Know-How Exchange : Advertising/PR

Unfortunately the rule of thumb is...there is no rule!

However, 0.5% sounds on the low side. Typically budgets might range from 1% to as much as 20%, depending on the business type, the point where it is in its life cycle, product portfolio size, where the products are in their life cycle, market awareness, and so on.

The question should really be, how should you set your budget? And there are probably three key things:

1. The business and marketing strategic objectives – the marketing budget must be driven by the business and marketing strategy.
2. What is it worth? The value of each of those objectives – what is each one worth to the business?
3. What can you afford? Cash flow - or availability of funds– it’s no good spending big to try to achieve step-changes in sales, if you can’t afford pay the marketing bills when they fall due.

Strategy-based budgeting
You must have a clear set of strategic objectives for your marketing, otherwise how can you figure out what items of expenditure will give the desired results?

Value-based prioritization
Rank your initiatives according to the estimated (or previously-measured) “bang-per-buck”. Prioritize the initiatives that are likely to create the most value, in terms of size, number and quality of leads.

Cashflow
Check against the cash-flow availability to ensure you can afford to spend what you are planning. If cash flow is tight, postpone some of the lower-priority expenditure until your higher-priority items have kicked in and started to lift sales and profitability.

Hope that helps

ChrisB

Basing budgets on percent of sales is an old and tired concept that assumes marketing is an expense -- and not a revenue generator. To move away from this philosophy, and prevent your marcom budget from being cut at each financial downturn -- while positioning yourself as a more strategic part of the management team, focus on the numbers . . .

How much gross profit do you earn from each sale?
How much does it cost you to bring in each sale? Are your marketing efforts profitable?

If it costs you $1000 to bring in every sale, and you earn $5,000 in gross profit from each sale, a $1 million budget brings you 1000 sales at a gross profit of $5 million.

If you boosted your budget to $2 million, you'd bring in 2000 sales at a gross profit of $10 million. What CFO wouldn't understand the benefit of boosting your budget?

Alternately, if you are bringing in new customers at breakeven or at a loss, use Lifetime Value in your calculation, to prove that spending $1000 now to bring in a customer who will spend $5000 over their average lifetime with you makes economic sense.

Great answers from both ASVP/ChrisB and kmarch.

One other thing to keep in mind when you're tempted to look at industry averages: Not all companies do their accounting the same way. For example, some include sales commissions in their marketing numbers, while others don't. Some allocate overhead expenses (e.g., copier, fax, utilities, rent, etc.) to functional budgets, while others don't.

That results in a "fruit salad" average that isn't accurate for apples or oranges, and that can be very misleading if you're trying to see how you stack up against the norm.

The one thing I will say is that the only thing lower than a fraction of a percent is zero, so you're undoubtedly at the low end of the range regardless of your industry.

Hope this helps.