Marketing your business.
Do it well, and watch your business grow into a powerhouse.
Neglect it, and watch your business wither away into non-existence.
Setting a marketing budget is critical – to prevent accidentally overspending or to avoid underestimating the budget required to beat your competition.
However, deciding how much to invest in marketing and how to allocate your online vs offline marketing budget…
…can leave you feeling overwhelmed and confused.
Today, we will provide a clear strategy and share research-backed findings – with percentage recommendations – that will help you set a marketing budget that makes sense and supports growth.
[Check out our handy dandy marketing budget infographic for a summary of this post]
You may be asking…
How much should I budget for marketing to grow sales at a comfortable rate?
What if I’m a start-up that wants to aggressively grow my business?
Is there a universal formula companies use to calculate a marketing budget?
How should I allocate marketing dollars for online vs. offline marketing?
These are important questions…. questions that pro-active, growth-oriented companies ask.
You’ve seen it before…
Companies that seem to have it all together. Their branding, promotions, sales, and messaging all just fit… and their marketing works like a machine to drive traffic, leads, and sales into the business.
This type of marketing harmony does not just happen. It’s the result of a great strategy and plan that’s implemented and supported by an allocated marketing budget.
John Jantsch, bestselling author of Duct Tape Marketing, describes marketing like this, “practiced effectively, marketing is simply a system… it may be the most important system in any business.“
As part of that system, he describes the “Marketing Hourglass” to illustrate the journey your customer takes from not knowing you at all – to eventually becoming a champion of your brand…
…and telling all of their friends about you.
The 7 Phases of the Marketing Hourglass go like this: KNOW – LIKE – TRUST…
…then TRY – BUY – REPEAT – REFER.
This is the type of marketing magic that fuels business growth!
And this type of marketing process is practiced by companies striving to deliver a world-class service to their customers.
Now let’s talk budget…
What is a marketing budget and why do I need one?
The truth is most companies give very little thought to marketing planning in general and carelessly throw money at various advertising outlets, hoping that something will end up working.
A marketing budget is – an estimate of projected costs to market and promote your business and its products or services. Your marketing budget includes both offline and online (digital) marketing investments, as well as some general marketing expenses that cross over and are used in both areas.
General marketing expenses may include items like: Marketing staff, consultants, marketing research, creative development, strategic planning, general company branding, etc.
Offline marketing expenses may include:
- Trade shows and events
- Business cards
- Promotional items
- Print advertisements
- Radio advertisements
- Direct mail
- Billboard advertising
- Product giveaways
Digital marketing expenses may include:
- Website design & development
- Search engine optimization
- Content writing & marketing
- Social media management
- Graphic design
- Email marketing
- Online reputation management
- Display advertising
- Pay-per-click advertising
- Video marketing
- Affiliate marketing
Your marketing budget is the foundation on which your marketing plan is built. Once you know how much money to allocate toward marketing, you can put together a plan to get the most return from your marketing dollars.
So how do you set a marketing budget?
Let’s get right to it…
As with every business discipline, there are several different approaches.
Two popular approaches to budget planning are – percent of revenue budget planning and goal-based budget planning.
These are safe, reliable methods great for a variety of businesses and stages of business.
1. Percent of revenue marketing budget
This is one of the most common approaches and easiest to plan for, especially for companies in the first few years of business.
Using this approach, you allocate a percentage of revenue or projected revenues to identify a marketing budget. The actual percentage varies widely by industry and marketing goals.
Fortunately, there has been a substantial amount of research done by various organizations to help point businesses in the right direction.
The Small Business Administration recommends a marketing budget of 7-8 percent of revenue for businesses under $5 million in sales. This is a general estimate, assuming that the business has net profit margins in the 10-12 percent range after all expenses. They also point to the necessity for many businesses to invest a much higher percentage during the brand building years or start-up stages of the business to gain traction in a competitive field.
