How can I build a better marketing budget? How much should I spend on my marketing?
These are common questions that I hear in marketing planning conversations.
There’s not an easy answer to this question. I often say, “Well, it depends.”
Let me explain – in general, there are three common ways to approach marketing budgeting.
Three Marketing Budget Methods
- Percent of Top Line Sales
- Based on Market Share
- Based on Objectives
The percent of sales method is difficult for start-ups to use because as sales increase, so does your marketing budget. When you have low awareness and low sales, you may need to spend more money on your marketing.
When you calculate your marketing budget based on market share, you’re probably a larger, established company that has market research that guides your planning. Even a smaller company can benefit from quantifying the overall market size, identifying key competitors, and estimating internal market share. Industry groups and trade organizations may also be able to provide insights on average marketing or advertising spend.
Finally, objective-based marketing budgeting is the most time-consuming method; however, it is the most effective. I briefly discuss the laddering of corporate goals into marketing and advertising goals in Your 2021 Marketing Roadmap blog post. By aligning internal strengths with external opportunities, you should budget marketing dollars to promote key objectives in the coming years.
I recommend using a blend based on objectives and looking at a percent of sales as a reference point.
Common Marketing Budget Benchmarks
Let’s explore some other sources for more information.
According to the latest Deloitte CMO Survey:
“marketing budgets have risen to the highest percentage of organization budgets and revenues in the Survey’s history (12.6 percent and 11.4 percent, respectively).”
Marketing spending is expected to decline in the next twelve months, as companies continue to weather and adjust to COVID-19.
Pre-COVID, the CMO Survey in 2017 describes differences in industry spending with consumer packaged goods companies spending 24% and manufacturing companies spending 8% of their overall budgets on marketing.
For smaller organizations, these numbers can seem less applicable, so I suggest referring to the SBA’s marketing budget guidelines of 2 – 8 percent. This can vary based on your industry, company size, and level of awareness.
How Much Can I Afford to Spend on Marketing?
Any budget requires careful calculations and coordination with accounting. Turn to your trusted bookkeeper for assistance, as you project your sales and expenses for the year. I asked Rachel LaMantia of Masterpiece Bookkeeping to share her advice:
In order to build a profitable business, your revenue should most often exceed all of your expenses. To see how this will work when you’re adding in a new expense, like marketing, it’s helpful to do some simple cash projections for a few months. A spreadsheet is an easy way to do this. In the first column, list Expected Revenue followed by your major expenditure categories. Then each subsequent column is a month, and you fill in (or “project”) what you think your revenue and expenditures will be for each month. At the bottom, add a formula to subtract all of the expenditures from your revenue, and you should have money left over.
If you’re starting with a big project, like a website, or your projections show you may have a couple of months of negative cash flow before the marketing starts bringing results, you should have a plan for how to pay for that. Maybe you have a cash reserve that you’ve been saving for project work, which is the best way. If you are using credit of some kind, know how and when you will be able to pay it off.
Evaluate your marketing spend every couple of months to make sure that it is still within your budget and it makes sense for your business.
Plan, Track, and Tweak
As with any sound marketing plan, be sure to track expenditures and performance to assess what’s working. Based on results, tweak your marketing mix and keep on tracking. Marketing is not an exact science, so anticipate learning as you make your marketing (and budgeting) better, year after year.
Reach out with questions on navigating your marketing for 2021. I provide marketing coaching, “done with you” marketing, and “done for you” marketing support.