Traditionally there are three ways to approach setting a marketing budget. 1. Strategic Investment, 2. Percentage of sales or margin or 3. Review of last year.
Good marketing drives revenue in most successful businesses and doesn’t just happen overnight.
The right strategy, approach, creative and plan will guide the expenditure and investment.
Strategic Marketing Investment
This approach begins with understanding the current value of a customer. Then assess the current cost of acquisition, retention budget and the dynamics of the sales funnel. We all know it’s on average 10 time more expensive to gain a new customer than retain a current customer. Hence marketing really is an investment and it is vital to look at all aspects of the prospect nurturing process and consider;
– How new potential customers enter in the top of the funnel?
– How much you need to invest to find those new prospects?
– How long a potential customer/prospects need to be nurtured before they become sales leads?
– How can we help move prospects through the sales cycle?
– How many leads are required in order to drive a sales opportunities? and, finally, how those opportunities are won?
– Then understand how to keep customers with us and build repeat purchases and loyalty?
This analysis, combined with a calculation breakdown will greatly assist the investment/budget process to and accurately devise targets and project expenditure to drive sales and return.
Percentage of annual projected sales, or gross profit.
If using projects sales or gross margin approach is preferred, before setting the percentage look for; companies similar in size, business maturity, stage of the business/products, level of competition to your company. IDC International Data Group records that on average;
– 46% of companies spend less than 9% of overall revenue.
– 24% of companies spend 9 to 13% of overall revenue.
– 30% of companies spend greater than 13% of overall revenue.
The rule of thumb suggests the majority of successful businesses spend between 10 and 12 percent of gross margin.
Previous year spend
Sadly an approach is a process that just looks at the previous year’s spending and simply deciding where they want to add more or less spending. While this seems to be a logical tactic, it’s the wrong approach since it positions the marketing budget as an expense, and marketing as a cost center. It isn’t strategic nor will it enable growth or opportunity to test and trial new media or communication tools.The best way to develop a marketing budget, is to treat the budget as if it’s an investment in-order to deliver an expected, quantified return over time.