The CMO Survey is another highly respected source for marketing planning information and trends. According to its website, “Sponsored by the American Marketing Association, Duke University’s Fuqua School of Business, and McKinsey, Inc., The CMO Survey collects and disseminates the opinions of top marketers in order to predict the future of markets, track marketing excellence, and improve the value of marketing in firms and in society.” In its latest survey results, published in August of 2016, it found the following key indicators:
- Companies under $25 million in revenue allocated on average 11.6 percent of sales toward marketing
- Companies with more than 10 percent of sales made through the internet allocated on average 13.3 percent of sales toward marketing
- Digital marketing spending is expected to increase 9.9 percent in the next 12 months
- Marketers expect to allocate 22.2 percent (currently 11.7 percent) of their total marketing budget to social media in five years
In 2014, MarketingSherpa fielded the 2014 E-commerce Benchmark Study through which it surveyed 4,346 e-commerce marketers. The results provide a goldmine of e-commerce marketing information related to conversion rates, traffic sources, average revenue ranges, etc. One narrative in the study states, “While there are many avenues to success, two key factors identified in these charts are marketing spend and daily site visitors. This won’t be surprising to many marketers, but it is likely a nice reassurance to what they already know. Namely, it takes money to make money. And it takes traffic to ultimately sell products.”
Rule of thumb percentages for setting your marketing budget
We recommend the following marketing budget percentages for moderate growth. We’ve also identified a Low to Aggressive budget range below each industry.
Established companies (in business for longer than 5 years) that want to put their marketing into maintenance mode may consider a budget approach closer to the “Low” percentage.
Newer companies (in business less than 5 years) pushing an aggressive growth curve or launching into the marketplace may consider a budget approach closer to the “Aggressive” percentage.
Low – Aggressive
10% – 20%
Low – Aggressive
15% – 25%
Low – Aggressive
8% – 18%
Low – Aggressive
15% – 35%
Low – Aggressive
3% – 6%
Low – Aggressive
8% – 12%
Low – Aggressive
3% – 5%
Low – Aggressive
3% – 7%
2. Goal-based marketing budget
Goal-based budget planning generally requires some history or track record that has identified costs associated with achieving certain revenue goals or business goals. It’s a little more difficult method to use for start-ups or businesses that do not yet have a grasp of their marketing costs and ROI.
With a goal-based approach, you start with a question, such as, “how much additional revenue do we want to generate from our marketing efforts?”
Then, based on prior experience and previous ROI, you can arrive at an anticipated marketing budget required to hit your revenue goals.
Let’s say your goal looks something like this…
We want to generate $600,000 in sales in the next 12 months.
Great! …we have a goal. Now, how do we achieve the goal?
Well, first we need to review the concept of Return On Investment (ROI).
How do you calculate marketing ROI?
Return On Investment is a calculation that illustrates what you gained as a result of what you invested.
Marketing ROI = (Gain – Cost) / Cost The gain is your gross profit. The cost is your marketing expense.
Let’s assume your business earns $100 gross profit per sale. And your marketing cost to achieve each sale is $25. Therefore ROI = ($100 – $25) / $25 for an ROI of 300%.
Another way to view ROI is by ratio, like this – 3:1, meaning that your return is $3 for every $1 invested. Remember, the return is gross profit minus marketing expense.
ROI Ratio Hack – We can use a simple formula that starts with the desired gross profit and ROI ratio to arrive at an estimated marketing budget in two steps.
1. Take your ROI ratio (3:1) and add the numbers together, like this, 3 + 1 = 4
2. Divide your desired gross profit by the sum of the ratio, like this, $100 / 4 = $25
Using the ROI Ratio Hack, we arrive at the same marketing cost of $25 for each $100 in gross profit.
One point of note – you may see other ways to calculate ROI, including the Customer Lifetime Value (CLV) method or the method used by Google.
Sometimes it is helpful to exclude fixed marketing costs when comparing ROI for different marketing tactics. So it’s easy to compare things like SEO ROI or AdWords ROI or billboard advertising ROI.
As long as you stick with one method when comparing quarters, years, or campaigns, you’ll be fine.
Just don’t make the mistake… of using straight revenue as your “gain” number when calculating ROI. If you leave out cost-of-good-sold, you could end up with an actual negative ROI on your marketing investment.
