How to set a marketing budget
Setting a marketing budget can be tough. How do you know if it's enough, or if it’s too much? Are you allocating it to the most impactful areas or is it being wasted?
Marketing budgets can be a constant battleground. The marketing team always wants more, while the finance team always wants it to be less. Business owners know that investment in marketing is key to growth but ensuring this spend can be tracked and monitored for performance is also key. In this blog, we’ll outline the costs marketing can incur and the results a business should expect from that investment, so you can decide what budget best fits your business, and where it could go.
Evaluate your marketing costs
Before allocating your budget to certain marketing activities or campaigns, it’s important to evaluate all of the marketing costs your business currently incurs. It’s essential for this to be as accurate and realistic as possible so you can factor in these expenses when analysing marketing’s return on investment (ROI). Below are a few common marketing costs that should typically be included:
- Marketing software: This includes your CRM software, automation tools, email service provider, web hosting costs, and more - anything that services your daily marketing activities.
- Employees and freelancers: Be sure to include the salaries of members of your marketing team, as well as the wages you pay to any freelancers (if applicable) for specific campaigns.
- Advertising spend: You’ll need to include any current paid advertising activity, including search engine ads, native ads, etc.
- Content creation: While content for blogs, videos, or social media posts may not cost in the same way as paid advertising, it does cost in regard to time. It’s important to budget for the amount of paid hours you’ll need to spend on creating such content.
Once you are aware of all your current costs you can move onto how you might create a marketing budget around these costs. You may be looking at increasing your marketing spend, or reducing it. In the next section, we’ll help to outline a few models you can use to achieve both.
Decide on a budgeting model
There are numerous ways a business can allocate its marketing budget, so we’ve compiled a list of the common methods below:
- Percentage of Sales method
- Objective and Task method
- Competitive Parity method
- Affordable method
It’s important to note that these methods don't always stand alone and can sometimes work best when combined. Rather than viewing these as strict structures to follow, look at them as building blocks to use, alter, or combine as you see fit.
Percentage of Sales Method
This is arguably the most commonly-used method by small businesses, whereby a historic marketing expense is converted into a percentage of net sales. This percentage is then allocated to the overall budget for advertising. It can be common for a business to allocate percentages of 20-35%.
Objective and Task Method
This method is often employed by large businesses with more experience as it allows marketers to observe marketing expenditures against overall marketing objectives, keeping the budget focused on the business’ primary goals. In this context, a marketer will decide on an objective to be accomplished and the resources necessary to achieve it. The budget is allocated by estimating the cost of finishing each task.
Competitive Parity Method
This method can help businesses to understand their marketing spend in relation to that of their competitors. Essentially, it is where a company seeks to match the advertising expenditure of its competitors in order to stay competitive. Of course, this method has a higher risk involved as following suit won’t always pay off, but benchmarking your competitors can provide useful insights. It can also be hard as you’re relying on the activities you see them doing and not the more subtle internal investments.
This budget allocation method involves marketers and businesses assessing their budgets and allocating funds based on what they believe they can afford. Since this method isn’t specific to a certain goal or historic data, it can be unreliable. However, it can be a good place to start for new businesses with little past experience to rely on.
A marketing budget for small businesses
Ultimately, we recommend starting with the percentage of sales method, especially for small businesses. It’s often beneficial utilising the less costly marketing activities first - you can even use sweat equity to get started. Similarly, social media posts sharing helpful advice for people looking to buy your product/service can be excellent low-cost tools. Also, you could try and gather contacts on a free CRM, such as HubSpot, to get you started. This way, you can slowly build up your marketing data to optimise your budget over the years to come.
If your business is a start-up then a percentage of sales won’t be possible. In this case, the objective and task method would work best.
A marketing budget for medium businesses
As a medium-sized business, it will be easier to reflect on past performance and use this to inform your budget allocation. This is a great time to begin condensing free tools into an efficient tech stack and increasing your measurability. In turn, you’ll be able to prove your ROI from each marketing activity and use this information going forward.
Here the percentage of sales method starts to be an easier approach to take. This can be combined with a growth-driven allocation. If your business is looking to increase sales by 20% then the marketing budget will need to increase accordingly to ignite this growth.
A marketing budget for large businesses
The larger the business, often the more complex budgets can become. At this level, it’s important to use historical data to inform your marketing budget. However, this is not the time to close off all other avenues. Investing in growth and retention is the way forward as a large business. This may mean trialing out new platforms to reach additional audiences, or connecting with your audience more frequently, or with different content in order to bring value and satisfy your customers. Another great tool for larger businesses is investing in automation for greater analytics and efficiency.
There’s a lot to consider when setting a marketing budget, so we’ve condensed the core principles into three simple tips:
- Start small and make use of any past data you can access.
- Stick to what has worked historically, while remaining open to testing new channels.
- Spread your budget allocation across multiple channels (don’t put all your eggs in one basket) and throughout different stages of the buyer's journey.
These basic principles will help you to set a marketing budget, but don’t forget to keep adapting it based on the results you generate. If you do that, you’re set to discover the optimum allocation for your marketing budget, while maximising your ROI. Analytics and reporting are key to understanding which marketing activities generate actual sales.
As every business is different, and the customers they're targeting are reached in different ways, it's impossible to set a universally applicable marketing budget. Looking at what you're trying to achieve will get you close to an effective budget, but at the end of the day, you need to understand the return you'll see on that investment.
All in all, setting a marketing budget boils down to the goals your business has. To set some objectives that you can then allocate your budget to accordingly, download our SMART goals template.
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