How much to spend on marketing is a question many small businesses find hard to answer.
Usually there are five ways to work out a marketing budget for the year. Remember that these are marketing budgets, not advertising budgets. Marketing covers everything you do in your business that creates awareness, including activities as advertising, brochures, competitions, free tastings, demonstrations, trade shows, travel, personal selling, direct mail, sponsorships, social media and digital marketing.
1. We don’t need to market
Some businesses have long term contracts or receive all their business from referrals. This is fair enough but remember that everything you do to get this repeat work (attending events, meeting clients, publishing content, blogging, entering awards etc.) does still incur a cost. You may not think of it as ‘marketing’.
2. Ad hoc method
Some businesses don’t have a budget and simply advertise either when they feel that sales have slipped and they need extra business, or when they get sold advertising. Often, it’s because business owners are just too busy during the year to think of advertising, or they’re actually already busy enough.
3. Whatever you can afford method
Here you spend any spare cash on advertising, so the advertising is dependent on cash flow. During the good times you advertise more, during the bad times you cut the advertising. The danger here is that if business falls, and you cut advertising then the situation is likely to spiral out of control.
4. The percentage of sales method
This method has you calculate at the start of the year what percentage of sales you want to spend on advertising. If you decide that you want to allocate 2% of sales to marketing, then $1m of turnover equates to $20,000 for the year. The problem with this method is you may not need to spend $20,000 and percentage that is supposed to apply to your industry may be way out of line for your circumstances.
5. The objective and task method
This method easily beats the others because it makes better business sense—and can be measured. At the start of the year select the targets you’ll be aiming to achieve over the next 12 months. Work out what you want from each of these targets (such as 100 new customers, or each existing customer to spend another $1,000, or an increase in the average sale). Then decide on the specific tactics that will achieve this and estimate the cost. Common sense will provide guidelines.
Complete this exercise for each of your targets, add up all the costs, and this will be your marketing budget for the year.
Final tips
- Have a cash reserve for marketing so you can take advantage of any opportunities that may arise during the year. Remember, you can’t always predict what may happen (for example, some action by your competitors) so have some capacity to market any time during the year
- Conduct a break-even analysis. For example, if you’re investing $10,000 in marketing and the gross profit in each sale is $100, you’ll need 100 sales to cover the cost (100 x $100 = $10,000). Can you sell 100? Remember this only covers the cost of the marketing. You haven’t yet made a profit
- You may have several methods that you have used in the past that you know work. Keep repeating them.
- You may have to spend a certain amount of money to keep your existing customers and maintain market share.
- Always have a method of monitoring if your marketing is working or not. You can’t refine and improve your marketing spend unless you measure the results.