Create Your Ideal Marketing Budget
Making a budget is boring and a little hard to figure out. I know this because I’ve asked hundreds of business owners what their marketing budget is and most answer with silence. BUT (and I can’t stress this enough) IT IS VITAL TO YOUR BUSINESS SUCCESS!!!
So, if making a budget is boring but necessary, you want to find the easiest, most productive way to do it, right? I can help you with that, and I will. But first, three disclaimers:
- There is no single one-size-fits-all solution. So don’t go into this looking for a silver bullet. You will get the tools you need to build the perfect budget for your business. You will not get “this one super secret budgeting trick that drives accountants crazy.”
- Think of your budget as a starting point. The goal of this article is to get you to understand the minimum amount you should be spending on marketing in order to GROW, not maintain the status quo. With that in mind, you can always increase your budget to grow more quickly. That’s how this thing works. It’s an investment. The more you put in, the more you get out (as long as it is wisely invested – don’t spend it all on dancing sign-wavers).
- The first thing a business owner will do when they need to cut expenses is cut the marketing budget. This is 100% ALWAYS the wrong thing to do.
Disclaimers done. Now, on to the good stuff…
THE BUDGETING METHOD YOU SHOULD USE
Before we get into how your specific situation impacts your budget, we need to start with a standard baseline. This is the budgeting method used by most successful small businesses[1]: your marketing budget is a percentage of your gross revenue.
Example:
ABC Products had a gross revenue of $500,000 in 2014. They assign 15% to marketing. 15% of $500,000 is $75,000. So $75,000 is their marketing budget for 2015, which comes to $6,250 per month.
So what percentage of your gross revenue should you use? That’s where it gets a little trickier, but keep reading.
Variables:
If your business is just starting out, or you are in an industry where revenue fluctuates greatly throughout the year, you should reassess your gross revenue quarterly, or even monthly, to get an accurate view of what your marketing budget should be[2]. You don’t want to stick to an outdated budget if your revenue has exploded (or imploded). I’ve read that the first year a brand new business needs to use 30% of the gross revenue. But again, its all variable.
Of course, the percentage you use is going to be different for different businesses. That’s what makes it tricky. But stick with me — we’ll conquer this thing.
FINDING YOUR PERCENTAGE
There are seemingly endless factors to consider when choosing the right marketing budget for your business, so let’s make it easier. Yeah? There are three main categories your business can fall into. Find the right one for you, and we’ll break it down from there.
1. Startup/New Product Launch
If you are a startup, or you are launching a new product, you will require more marketing capital to get the ball rolling[3]. Often this means tightening your belt and persevering through a lean season in terms of your own income, but, again, think investment. You’ll reap what you sow. So sow marketing, and reap greater revenue down the road. (That’s how I grew PostcardMania!)
Ideal Percentage Range: 25-35%
Variables:
This is the widest of the possible ranges because it is the most volatile situation your business can be in. Some industries are more competitive than others. If you’ve done your homework, you know where you stand on this scale. If your competition is light, 25% should be enough to grab a share of the marketplace. If competition is heavy, you need to invest more resources into marketing, or you will fall behind, which is BAD news for a new business.
Helpful Tip:
Rate your competition level on a scale of 1-10. You have several competitors already established nearby you? Then you’re at 10. Usually Dentists fall into this category. You have a niche business and there are zero to one competitor then I’d give you a 1 or a 2. A chess school would fall into this category. Use that number to guide your marketing percentage. The heavier the competition the more you’ll need to spend in order to penetrate the market.
I know this can seem like A LOT. Obviously, never make a decision that will put the viability of your business in jeopardy. But remember: the time your business spends as a startup is a mere season compared to what you want to achieve in the long run. Right? Once you are at a sustainable revenue level, you will fall into the next category, where you can potentially lower this percentage.
2. Established, Growing Businesses
We are not talking about businesses that have leveled off or are on a downward trend (see below). If you are growing and prospering, you have generated momentum, which is absolutely crucial. But in no way does this mean you can take your foot off the gas.
Ideal Percentage Range: 12-18%
Variables:
Competition factors in at this level, too. But there is another factor to consider: your profit margin[4]. A profit margin of 10-12% is average. The higher your profit margin, the more you can afford to spend on marketing.
Helpful Tip:
Again, think of a sliding scale. First, let your competition set the bar. Low competition goes in the 12-15% range, high competition in the 16-18% range, etc. Then, allow your profit margin to move the bar a couple percentage points in either direction.
Example 1:
ABC Products is a growing business in an industry with low competition. Based on this, they set their marketing percentage at 13%. However, they sell high-priced items with a significant profit margin (50%). In light of this, they bump their marketing percentage up to 16% because they can afford it and more is more.
Example 2:
XYZ Products is a growing business in an industry with average competition. They set their marketing percentage at 15% based on this fact. However, their profit is only about 7%, which is considered low. Knowing this, they bump their marketing percentage down to 13% to ensure it is financially viable for them.
Again, remember this is a starting point. Over time you will discover the true impact a certain percentage has on your business, and you can adjust accordingly. But keep in mind that how you spend the budget is just as important as spending it. If a certain percentage level isn’t producing results, try changing the way you spend the budget before you reduce the percentage.
3. Stagnant/Declining Businesses
If you find yourself in a death spiral, or simply unable to break through into that new revenue bracket you’re eyeing, you need something to jolt your business back on track. And that thing that you need is more marketing. Of course, it may not be the ONLY thing you need, but it most definitely is ONE of the things you need.
Ideal Percentage: +3-10% over what you are currently doing
If you are currently using a percentage of your gross revenue to set your marketing budget, bump it up by 3-10% (depending on competition and severity of decline) and watch what happens over the next 6 months. At first, you probably won’t see anything. A couple months in, you should start to see your trend reversing or flattening out. By the end of the 6 months, you’ll know exactly what impact the bump has had. If you are back to prospering, consider lowering the percentage ONLY IF IT IS CURRENTLY UNSUSTAINABLE. If you can live with it, live with it. You will continue to grow. If you have only returned to stable revenues (or are still in decline), consider another increase in the percentage. Do this until you find the number that allows your business to prosper.
If you are NOT currently using the percentage method to set your budget, figure out what percentage the amount you have budgeted actually is based on what you’ve spent. Then follow the guidelines above!
Example:
ABC Products is a declining business that generated gross revenue of $500,000 in 2014. They budgeted $2,000 per month for marketing ($24,000 for the year), which comes out to be 4.8% of their gross revenue. In 2015, they would bump their marketing percentage up to a minimum of 8% (rounded up) and measure the impact on revenue. This works out to be $3,333 per month.
Helpful Tip:
This may require giving up some luxuries you came to expect while business was thriving. Don’t get stuck in the past. Embrace where your business is now and do what is necessary to get back on the right path – and start growing your business again!
That’s it. Go forth and prosper!
Still need help putting together a budget that works for your business? Call 1-800-628-1804 for a free consultation, and find out exactly how much raw marketing power your new budget will allow!
[1] http://www.inc.com/encyclopedia/advertising-budget.html