An entrepreneur’s livelihood is often determined by the success of their business. With nearly 75% of all US businesses being classified as nonemployer
¹ (business receipts of over $1,000, no paid employees), entrepreneurs are often tasked with running with all aspects of the business. Sales, billing, service… entrepreneurs are forced to manage critical business areas that don’t always align with their core expertise. One of these critical areas tend to be marketing. From finding new customers, to building brand awareness, a strong marketing strategy is an absolute must for growing your business. To help entrepreneurs build their business, let’s take a look at 3 common techniques for identifying your marketing budget.
There are a number of practices for determining your marketing budget. First and foremost, you need to identify what you can theoretically spend and still manage all aspects of your business. Allocating budget for marketing should not come at the expense of business-critical areas that require capital for the business to succeed. An honest assessment of the business’s fiscal position is required prior to identifying the methodology for determining your marketing budget. Generating opportunities, at the expense of being able to produce the good or service or pay bills, is an absolute must. Once you have identified and confirmed your marketing budget range, you should select the method that best suits your business model for setting your marketing spend.
Technique 1 – Gross/Projected Revenue
The first option for setting marketing spend is factoring it as a percentage of your gross or projected revenue... somewhere between 4 – 15%. Yes, that’s quite a wide range… let’s expand. You should take multiple factors into consideration when determining that percentage:
- How long you have been in business?
A startup may want to allocate less, say 4 – 6%, due to the volatility that can come from starting a new business. Young, yet established businesses might spend at a higher level to establish brand awareness and generate sales, provided that the projected marketing spend doesn’t hinder their ability to perform.
- What are your revenue projections?
As a general rule, revenue projections should impact the percentage used in this methodology. A small business with less than $5 million in revenue should spend around 6 – 8%. Significantly higher revenue projections, within competitive marketplaces, should consider spending significantly more to expand market penetration.
- How certain are your revenue projections?
New and established businesses alike should model forecast projections as realistically as possible… using data, market forecasts and more to establish attainable revenue projections.
- Is the market environment primed for marketing?
Consider factors such as the economy, your competitors, the target audience, etc., to assess the likelihood of your marketing campaign’s succeeding and fueling growth.
Technique 2 – Desired Customer Growth
Another option for determining your marketing budget is setting spend levels that correlate to desired customer growth goals. This requires that you have access to certain 2 marketing measurements:
- Customer Growth Expectations
– You need to have established growth expectations for the company in the fiscal year. These should be based on previous customer acquisition results and marketplace trends. This technique requires realistic, attainable customer growth expectations.
- Cost per Customer Acquisition
– Knowing how much/fast you want to grow your customer base, you will need to have an established “cost per customer acquisition” figure that you can use to determine overall marketing spend. When calculating these costs, you should look at how much it costs to create both a new lead, as well as a new sale. If you have the tools in place to calculate the costs per medium (email, social, media, PR, etc.), this will allow you to focus spend on your more cost effective tactics for creating customer growth.
Once you have these figures, you can multiply the number of new customers by the costs associated with acquiring them to get your marketing budget. While this is an accurate method for determining marketing spend, it requires accurate reporting and data to get to that spend level. For those newer businesses that don’t have access to that historical performance; a full-featured CRM service like Act!
can help provide those key customer acquisition and marketing expenditure/performance insights necessary to efficiently manage and grow your business.
Technique 3 – Marketing Objective Focused
The third possibility when setting your annual marketing budget is calculating the costs of your desired marketing efforts. This objective-based technique puts the primary focus on marketing tactics vs. revenue or customer growth expectations. It offers the opportunity to develop your budget around known marketing initiatives... ensuring that they are properly accounted for in that fiscal year. To this point, this method requires that you have your entire annual marketing plan developed, including the costs associated with each tactic, prior to setting your marketing budget. For many new and/or younger businesses, this might not be feasible; recent study² showed that only 56% of small businesses have a marketing plan
. It also doesn’t provide the flexibility to expand, change or add to those planned marketing initiatives. To offset this limitation, you can set aside a bucket or pool of your marketing budget for new marketing tactics.
Selecting What Works for You
While these are 3 well-known methods for identifying your marketing budget, there are many other techniques for developing your marketing budget, including budgets based on market share, setting industry specific spend-levels and others. One of the first steps in this process is selecting a method that works for you and your business. What type of data do you currently have access to? How accurate/confident are you in that data? Where are you in the development of your business? These are all questions that will impact how you develop your marketing plan and budget. Knowing that entrepreneurs may be hindered by limited resources (time, money, expertise), understanding the strengths of your organization and using those in determining the best method for developing your marketing budget is an absolute essential component in this process. The simple fact that you understand the importance of setting your marketing budget and are investigating methods for doing so is a huge first step. Just make sure that you are basing your determinations on sound data and achievable growth expectations.
Travis Moss – Sr. Marketing Manager at Swiftpage
About the Author
With over 20 years of corporate marketing and advertising agency experience, Travis offers unique insights into how businesses can use marketing to fuel small business growth. From identifying marketing opportunities, to implementing an integrated marketing strategy, Travis has managed the marketing efforts for large international brands like Act!, DIRECTV, Mitsubishi, Barrett-Jackson, and Safeguard.
¹ 16 Surprising Statistics about Small Businesses - Forbes.com
² Do you have a marketing plan? – SBA.gov