Are you spending enough on marketing? According to a recent survey, if you’re like many of your colleagues, the answer is no. 42% of marketing budgets fall below the 5% of revenue mark. In fact, only 38% of companies spend an adequate amount on marketing by industry standards and only 36% of respondents felt they spent enough to be successful by their own standards.
That’s not a pretty picture of the marketing budget situation most of us are facing. As we put together our marketing budgets, we are often faced with establishing and validating the money we plan to spend, and can be perplexed with how to approach it. Some of you are simply handed a budget from management. Others are given a percentage of past or projected revenue, while others still are told to submit a plan for budget approval.
In reality, there is only one place to start–the Strategic Marketing Plan. Once you understand the goals and strategy around your marketing efforts, you will be much better prepared to establish a budget. With that said, there are three approaches to the budgetary process that you should consider…and they are not mutually exclusive.
Top Down
With the top down approach, you start with a budgetary number that “comes down” from finance or upper management. You have $X to spend and you take this number and allocate the funds into months. To do so, take a look at your company’s seasonality (are there months that require higher marketing activity than others), sales quota distribution, and sales cycles.
We recommend you ask your management team for a commitment to a percentage of revenue for your “top down” budgetary number. This keeps marketing more aligned with the revenue goals and prevents the dollar figure from being some arbitrary number that can be increased or decreased at whim. Instead, it should only be adjusted when revenue expectations are also increased or decreased. As a guideline, our surveys show that 30% of companies spend between 3-5% of revenue on marketing, with 45% spending over 6% (most of those between 6-10%). If you are launching a new product, or are expecting to launch into a new market or territory, expect to spend approximately 20% of revenue to fund that program.
The general guideline for using the percentage of revenue approach is 8-10% of revenue should be spent on marketing, with approximately 5% of that going to labor (either for a department, or outsourcing to a marketing firm). What percentage you use is determined by a number of factors, how mature is your market (how much education do you have to do), how well known is your company in your industry (are you a new or established business, how much brand awareness do you have to do), and how fast do you intend to grow, just to name a few. Once you’ve received a commitment from management on your percentage of revenue each month, calculate the “allowed” monthly budget for marketing.
Bottom Up
Once you’ve established your top down numbers, set it aside and review the budget with a bottom up approach. That is, look at the specific activities you are planning to launch, the frequency you’re planning to launch them, and then calculate the costs for each item in the month are scheduled. You will want to segment this into several key categories for ease of reporting and tracking (i.e. Staffing, Brand Materials, Collateral, Web Site, Promotions, and PR) and add each activity under the segment it applies to. Once you’ve calculated the “true” costs of your proposed programs, compare with the top down numbers. Then let the negotiations begin.
Projected ROI
In every budget negotiation, talks always come back to one thing–What’s the Return? Though it is often very difficult to calculate in terms of conversion to sales, there are techniques you can use to validate your marketing plan before you implement it and these same techniques can also be used to measure it during and after execution. To calculate a marketing plan’s expected ROI, you need to compile the key assumptions in a Marketing ROI Calculator. From there you should be able to ESTIMATE how many leads your program should generate (given messaging, right mix of vehicles, appropriate target market, solid product offering, etc.), how many customers you should convert, and therefore your projected return on investment.
The budgetary process is something we “creative” marketing folks sometimes dread, and as a result do not spend enough time thinking about it. But with a solid strategic marketing plan and the above budgetary approach, you will have the resources and direction your company needs to build your marketing budget.
