Question

Topic: Research/Metrics

Accidental Marketer Needs To Know What To Spend

Posted by ccaum on 8/18/2005 at 12:39 PM ET 250 Points
It's a long, strange story, but I've ended up responsible for Sales and Marketing in a small company, without having any experience or training in the field. 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. My question is: How can I determine what constitutes a reasonable budget? Is there a magic formula that says "If you historically have made $X in sales, and hope to increase that by $Y, don't spend any more than $Z on marketing."? (Remember- this is a small company with average sales of somewhat over 1 million).
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RESPONSES

  • Posted by Chris Blackman on 8/18/2005 at 5:56 PM Accepted
    Catherine

    Congratulations on becoming a marketer, I'm sure it's no accident!

    Budget schmudget. You should aim to spend an amount that will generate a gross margin contribution of around 4-5 times the spend. So if you plan an activity like a trade magazine advert, and it costs $3k all up including production, them it should generate $12-15k in margin to be considered successful.

    Of course your firm's owners may think it should generate 10 x the gross margin contribution, and that expectation ought to be uncovered earlier rather than later...

    So if you're OK with the 5 x gross margin effect, and your margin is (say) 40%, then you would need to generate incremental sales of (15k div 40% =) $37,500.

    To find out what any one marketing initiative generates, you need to do some sales order intake tracking, which you can do by simply asking customers how they know about the company, what prompted them to buy this product, and whether they have seen any company advertising recently, to establish if the advertisement has been a causal factor.

    So go ahead and create your marketing activity calendar, cost it, work out the sales increment it will generate, and overlay both amounts into the business cash flow projections, to see whether it all fits together.

    If it seems too aggressive, then back out some expenditure until it feels more reasonable. Then do one or two activities, test, monitor, and adjust to build your (and the stockholder's) confidence.

    Hope this helps.

    ChrisB
  • Posted by SRyan ;] on 8/18/2005 at 7:27 PM Accepted
    Look at this recent thread about a similar question here on the forum.

    "What do I budget?" is asked here over and over again. That thread has some good answers, as well as links to earlier postings.



    Nice answer, as always, from Chris! ;]

  • Posted by mgoodman on 8/18/2005 at 9:13 PM Accepted
    The amount you spend will depend on a whole bunch of factors. There is no set percentage.

    For one thing, it depends on your objectives. If you want to grow the business at the rate of inflation, your spending will be at one level. If you want to grow it dramatically (and quickly), it will be another level. And if you're happy with the current sales/profit level, it may be a third level.

    Next, it depends on the industry, competition, and profit margins. If you're in a highly competitive industry, with giant corporations spending money like there's no tomorrow, you're not going to make a difference by spending a little more or a little less. You're just too small to have that kind of impact. In fact, the WAY you spend your marketing funds will have much more impact than the amount of money you spend.

    If you have a unique product and a loyal customer base, then you may go one way. If you're in a commodity market and the only differentiator is price, you will probably go another.

    There are just too many variables for us to give you a hard number -- or even a range -- as the answer. There are companies that spend less than 1% of sales on marketing, and there are companies that spend 50% or more. Whatever the average is makes absolutely no difference, and it is not actionable.

    The only way to make the decision you're facing is to lay out the objective(s), figure out how you will accomplish them (i.e., what your strategy will be), and then calculate how much it will cost to implement the strategy. If you need a percentage (of sales) number, take that cost and divide by your sales. That's the percentage.

    Don't make the mistake of chasing a percentage number. It can't possibly be right, except by pure luck.
  • Posted by ccaum on 8/19/2005 at 12:37 PM Author
    Thanks to everyone- your input is really valuable to me. I knew this would feel like a very basic question for most of you, and therefore not terribly stimulating to answer, so I appreciate your willingness to contribute. Here's what I think I learned- let me know if I need to think again:
    1. There is no one magic formula for setting a reasonable marketing budget (I kind of suspected that). It sounds
    2. I need to start at the goal and work "backwards", i.e. what do I want to achieve?...How do I think it could be achieved?...What will the chosen strategy cost to implement?...Can the owners live with that margin, or do I need to scale back?
    3. I might do better to start by studying what marketing strategies make the most sense for my company given our size and resources, who our customers are, who we're competing with, and how our market functions.

    I do have a follow-up question raised by your responses-(I'm new on the KHE, so I'm not sure it's kosher to slip another one in here): Other than through trial and error, how do I "work out the sales increment" a particular strategy will generate? Is it more or less an educated guess (or hope)? NOTE: I have not yet read through the thread that SRyan posted for me- if I'm likely to come across the answer there please don't bother to respond.
    Thanks again, Catherine
  • Posted by ccaum on 8/23/2005 at 12:08 PM Author
    Many thanks! These kinds of resources are just what I've been trying to find. I've lacked any kind of frame of reference for making sales projections and gauging their acceptability versus our expenditures. The "light bulb" is starting to flicker for me now.
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