Thursday, June 7, 2012

How To Determine Your Marketing Budget

Marketing BudgetIs your business spending enough money on marketing - or too much?  How will you know?  There are some simple approaches that provide guidance in determining a marketing budget level to support the goals of the business.

Before setting a marketing budget, it is imperative to have a documented strategy outlining sales goals, target audience and the unique selling proposition of the brand. Investment should not be wasted on programs that do not provide value.  Once complete, setting the marketing budget follows one of three approaches. 

Percentage of Net Sales. Industries differ widely in what they invest, but between 4% and 12% is a good rule of thumb. Use the lower end when your business has achieved the sales level or growth that is needed, use the higher end when you must grow faster than the rest of the market.   While some organizations will invest at much different levels, these percentages will hold true for most products, services, B2B or B2C. In the case of a startup, the ultimate net sales targets of the business can be used to calculate the marketing spend level.  

Share of Market. This approach sets the marketing budget at a level that will provide a share of spending in the category equal to the market share of the business. In other words, if the business has 30% share of the market, it should budget at a level of 30% of the marketing spending in the category. This method is sometimes referred to in advertising as “Share of Voice”.  Determining the share of market and share of spending will take some digging, but this will be invaluable intelligence for the business. 

Objective Based. Many marketers create marketing budgets based purely on the marketing objectives of the business.  Determining what it will take to get a message to the desired target audience, regardless of external comparisons, is particularly useful when a business is changing directions or just starting out.  This approach can lead to an unsustainably high level of spending and benchmarks will be ultimately be needed to gauge whether these levels are correct.

Marketing budgets should include advertising, PR, direct, and social as well as consumer research, trade event participation and promotional materials.  It is important to include the costs of development and materials along with the cost of the actual media. 

Determining a marketing budget will always be tricky, and will certainly be subject to what is affordable to the business.  Having a solid approach helps in the planning and reduces the risk of over/under investment.

1 comment:

Jim said...

Solid advice. I have a client that does their budgets diffently. They ask their Marketing Director to deliver a flat marketing budget that will deliver an increase in Sales, then detail any incremental spending that will be needed to help make the numbers. Strange? All it means is that they build in a line item for my company, year after year, thus we can never take an increase even though we have been over delivering our services. Like I said strange.