9 Popular Ways to Determine Your Marketing Budget
1. Percentage of revenues
This is by far the most talked about method of determining your budget. This method works by taking a fixed percentage of your revenues (that’s every penny your company brings in) and allocating that amount for marketing. The most commonly used numbers are 5-10% (generally for bigger businesses), 20% (used more for small businesses), and 2-5% (very large companies). Picking the percentage that works best for you will probably take some trial and error.
Pros: It’s an easy and understandable answer. It makes for great cocktail party and networking event rumors.
Cons: It really isn’t very accurate. In fact, it’s not accurate at all. Also, with small or new businesses, it can completely break down if you don’t have much to show for revenue. Oh yea, and it will vary wildly depending on your profit margins.
2. Percentage of net sales
Similar to taking a percentage of revenues, this determines your marketing budget as a fraction of your net sales. This method is a little bit less aggressive than the last method, since you exclude expenses from your calculations. As with the first method, this method will take a lot of trial and error to find the percentage that works well for your company.
Pros: It’s also an easy way to create a marketing budget, and it might be a bit better than percentage of revenues for some industries (depending on profit margins).
Cons: It’s a broad generalization that isn’t very accurate.
3. Everything you can afford
In the realm of fast-growing small business, this is definitely one of the most popular answers. The idea is to set aside the money you need to keep your business alive (presumably your family too), and throw everything else at building popularity. Proponents of this budgeting method will say that it helps grow your business quickly, and that you can worry about other things once you’re established in the marketplace. If you choose to budget with this model, make sure you understand the risks you’re taking.
Pros: It’s aggressive. Some Venture Capitalists like this plan because it means getting big fast. It is also another one that can be talked about easily, since it’s pretty easy to understand too.
Cons: It’s risky. Most small businesses should not even think about this type of marketing budget unless they have a significant amount of backup.
4. A hair more than the competition
This method is simple in principle: find out how much your competitors are spending, and use just-a-bit more than that to market your company. The reality of doing this is a lot more difficult than it seems, since it can be very hard to find out exactly how much your competitors are spending. If you do manage to find out that information, this method can be a great way to figure out how much to spend marketing.
Pros: It’s a reasonably good estimate of how much you’ll need to spend to compete in the marketplace. It can also save you some calculations, assuming you can actually get good information on your competitors.
Cons: It’s hard to find out what your competition is spending. Also, the act of entering the marketplace will likely change how much your competitors spend, so your numbers won’t be accurate for long.
5. Desired customer growth
This is a great way to determine your budget if you have a specific number of new customers as your goal. It does, however, take a lot of information to implement properly. First, you have to figure out how much it costs to get a new customer. Then, you multiply that cost by the number of new customers you want to acquire. The result is the amount you’ll need to budget in order to hit your target.
Pros: It’s a very accurate way to forecast the amount of spending you’ll need to hit your goal.
Cons: This method depends on having accurate data to begin with. It also ignores the immeasurable benefits of branding and image marketing.
6. Industry specific