m or 8.4% of Total Revenue in a category that sees LinkedIn play in 3 different markets with varying levels of competition:

a.     Professional Networking – subscription fee model where they have little or no competition other than that of consumer attention deficit caused by every other social medium

b.     Advertiser Media Dollars excluding Recruitment, which is an incredibly competitive category dominated by Google’s Adwords

c.      And finally competing for recruitment advertising dollars that LinkedIn is vying for by hoping to take share away from other recruitment portals.

Regardless of your industry or stage of development “You’ll Feel Better If You Budget For Adequate Marketing Investment” and invest your marketing budget wisely!