How to set a marketing budget is the most commonly asked question from most small to medium sized businesses.
Looking at data from over 5000 business leaders we have surveyed, only 17% say they have a defined marketing budget. 61% say they are working on it, and 22% say they don’t have a budget for marketing at all.
Our interpretation of these scores and our knowledge of SMBs would tell us they do have a marketing budget on their P&L, however it is not treated as a planned budget as such. It’s not planned and delivered as a typical P&L item because they don’t know how to measure and communicate a return on investment.
It is challenging to get a marketing budget right. We see businesses often under-resourcing marketing and treating it in an ad-hoc fashion. This is a mistake, you always get better value and better buying power with planning.
Planning a budget also empowers you to hold fast on your decisions and say yes or no to short term opportunities.
There are certain factors a business needs to consider when setting a marketing budget:
- The growth you are looking for – you cannot grow a business significantly on a low marketing budget. If a business wants to grow from, for example $12m to $30m that won’t be achievable on a small marketing investment. When a business comes to us with a growth target we also expect them to be prepared to invest to achieve their goals.
- Another factor is the ‘job to be done’. If you are operating in a highly competitive and/or a sophisticated market, your marketing investment will need to be higher.
When we are helping a business set a marketing budget we always look at what their competitors are doing and what is going on in their operating market. If their market and competitors are very active then it is likely that the budget is going to be higher.
The opposite also occurs – if a market is unsophisticated and you are a sophisticated business, it allows us to take a market leader position.
- This figure is very arbitrary however worth a mention – when a business comes to us and they are looking at ‘business as usual growth’ [ie. under 10%] they should expect to invest between 1-5% of sales on marketing. This range again is dependent on age and stage of the business and their operating market.
- We often get asked about marketing salaries – we always recommend salaries sit in headcount not in the marketing budget. There’s little value having a marketing salary in your marketing budget and nothing else to invest in marketing. Your marketing budget needs to be minus salaries and represent the job to be done.
- If a business is doing something exceptional [out of businesses as usual] this also needs to be factored in. For example, if you are launching a new product into a new country or rebranding, you are not going to do that on 1 – 5% of sales that typically takes a major investment.
- At any age and stage businesses need good marketing advice however specifically in start-up or early stage. Every dollar needs to be wisely spent and reported back on – there’s little room for error in those early-stage businesses. SMBs can waste investment looking for that ‘instant gratification/silver bullet’ through tactics that aren’t backed up by strategy. The end result can be devastating for many small/early stage businesses.
On the flip side of that – for more mature businesses with an unsophisticated marketing capability the costs can be equally devastating. We recently saw a business investing $200k in a channel that was not going to work for them – that’s a lot to lose even for larger businesses.
Building a marketing budget requires careful consideration of what the next 12 months looks like for you. What marketing projects do you need to deliver to build your infrastructure for growth? What do you need to be investing In agency support? What should be spent on advertising and media to engage your customers and nurture them to a sale? All of these questions need to be weighed up. Most importantly, you must have a series of meaningful KPIs to track performance, so the strength of your investment can be measured with clarity.
