Last month Joe explained that setting a budget is essential before preparing a marketing plan. But how do you set a budget? What is a realistic spend on marketing?
For those of us working for others usually our budgets are set, or increase year-on-year, or based upon a calculation that says “it will cost you XX to do this so we will give you XX plus a bit more” (or more likely a bit less). But if you have a blank sheet of paper then how do you calculate a suitable budget?
The standard industry view is that 1 to 5% of revenues/turnover should be invested in marketing. Will this metric work for you? Well for many businesses there a huge gap between 1 and 5% so maybe that doesn’t help. For some small business the budget goes like this: one small investment pool, allocate a proportion to operational costs and similar. Whatever is left is discretionary spend on marketing. Probably nothing. So somewhere between spending Zero and the likes of Microsoft who can, according to reported rumours, spend up to 30% on marketing, how do you get to the “right” figure.
Some suggest to take a rational and accountancy-style view of the process. If you can accurately identify what each marketing promotion produces in enquiries, leads and conversions. And even better if you know how profitable these are, then you can build a very focused business case identifying activity, associated cost and expected revenues (and then track those during the year). Of course many of us don’t have the benefit of having that degree of market intelligence. Instead we have to build some sort of model to replicate this. So if you know it costs £20 to get a customer, and that each customer on average buys £100 from you, then just run the multiples of how many customers you need. Then add those costs/revenue model to provide your marketing budget.
But this supposes you actually know these things. What about if you are a start-up or new business? Well one way is to identify what you need to reach a certain point. For example to reach your break-even point. Then use that figure to back-factor the other numbers. So if you need 10 customers to break even, then you build a model that says to get those 10 customers I need 50 sales leads. To get those 50 sales leads I need 100 prospects, and to reach those 100 prospects will cost me $XX. Realistically, when introducing a new company or a new product, it is going to take far more of an investment in marketing than when running an established business.
Then of course you can trip over what you count as Marketing. You may meet people who profess not to spend any money on marketing. They spend it all on sales, and sales promotion, and lead generating! And its best to try and strip out overhead costs from your budget. If you need to attend an exhibition then it will cost you to exhibit and stay overnight(s). Your marketing budget should include the costs to prepare the material/demos/presentations for that exhibition but not the operational cost of staying there. Otherwise your marketing budget will swell to include operating costs and it will be hard to prove any return on investment (ROI) from your marketing activity.
Probably the most effective way is to look at what you need to do to generate new business. Work out the investment needed to do that, and use the ROI metric to identify, track and measure how you are doing. That way you can’t be far wrong. Now that you have some kind of budget, where and how do you spend it? That’s another problem for another day.