Ok, back to working out our goal-based budget
If you recall, our goal is $600,000 in sales in the next 12 months…
- Let’s assume that the average sale per customer is $200 (with a gross profit of $100 per sale)
- So $600,000 in sales would produce $300,000 in gross profit
- Let’s also use a marketing ROI* (return on investment) of 300% or the ratio 3:1
- Using our ROI Ratio Hack, we can do the math like this: $300,000 / 4 = $75,000 marketing budget
- Working backwards with a traditional ROI formula, it looks like this: ($300,000 – $75,000) / $75,000 = 300% ROI
*300% ROI is an estimate only. Some marketing tactics may generate lower ROI, while some may generate higher ROI.
It’s important to note there are several other factors that go into understanding how your marketing investment translates into revenue. They will vary by company, customer type, and goals. These factors get into the details of how you arrive at your ROI. Simply put, your analysis might look something like this:
- How many transactions do we need to achieve our revenue goal of $600,000? Answer – 3,000 transactions at $200 each
- How many website visitors do we need to generate 3,000 transactions? Answer – assuming 3.0% conversion rate, you will need 100,000 visitors for the year
- If we spend $75,000 on marketing, what is our cost per customer acquisition (cost per paying customer)? Answer – $75,000 divided by 3,000 = $25 per customer
- If we spend $75,000 on marketing, what is our cost per lead? Answer – $75,000 divided by 100,000 = $0.75 per lead
This type of analysis can help you determine which marketing / advertising investments are acceptable and which are not. You can also use this analysis to work toward lowering your cost per acquisition and or cost per lead.
How should the marketing budget be allocated?
Marketing budget allocation varies depending on your goals, internal resources, industry, strength of current marketing channels, etc. The following allocations are general recommendations for digital vs. offline marketing. And as media consumption continues to transition into the digital and mobile space, these numbers will also change.
- eCommerce Website, Info Products – 75% digital and 25% offline
- Service Business, Start-up Business – 60% digital and 40% offline
- Restaurant, Local Other – 40% digital and 60% offline
- Construction, Manufacturer – 30% digital and 70% offline
Digital marketing expenditures would consist of things like – website design, SEO, content marketing, email marketing, social media, reputation management, online paid advertising.
Offline marketing expenditures would consist of things like – trade shows, promotional items, t-shirts, brochures, print catalogs, billboards.
The marketing mix that makes up your budget allocation should be carefully considered. You want to MAXIMIZE your return on investment with any marketing tactic you deploy. It’s very important to plan for, experiment, measure, and repeat what works well.
Some common marketing budget questions
1. Does the marketing budget include product discounts? No, the marketing budget does not include product discounts, as discounts generally reduce the top-line revenue number and are not factored into expenses.
2. How should the marketing budget be allocated? The right marketing mix depends on company goals, customer behaviors, personnel or resources, and other unique marketplace opportunities. The right experts can help you determine the right blend of offline, digital marketing, and promotions to fit your business.
3. Is “Advertising” part of the marketing budget? Yes. Although advertising is different from marketing, it is a component of the marketing process. So, the dollars spent on advertising come out of the marketing budget.
4. How do I know if I’m making money with marketing? It’s important to track results and costs (ROI) associated with your marketing efforts and campaigns and consistently measure results to see what is working and what’s not. Some marketing efforts, like social media or content marketing, may take several months to gain traction and turn into tangible results. Additionally some experts, like Gary Vaynerchuk – who built a multi-million dollar wine company primarily through social media and content marketing – think that too much focus on ROI can lead to missed opportunities and worse results.
5. Do I have to spend money to make money? In general… yes. You will either spend money internally with staff handling marketing activities, or you will spend money to hire external help to plan and implement marketing activities. However, there are several low-cost – high ROI marketing strategies that can be implemented. Good marketing will ALWAYS work to get you the best bang for your buck, delivering traffic and leads for the lowest cost. Sloppy marketing and advertising ends up costing more money and time.
6. What do I do if my budget runs low? Provide absolutely impeccable customer service, over-deliver, and wow your customers. Then ask for referrals. You should be doing this anyway, but this is a great way to pour fuel on your marketing fire, and it’s done in the normal course of business. Exceptional customer service will get word-of-mouth rolling and will help earn more business for your company.
Now it’s your turn
Get your calculator out, open an Excel document, or grab a pen and paper.
Crunch the numbers to find out what marketing budget you should use to reach your goals.
It will give you direction and peace of mind as you move forward with a plan.
Do you need help with marketing?
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