How To Determine your Marketing Budget

“BUSINESS HAS ONLY TWO FUNCTIONS – MARKETING AND INNOVATION.” – MILAN KUNDERA

Determining your annual marketing budget can be a daunting task, especially in the wake of the digital marketing revolution. This is particularly true for the small business or start up who knows that they need to get the word out about their brand, but lack the resources or know-how to compete. Marketing is still the definitive way to increase your brand awareness and drive sales. While it is free, social media should not be your only platform for your marketing efforts.  You have to invest in a wider range of options if you wish to grow your customer base.

Playing with Percentages

But you also don’t want to be spending a lot on all the wrong things. So, how do you determine your spend? While there is not a definitive number – the standard percentage for small business marketing allocations sits between 9-15% of total gross revenue. Businesses that have earned a great reputation and have substantial market share can afford a lower spend. Businesses that are younger than 5 years have to increase their marketing investment if they want to make any impact on the industry. The size of your company, as wells as your current sales figures, will also impact your final budget allocation. When you work on the percentage model to determine budget it will never be a fixed figure, as it will expand with your business. It also nips any overspending in the bud. This method should only be applied if your margins are currently above 10- 12% (If you are operating at a loss, this approach would not be ideal for you).

You could also choose a fixed budget option where you decide on a figure and come up with a strategic marketing plan to make the best of the resources that you have.

Learning from the Competition

It is vital to research your competitors to ascertain their marketing budgets (or ask business owners who are a similar size to your company, what they spend). You want to look at your competition’s marketing efforts linked to their advertising expense. But you want to compare apples with apples and not look at one of the giants in your industry if you are a small business. Always remember that before you deploy any marketing campaigns, you must have researched and segmented your target audience, so you know exactly who you are “talking” to and where to find them.

Calculating Your CLV

One of the key metrics that will need to be understood before deciding on your final marketing budget, is the customer lifetime value (CLV). This figure refers to the amount each new customer is worth to your business over a long period of time. When you know the figure, it can help you to decide how much you are willing to spend on marketing to acquire new customers and the amount to retain existing customers. There are a fair number of complex calculations you can make to arrive at this figure. They include elements like average order value, purchase frequency, customer value, customer’s average lifespan etc.. When you know your CLV, you can accurately forecast your marketing spend so that you never outlay more on acquiring a customer than their lifetime value.

Showing Up in All the Wrong Places

“Don’t optimize for conversations, optimize for revenue.” – Neil Patel

The biggest calculation you will need to make is what the return on investment (ROI) is for your chosen marketing efforts. Whatever you are spending on ads must be doubled in revenue received, otherwise you are spending too much, and in all the wrong places. You need to be evaluating the successes and challenges of every single marketing campaign to see what is actually working. When you can repeat your conversion creating initiatives, you are able to increase your ROI. Analyzing the data of your marketing efforts will help you to easily predict the following year’s marketing spend.

What is your Risk-Taking Richter Scale?

Sometimes businesses decide to choose an aggressive marketing strategy that requires a big investment, but with potentially enormous rewards (without breaking the bank of course). The most important thing is that you have to have a marketing budget and strategy if you wish to see revenue growth. It’s a difficult task but a necessary one. If you spend a tiny amount, your product might be invisible, but you could also spend too much and have no ROI to speak of at the end of the campaign. Whatever amount you settle on, make sure that you are constantly testing and analyzing your data to be able to make improvements. You must keep tweaking your campaign to build on successes and cut the low performing efforts.

If you are struggling to decide on an appropriate marketing budget or how to create a strategy for your chosen resources, we can help you see the wood for the trees. Give us a call to see how we can assist you with any pressing marketing needs.