When it comes to marketing your company, the old adage that says it takes money to make money is often true. After all, if you don’t allocate some funds toward getting the word out about your business, how will people know it exists? But rather than taking a haphazard approach, you should take control of the process by creating a marketing budget that will guide you in your marketing decisions and drive positive results. Here’s a step-by-step guide to help you set that budget to align with your goals.
What Goes Into the Budget?
To get the most from your funds, you you want to create a budget that strictly covers marketing expenses. For example, if you have salespeople and provide them with an expense account, that money should come out of the sales budget, not marketing. Here are some things that should be included in your marketing budget:
- Paid advertising: Any ads you run in newspapers, magazines, direct mail campaigns, TV, and radio should be included. Also include any online advertising, such as videos, banner ads, email marketing, pay-per-click (PPC) ads, content marketing, and blog maintenance.
- Marketing collateral: Include brochures, flyers, car wraps, catalogs, give-away items like T-shirts or pens, as well as other items that are designed to spread the news about your company and its offerings.
- Production costs: This includes any art, design, photography, graphic art, and any other expenses necessary to create your advertising.
- Technology costs: The cost of building a website and maintaining it should be included in your budget.
Budget Method Options
There are four typical methods used for creating a marketing budget. They are:
- Top down: The person in charge, whether it’s the financial manager or CEO of the company, decides how much can be spent and assigns that amount for the budget.
- Match the competition’s efforts: If they run an ad in the Sunday paper, you run one, too. If they sponsor a little league team, you do the same. In short, watch your closest competitor and shadow their marketing efforts.
- Set a goal: Here, you would identify a measurable goal, such as a specific number of new clients or a certain amount of revenue, and then work backward to come to a budget. For instance, if you know that for every 100 prospects, you typically get 10 new clients and your goal is 30 new clients, then you know that you have to drum up 300 prospects to meet your goal. Now, look at your past marketing efforts and determine how to do that and what it will cost.
- A percentage of sales: Spend a percentage of your sales on your marketing efforts. This is a great option for those who don’t have historical sales records to go by. For small businesses and startups, this is likely the most appropriate option.
Using a Percentage of Sales to Set Your Marketing Budget
Now let’s run through some numbers. The first thing you’ll need to do is determine what percentage of your sales you should plan to use for marketing. Different industries use various ratios, and the best way to determine the percentage rate for your business is usually to contact a trade association for your industry and ask. According to the State of Marketing 2014 report [PDF] conducted by the CMO Council, 39 percent of those surveyed will spend between 3 and 6 percent of revenue on marketing, while 40 percent will spend less than 2 percent. Traditional thought dictates that a startup would spend more because it has to build its brand and market share.
Next, you’ll need to calculate your anticipated sales for the time period in question. If you’re working on a marketing budget for next year, forecast your sales figures for that same time period. You can do this one of four ways.
- Current sales: Use them as a guideline for what your sales will be in the next year. This method will only work if you own an existing business and have prior sales. Be sure to take into account any upcoming events, such as an expansion or discontinued product lines, which might increase or decrease your sales volume.
- Projected sales: This method is ideal for startups that have no historical data to rely on.
- Moving average: When you average your predicted sales with your current sales, you’ll get a moving average. This method should be used if you want a conservative estimate.
- Ideal sales: This is when you set a sales volume you would like to achieve in a set period of time. You can base your budget on this if you want an optimistic number.
Depending on the type of business you run, you can calculate these figures for your total annual sales, or individually for each product or service. If you do the latter, you’ll get a sense of how much of your budget to attach to each of your offerings.
When completing your budget, be sure to take advantage of the free tools available online. You can download a free marketing budget forecast template here, or download a comprehensive marketing plan template from QuickBooks.