Deciding how much to spend on Marketing is a difficult decision, especially for a small business. It’s a little like figuring out how much ammunition you need to purchase or how much bait will you need for the day. You want to buy just how much you need without spending on something you don’t need. Problem is you don’t know how you need until you are done. If you can drop your trophy buck with one shot, you only need one bullet. Catch you limit of walleye with one tub of leaches, and your done, for now. There are many rules of thumb and many general sayings in the history of marketing. Choosing which one to follow is key on making the right budget decisions. Making the choice will usually depend on your business situation and your business objective, plus many external factors, such as the economy, the amount of competition, and the game forecast in your area. There are also variables specific to your business such as your reputation, how many customers you need to fill up your calendar, your balance sheet, and all the other consideration you must account for in running your business. Many situations can be general categorized to fall into one of the following four approaches to marketing budgeting that we’ll describe in more detail below. These at the Top Down Method, the Bottom Up Method, the Growth Objective Method, and the Start Up Business. If you don’t find the perfect category for you, don’t throw away your plans to market your business. Without Marketing, you have little else to attract new customers to your business. Here are a few of the tried, tested, and true marketing sayings that may apply to you:
“In good times you should advertise, in bad times you must.”
“Over half of the money I spend on marketing is wasted, I just don’t know which half.”
“The only truth that matters in marketing is whatever the customer believes.”
“Marketing is the life blood, the starting point, for any growing organization.”
Top Down Method Start with how much revenue you believe you will bring in this coming year and then budget your marketing expenses as a percentage of your gross revenue. The percentage you use to budget depends on the general type of marketing you will be doing. In business to business marketing (B-to-B) this percentage can be as low as 1% of gross revenue. In the high margin world of consumer packaged goods marketing this can be as much as 50% of top line revenue. For many business to consumer (B-to-C) companies the range is typically between 5% and 10% of gross revenue invested into marketing. The low range of 5% is what as established company in a stable industry with a single digit growth objective might spend. The high-end of the range is for companies with high growth objectives, or who are not an established brand in the marketplace. The Top Down Method is a good approach as it right away put into perspective the dollars range that a business should spend on marketing, with some flexibility for the business owner to match the budget to the business objectives.
Bottom Up Method The Bottom Up Method is usually an approach taken by a more business owner with more experience in establishing their marketing, having the luxury of historical data on their side, and an established marketing program. This planning approach usually begins with the marketing budget $’s from past years, along some measurement of relevant results, such as number of phone calls from prospects, email inquires, web site traffic, walk in traffic, tradeshow leads, revenues, or whatever the business owner determines as the proper measuring stick. Think of a ratio of results. The more times you pull the trigger, the more birds fall from the sky. Cast your lure once, you likely won’t get a strike. Cover more area with multiple casts and you improve your chances. The same is true with established marketing programs. Do the same thing and you are likely to get the same ratio of results. If you are getting what you want, why change? If you need more, put more in. If you normally get 50 new prospects a year, which turn into 5 new customers a year, but you want twice as many, then double your marketing activity and you stand a good chance of getting the customers you are seeking. As long as the ratio is somewhat constant, the results can be predictable. For example, if you normally send out 5000 direct mail packages, and get 50 responses, to get your 5 customers, then you can expect that ratio can be repeated, to a greater scale, by spending more money. At the same time, if you are able to improve the ratio (usually a harder thing to do) then your results will improve at no cost. There are two standard ways to increase the quantity, either by increasing the size of the list, or by increasing the frequency that you send to the list.
Growth Objective Method The Growth Objective Method is a combination of the above two methods. The key elements in this methods are first having an established marketing program with measurable results and the second is knowing how your marketing plan fits into your business plan for growth. The primary pieces of data required for the Growth Objective Method are your current revenues and your desired future revenues. Of those two, your target in mind is the future revenues. In fact, if you really want to simplify it, you can get away with only having one number in mind, the future revenue level you want to achieve. With this target in mind, begin to develop a marketing plan to suit that size of company. Work on the principle of acting like the business you want to become. Then, use the Top Down Method to factor out your required marketing budget as a percentage of your desired revenue level. Use the 5% rule of thumb discussed earlier, adjust it up or down at your management discretion, and you quickly have a $ figure that should help guide your marketing expense planning to become the size of business you want to be.
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