“How much should we budget for marketing?” That’s a question that dozens of business owners have asked me. Your accountant may have told you 3% of revenue is a good number (or maybe he said 5% or 1.5% or some other number he thinks would work well. Or, he may use an average for your industry he found in a report).
I like my accountant, but I don’t depend on him for setting my marketing budget, and you don’t need to either. Accountants are often detailed-oriented, conservative thinkers with low-risk tolerance. Those characteristics make them good accountants but poor entrepreneurs.
Now you accountants, before you close your ears, please hear me out. We need you and your perspective. You may disagree with me, but that’s ok. You have a right to your viewpoint.
Cut costs or increase revenue?
Business owners need to understand the role accountants should fill and not fill in servicing the business. Accounting, by nature, is historical. The numbers tell us what happened. They also tell us where we are today. The numbers show trends, but they don’t tell us what will happen tomorrow. Just because numbers are trending up or down doesn’t mean they will continue that way because business, like life, is dynamic.
When cash gets tight, most accountants and business owners look for cost-cutting measures. After all, Ben Franklin warned, “Beware of little expenses; a small leak will sink a great ship.” This is an essential step when money or resources are being wasted.
However, cost-cutting has its limits. I clearly remember the paradigm shift I experienced when my business partner and mentor, Clair High told me for the first time, “You can’t save your way to success.”
Why do we focus on cutting costs when there is infinitely more potential to solve cash and profit problems by increasing revenue? Cost-cutting is appealing because the results are usually quick, quantifiable, and tangible. Plugging leaking holes can indeed result in long-term savings, accruing substantial amounts over time.
But when cash is tight (and when it’s not), you should look for ways to increase your revenue. Like cost-cutting, this also can produce substantial amounts of profit in the long term. However, increasing revenue has the potential for more profit than the cost-cutting method. A lot more.
How much should I spend on marketing?
Marketing is the way to find those new revenue dollars. You may or may not need to invest a lot of money. When cash is tight, it is critically important to look for ways to increase sales without investing many dollars.
There are four ways to increase revenue:
1) Increase the number of customers.
2) Increase the average amount of each sale.
3) Increase the frequency of sales per customer.
4) Increase prices.
In any case, you will need to invest time (and very likely dollars) to accomplish your goals. Using a percentage of sales to set your marketing budget has several problems:
- It is an irrelevant benchmark for what is too little or too much.
- It doesn’t take into account your marketing goals or production capacity.
- It doesn’t account for earlier marketing investments that continue to yield results.
- It doesn’t reflect industry changes that you need to respond to.
- It doesn’t consider the amount of risk appropriate for your current position.
What do you want to accomplish? This is the key question as you consider how much money to allocate for marketing activities. Will you be launching a new product line or continuing with your current offerings? How much growth do you want? Are there major issues to fix? What would be lost if enough sales were not generated? How much unused capacity do you have to fill?
Spending money on marketing can feel risky if you feel uncertain it will pay off. Like many aspects of running a business, we are never guaranteed our efforts will be successful in the way we envision. The answers to the following questions can help you determine the amount of risk to take on:
- What is our net monthly cash flow?
- Based on our experience, how confident are we that the initiative will succeed?
- How much cash reserve do we have to fall back on?
- What is the worst-case scenario if we do this? If we don’t do this?
- How stable is our business plan and historical performance?
Another aspect of managing risk is to take baby steps before attempting a giant leap. In their book Great by Choice, Jim Collins and Morten Hansen call this strategy “fire bullets, then cannonballs.” The analogy comes from the concept of a military saving its heavy artillery until the target position is calibrated using smaller weapons. The point regarding business is to test your plan in a small way to elicit real-life feedback before going all-in on a risky, expensive bet.
You can limit risk by budgeting money for experimenting with a new marketing initiative. If the results are positive, you can invest more resources with higher confidence and more experience.
How do I set priorities?
You usually have more projects to complete than you have budget for. How do you choose which ones to keep and which ones to put on a waitlist? Your SMART Goals and KPIs determine these decisions (see the previous article in this series). The projects reflected in those goals get top priority in your budget. Fill in your most important tasks first.
Next, consider if any projects will give you long-term benefits, such as building an e-commerce website, refreshing your brand, or erecting a digital sign where you can display messages. The reason to prioritize these projects is that choosing to do these projects now allows you to benefit sooner and longer.
Be willing to drop your pet project if it simply doesn’t fit in your budget this year. Maybe you don’t care for the look of your current sign, but if updating the sign doesn’t help accomplish your SMART goals or KPIs, then you should back burner it for now.
You can also ask these questions to help you set your priorities:
- Where is our greatest weakness?
- Where is the low-hanging fruit?
- What will bring the quickest improvement?
- What will have yielded the most results one year from today?
What categories should my budget include?
Don’t get hung up on the format of your annual marketing budget. Getting the content in place is more important than how you format the information.
To help you plan accurately, include costs for each of these categories in your budget, or you can adapt these to your liking:
- Market research
- Messaging development
- Lead generation
- Lead conversion
- Testing & measuring
Completing projects to achieve your goals requires not just dollars but also time. Marketing projects don’t get done by themselves. Someone needs to think about them, plan them, and execute them. Most marketing plan failure results from failing to schedule the necessary time for you or your employees to do the marketing tasks. Therefore, you need to not only budget dollars but also time. Ideally, your marketing budget will include the following elements:
- Dollars budget
- Time budget
- Calendar of events/deadlines
- Review and update cycle
Estimate how much time is involved with each project or each step in a project. This will help you be realistic about achieving it. When a subcontractor or marketing agency is involved, that expense goes into the dollars budget while your and your employee’s time goes into the time budget. Assign responsibility to yourself or someone else for each project and set a start date and completion date.
For projects with phases, set a start and completion date for each phase. For example, think of what goes into a catalog project: Writing copy, photography, layout, and design, incorporating pricing updates, proofreading, and printing/mailing. Who will do each phase by when? Schedule these details into your calendar.
On your marketing calendar, schedule the events for the coming year: shows and expos, open house, sale dates, etc. Then schedule the start dates for the work that is done to prepare for those events: planning meetings, preparing new marketing collateral, placing advertisements. The people involved with or responsible for various aspects of the work should put those start dates and deadlines on their calendars.
Schedule time each month to review progress. Are projects moving forward? Are expenses in line with your projections? What should be re-calibrated? Of course, when another year rolls around, it will be time to start over and adapt your marketing budget for the coming year.
How much should you budget for marketing? I can’t answer that question for you, but I also know you don’t need to pluck a random number out of thin air. I hope this article has shown you a thoughtful path to finding a reasonable number for your business.