How does a business determine how much to devote to its marketing budget?
Unfortunately, there's no magic number or formula. The most common answer is, "It depends."
Among the variables, of course, are your industry and strategy, as well as your intended delivery vehicles. Read on for valuable advice from our readers on setting a workable budget.
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Sensing the magic marketing budget number
I'm responsible for sales and marketing in a small company. I have some ideas about what would improve the way the company markets its products and have researched what those ideas would cost to implement. How can I determine what makes a reasonable budget? Is there a magic formula that says, "If you historically have made $X in sales, and want to increase that by $Y, don't spend any more than $Z on marketing"? —Carla, Director of Sales and Marketing
—Carla, Director of Sales and Marketing
Readers provide good guidelines for reaching the magic budget number. One reader says to keep in mind that a business spends more on its initial marketing and then establishes its percentage based on experience and industry.
Another reader provides a general rule of thumb and a couple of factors that could change the rule:
The rule of thumb, at least in India, is that the budget for advertising and promotion to generate sales revenue should ideally be around five percent of sales. So if you want to generate sales of $100, a good marketer should be able to spend no more than $5 to generate that.
It also depends on the stage of your product's life cycle. When launching a new product or service, you definitely need to spend more on marketing, which could be as high as 20 percent of the sales and revenue target. Also, as the media costs keep getting higher year after year, this formula needs to evolve, but then again the use of clever and alternate media vehicles instead of TV and print are the keys for justifying advertising spending.
In addition to readers' suggestions, there are valuable resources for information on setting reasonable budgets. For example, the nonprofit organization SCORE offers free and confidential counseling to small businesses for building a business—from idea to success. It has an article on "Setting a Marketing Budget," in which it states that spending varies "from less than one percent of net sales for industrial business-to-business operations to 10 percent or more for companies marketing consumer-packaged goods."
The United States Small Business Administration says marketing needs and costs vary, and there are no rules:
A popular method with small business owners is to allocate a small percentage of gross sales for the most recent year. This usually amounts to about two percent for an existing business. However, if you are planning on launching a new product or business, you may want to increase your marketing budget figure to as much as 10 percent of your expected gross sales.
MarketingProf's know-how exchange (affectionately known as KHE) also has a lot of discussions on this topic.
To find formulas and other information on setting budgets, go to a search engine and try the following search keywords and variations:
- budget percentage
- [your industry] budget spending
- [your industry] marketing budget
Both the readers and SCORE state that a new business has to spend more. The SCORE article provides a sample, which should give you a better idea of how to go about setting the budget.
If your business has already done marketing, it helps to review the results and judge the percentage based on that. The Business Owner's Toolkit lists advertising dollars as a percent of gross sales based on industry.
The Web also has a wealth of information specific to your business and would be a good place to start.
Next Marketing Challenge: Can You Help?
It's time to start thinking about annual gifts for our clients. This is the first year we will send gifts to our clients. We're trying to figure out if we should give a gift to all paying clients or only to the top ones. Also, we haven't been able to find out what kinds of gifts are memorable and appreciated as opposed to useless and overused (e.g., fruitcakes and calendars with our logo). We want them to come across as genuine, not as sales pieces. What are the gift-giving rules of thumb?
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