Know-How Exchange : Research/Metrics

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

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! ;]

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.