If you are actively pursuing growth for your business, you may find yourself wondering, “How much should I spend on marketing?”
It’s a very good question. While the answer depends greatly on your offering, a good marketing budget will help your business grow.
Determining the best budget for your marketing efforts will probably take some practice through trial and error. Tracking your Return on Investment (ROI) for your marketing efforts will help you figure out which activities or campaigns have brought in the most customers, and significantly, how many of those customers were ideal customers for your business strategy.
Marketing budget based on growth stage
If you have a new business, you will probably need to spend more on marketing per sale than an established business. This also holds true if your established business is trying to enter a new market or launch a new product line.
By way of contrast, a “line extension” for an established product line will usually require less marketing investment than a new product line.
When you become the market leader, you will buy advertising solely to maintain your leadership position. This is a common defensive strategy for industry leaders. In such a case, the objective is not necessarily to gain market share, but to protect market share from hungry rivals.
What exactly are we talking about here?
To marketing professionals, there is an element of marketing involved in every aspect of a company’s operations.
So in order to understand a marketing budget, we must discuss what a marketing budget includes.
A marketing budget may include customer surveys, target market analysis, and the cost of creating a new marketing campaign.
But perhaps your business is very small, and you intend to minimize these types of expenditures. We understand.
The cost of marketing often includes “promotions” or price discounts. Although you may not immediately think of a “sale price” as a marketing campaign, discounts offer an incentive to the buyer, based on a reduced price. This is a common marketing tactic.
Price promotions are most effective for new market entrants looking to gain market share. Other than that, occasional “sale” events may offer businesses an opportunity to make a splash, do some advertising, and perhaps clear out excess inventory. However, discounts should be used with caution over the long term. Frequent price promotions may eventually cause a business to lose money.
The “cost” of a price promotion often feels easier to bear, since it is a reduction in revenue, rather than a cash outlay. However, from an accounting perspective, it is still a cost, and potentially a heavy cost. Retrospective studies have shown that price promotions rarely increase a company’s profitability (and by “rarely,” I mean only about 16% of the time).
So, offer a temporary price promotion if you want to gain exposure. Offer a limited time sale to deal with excess inventory. But recognize that charging less is a cost, with very real effects on your income statement.
Probably most people think of “marketing” as being synonymous with “advertising.” Of course, there’s more to marketing than just advertising. Still, advertising costs will typically represent the largest part of any marketing budget.
OK, then what’s included in an advertising budget?
There are many ways to advertise.
You could go down to the sign shop and buy a sign to hang in front of your office. That’s a location-based advertisement.
You could create a website, and invest in SEO to improve its search engine rankings. That’s positioning, and it is essential in the modern business landscape. But does website design really count as advertising? That’s a debatable point. These days, having a website is such a necessity for your business that it almost seems like overhead, just like the lease on your office. Still, it’s reasonable and probably easier for most small businesses to classify website design as a marketing expense.
You could send out targeted direct mail. Between various marketing channels, direct mail is statistically the most likely to have the best ROI if you are selling a high-value product, or if you are in a Business-to-Business (B2B) field. If you need to reach a broader audience, or if you are ready to really make an impact, then your advertising campaign will include mass media: print publications, online advertising, radio, or even television.
Targeted advertising is the key to long-term sustainable growth. Most companies dedicate most of their marketing budgets advertising across multiple media channels.
Your advertising budget
So how much should you spend on advertising? Again, this will depend on your business situation. It’s also worth noting that experts disagree!
In general, probably the easiest way to estimate a successful advertising budget is the “percent-of-sales” technique.
On average, if you are small, new, or entering a new market, you can probably expect to spend almost 20% of your projected revenue on advertising.
(On the other hand, if you are a well-established business introducing a new line extension, you would probably only have to spend about half that.)
How much to spend on marketing: An Example
So, let’s say you’ve been in business three years. Your customers like your offering, but word-of-mouth is not increasing your sales volume rapidly enough at this time. Let’s say, just by way of example, that you want to increase your revenue by $60,000 over the next year by entering a new market (and when you’re a very small company, almost every market is a new market). Using the percent-of-sales method, in this example, you can expect to spend approximately $12,000 more on advertising over the course of the next year than you do presently.
Now, this does not mean that you should rush out and drop twelve grand right away. Your marketing budget will be most effectively if it is spent wisely. With appropriate targeting, you may be able to improve your marketing efficiency: to “get more bang for the buck,” as it were.
First, you need a plan.
Creating a marketing plan should include some research (and possibly a little soul-searching) to ensure that it will be effective.
Next, start small. Recognize that in the modern era of media saturation, you may need to communicate with a prospect twelve times before they make a purchase. At the same time, it would be great to wow them from the beginning. Try a few things. See what gets the best response. Be sure your sample size is large enough, so you don’t make important decisions based on one or two outliers.
Tracking your results will help you understand what resonates best with your target market. Then you can focus on that channel, and drive your message home.
Want some help with that? Contact the marketing professionals at Mardesco.
Jantsch, J. (2011). Duct tape marketing: The world’s most practical small business marketing guide. Nashville, TN: Thomas Nelson.
Keller, K. (2008). Strategic brand management: Building, measuring, and managing brand equity (3rd edition). Upper Saddle River, NJ: Pearson Prentice Hall.
Kotler, P., and Keller, K. (2009). Marketing management (13th edition). Upper Saddle River, NJ: Pearson Prentice Hall.
Ries, A., and Ries, L. (2002). The 22 immutable laws of branding: How to build a product or service into a world-class brand. New York, NY: HarperCollins Publishers.