This is probably one of the most asked questions of marketing agencies and consultants. If you google the phrase, there are almost 17 million results. Guess it’s on peoples’ minds, eh?
I think one of the reasons why it’s on everyone’s mind is because there is no magic answer. Before we get into the methods of determining a right answer, let’s be very clear about these two points:
The exact amount matters less than having an amount. In other words, having and tracking a marketing budget, even if your initial number is off, is much more important than getting the number exactly right.
You can have the right budget and spend it on the wrong things. A marketing plan should always be tied to a strategic marketing budget.
Now, let’s tackle the question. Here are some of the more effective ways to set a marketing budget:
Percentage of gross sales/revenue:
This is probably the simplest method. Most experts recommend somewhere in the range of 2-8% of gross sales. McKinsey & Company is often quoted at 5%.
Most small businesses (less than $5 million gross revenue) should shoot for at least 7-8%.
Many industries have their own standard. For example:
- Consumer package goods: Up to 50% of projected net sales to launch a new product
- Industrial B-to-B: 1% of gross sales
- Retail: 4-10% of net revenues
- Banks/Credit Unions: 2-5% of assets
- Law firms: 1-4% of gross revenues
- Pharmaceuticals: Up to 20% of net sales
- Hospitals: 1% of net revenues
Lifetime value of customer:
The idea is simple. You identify how much profit (on average) you make during the lifetime of that customer relationship and determine how much you are willing to invest per customer acquisition. If you choose this method be very careful that your numbers are accurate.
The thinking behind this method is really a blend of some of the others. Identify measurable goals (# of new clients, % of revenue increase, etc) and then determine your sales equation.
For example: For every 100 prospects approached, you get 25 initial meetings. From those 25 meetings, you can expect to get 12 invitations to present a proposal. From 12 proposals, you will score 4 new clients. If your goal is 20 new clients, you now know that you need to approach 500 qualified prospects. You build your marketing plan to accomplish that and assign the costs accordingly.
Again, this method requires very accurate numbers to make the equations viable.
So what do you think? Which method do you currently use? If you don’t have a marketing budget, which method do you think would serve you best?
Roy H. Williams recommends you start with a basic percentage of your gross for occupation (rent) and a percentage for advertising, adjust them both by your markup, subtract the rent, and spend the remainder on advertising.
This works for both retail and service businesses.
Glad my timing was good! I hope it helped your client and you!
Sorry — can you run that by me again. Maybe use numbers to illustrate? I’d love to update my post and add Roy’s idea. But I’m a little slow, so you have to paint me a picture!
Sure, Drew, but rather than my interpretation, here’s a link to the original from Roy: http://www.entrepreneur.com/advertising/adcolumnistroyhwilliams/article54436.html
Also, here’s a budget calculator that Dave Young created from this basic formula: http://www.adbudgetcalculator.com/
Thank you so much for the links and the information!
Drew, thanks so much for pointing to my blog. I just discovered your post today from a click-through. Great points you make! Wish you would have sent a trackback so my readers could find your post too. Wanna comment on my post and link over?
Best wishes and I really like your blog!
Ask and you shall receive. You’re right — I should have tracked back and now I have!
Excellent post. Not just conceptual but useful on the ground.
This is a really nice guide – thanks for sharing!
How does it differ (if at all) with the advice you offer your clients?
I think that this question is answered with three “words”: ROI !
But the follow problem is to measure the ROI. Anyway, nowadays SEO and SMO (Socia Media Optimization) is becoming a amazing way spend less in marketing with greater results.
Invest a resonable budget into a organic seo campaign with a reputable company – that’s my advice. You should expect to spend at least $500 per month for this.
Without a doubt…the marketing plan and the marketing budget must dovetail. Otherwise, neither will be successful.
I am looking forward for your next post. I found this informative and interesting blog. I just hope you could make another post related to this. This is definitely worth reading europe
It totally depend upon the field of marketing. We should keep in mind that we should invest according to our budget. Otherwise we get fall soon.
thanks for the instruction and information
I was searching for this question long time back. Today i got the answer , Thanks for sharing your marketting ideas. Hope it helps me in near future.
This is really helpful for a struggling business or one just starting out. I had no idea there were amounts that were specific to an industry. I wonder where my quilting business would fall into?
we have spend on marketing 30% of our profit!
I spend about 20% of my resources on marketing. However, it will differ depending on the type of company etc.
what you’re seeing is the new iphone 4g STEALTH MODE!
Thanks for these numbers, I am actually spending a lot more on marketing as I am starting out. Once established I will probably scale down a bit to probably around 2% of gross income.
Interesting post, I really never thought I could have a good read by this time until I found out this site……….
I have to say, you’ve got one of the best blogs I’ve seen in a long time. What I wouldn’t give to be able to create a blog that’s as interesting as this. I guess I’ll just have to keep reading yours and hope that one day I can write on a subject with as much knowledge as you’ve got on this one!
Thanks for this post! the information very well. good luck