Getting your marketing budget right is a crucial to the success of your small business and that's because your marketing spend is a direct investment in your revenue generation:
"The business enterprise has two — and only two — basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs." - Peter Drucker
But before you decide how much you should spend on marketing, the difficulty is in knowing how to even start calculating the number.
So I know I need to spend, but how do I decide how much?
As much as we'd love to give you a concrete number, there are obviously far too many variables to make this meaningful.
Except to say, if you spend too little your message won’t get in front of your target audience in a meaningful way and your return will be lower. But spend too much and you might run out of money before the year is out, or you might waste a lot of it on the wrong activities.
(There's nothing worse than pleading poverty in October and going cap in hand to your boss to ask for more budget for your big Christmas campaign.
This post won't give you that ideal number, but it will give you some idea of the ball park you might be playing in.
So how do you decide which method to take in setting your marketing budget?
The top 3 approaches to setting your marketing budget
1. Percentage of revenue
This is a traditional approach where you set a budget based on a percentage of your revenue. 10% of revenue is often the baseline number, but why make such a generalised guess at your marketing spend?
The percentage of revenue a business may choose to set as their budget can depend on a huge range of factors including industry, company size, company history, existing digital presence and goals.
For example, the consumer packaged goods industry spends the most on marketing, about 24% of revenue, while energy companies spend only 4%.
What are the pros and cons of setting a marketing budget based on revenue?
- get a clear, set budget that can be allocated across marketing activities in advance
- a reliable method that considers information from previous years
- a safe approach - keeps budget in relation to revenue
- does not consider whether the company is in its growth phase or is a well established brand
- can be set by Finance executives who aren’t in touch with your marketing strategy or have any insight into market dynamics
2. Fixed budget
This is another common approach to budget setting, and as digital marketing budgets continue to climb, many companies are abandoning the ol’ 10% rule in favour of bigger budgets, with a heavy focus on digital marketing.
If your primary business goal is growth, you might just need more to spend more marketing moolah to achieve that growth.
What are the pros and cons of having a fixed marketing budget?
- an easy approach, especially for businesses with predictable sales patterns
- can be set in response to business goals
- knowing what you've got to work with can focus your efforts on revenue generating activity
- stagnant budget and unlikely you will be granted flexibility if you need to spend a little bit more
- doesn’t account for large one-off costs like implementing new marketing software. (Gartner reports that marketing technology now accounts for almost 30% of the total marketing budget and this number is increasing year on year.)
3. Zero-based budgeting
Even though it has the word zero in the title, the zero base approach is a more strategic way to plan your marketing budget. Instead of allocating marketing activities from a total spend, your marketing team will need to do their research and construct a marketing plan with a built-in budget.
They'll ask for a certain amount of investment and promise a specific return for that investment, and senior management will have to review the marketing plan before approving the amount.
This adds accountability to the marketing team because they will be expected to generate financial return on their marketing spend.
Big companies like Unilever have adopted the zero-based approach not to cut marketing spend, but to make it work more efficiently. In fact their brand investment has increased for the past seven years, and digital marketing account for 24% of Unilever’s spend last year.
Should you set a zero-based marketing budget?
- an accurate method that factors in marketing objectives and ties the use of marketing spend directly to what you want to achieve
- avoid waste from the marketing team who are just spending their money to justify the same allocation the next year
- the planning involved requires the marketing team to define its role
- time and resource heavy, a more strategic approach requires more effort
- estimating costs can be tricky, not every activity has an ROI and demonstrating value may be difficult
What you should expect as an ROI
Consider another approach - instead of looking at your budget as one yearly lump sum, view it as a scalable, fluid amount that can grow as your ROI grows.
If you find a way to generate $10 for every $1 you spend, then why would you stop spending?
If your marketing activities are really delivering, you'll want to drive up your marketing spend until you reach the 'sweet spot' where your efforts are getting optimal results. To be able to do such highly flexible budgeting, you’ll need full attribution from your marketing assets through to revenue to accurately measure ROI.
Tracking and measuring your digital marketing doesn't need to be a headache. If you're struggling to show ROI on your marketing activities, we are here to help!