When it comes to marketing your company, the adage that says it takes money to make money is often true. After all, if you don’t allocate some funds to getting the word out about your business, how will people know it exists?
But how much is too much? How much is not enough? According to a recent Gartner CMO Spend Survey, the average marketing budget for businesses in the United States was 11.2% of overall company revenue.
Is this how much you should spend? Not necessarily. Determining your budget requires you to identify and implement your marketing strategy. What works for one company may not necessarily work for another.
Rather than taking a haphazard approach to marketing your new product, you should take control of the process by creating a marketing budget that will guide you in your marketing decisions and drive positive results. This step-by-step guide and marketing budget template will help you set a budget that aligns with your organizational goals.
Why is budgeting important for small businesses?
Your small business is likely responsible for numerous debts and obligations, many of which are overhead costs that you don’t have much control over. Examples include:
- Rent and utilities
- Repairs and maintenance
- Office supplies
- Purchasing obligations
Failure to budget properly could cause you to miss your obligations, at which point you’d be looking for ways to manage debt. Other severe consequences can include things like employees leaving the company if you miss payroll or losing licenses to conduct business if you miss insurance payments. Your budget should serve as the framework that guides your spending.
Having an idea of how much money is coming into and leaving your business will allow you to determine how much you can spend and where you can spend it. A budget plan will enable you to meet both your short-term and long-term business goals.
What goes into your budget?
When creating a budget, you should have two different things. You should have an overall budget based on your firm’s total revenue. And within that budget, you should have different subsections.
For instance, you can create budgets for things like research and development, professional services (like accountants and lawyers), and marketing. Within each subsection, you should provide a detailed breakdown of your costs.
So what should you include when determining your marketing costs? Consider including some of the following:
- 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, blogging, digital marketing, search engine optimization (SEO), and social media marketing.
- Marketing collateral: Include brochures, flyers, car wraps, catalogs, give-away items like T-shirts or pens, as well as other items designed to spread the news about your company and its offerings.
- Production costs: This includes any art, design, photography, graphic art, and other expenses necessary to create your advertising. You may be able to hire a freelancer to provide these services.
- Technology costs: Include the cost of building and maintaining your business website and social media channels. A new website or a website redesign would fall under this category in your marketing budget plan.
- Marketing automation: There are services available like HubSpot that automate a lot of the marketing process for you. Investing in one of these services could help you meet your marketing goals at a more affordable cost.
- Market research: An effective marketing strategy involves figuring out who your target audience is. If you haven’t conducted market research, you should budget for this.
While the above are good places to start, only you and your marketing team knows what works for your business. Past data will help tremendously when figuring out how to budget for future marketing expenses. If you use accounting software, a simple search will allow you to find these expenses quickly.
Also remember that as time goes on, your goals may change. You may begin to use new marketing tactics and phase out old ones. Consider setting both quarterly and annual budgets for your marketing spend. This will allow you to better compile an effective marketing budget, ensuring that you aren’t caught wasting money on unnecessary expenses.
Once you figure out what you want to allocate your marketing dollars toward, you’re ready to start building your budget. There are four primary methods you can use to create a marketing budget.
The person in charge, whether it’s the financial manager or the CEO of the company, decides how much can be spent and assigns that amount for the budget.
2. 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 campaigns.
3. 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 backwards 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 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.
4. A percentage of sales, total revenue, or gross revenue
Figure out which measure you want to use for your budget and then determine how much of that you’re willing to spend on your marketing efforts. This is an excellent 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.
Since you may not have much historical data for your firm and because it’s the easiest to forecast, we’re going to take a look at what’s entailed in using a percentage of sales to set your marketing budget.
Using a percentage of sales to set your marketing budget
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. Additionally, 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 period in question. 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 marketing budget to attach to each of your offerings.
If you’re working on a marketing budget for next year, forecast your sales figures for that same period. You can do this in one of four ways.
1. 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 a discontinued product line — that might increase or decrease your sales volume.
2. Projected sales
This method is ideal for startups that have no historical data to rely on. There is a bit of strategic guesswork involved with this, but making educated calculations and financial projections can put you in the right ballpark and give you an idea of how to set your budget.
3. Moving average
When you average your predicted sales with your current sales, you’ll get your moving average. This method should be used if you want a conservative estimate.
4. Ideal sales
This is when you set a sales volume you would like to achieve in a set period. You can base your budget on this if you want an optimistic number.
Other things to consider when crafting a budget
Setting a budget for the first time can be challenging. Consider some of the following tips when doing so.
Outsource your marketing efforts
If you don’t have an in-house marketing team, consider outsourcing it. There are plenty of marketing experts available who can help you craft a strategy and budget. However, before outsourcing, you should still have an idea of how much you’re willing to spend.
In this case, because you’re not hiring someone directly, your payroll numbers will be a bit lower. Instead, you can incorporate the payments to the independent contractor as part of your marketing budget. Doing so could be a worthwhile investment, as you should see excellent returns. When done correctly, outsourcing could be a good way to stretch your dollar.
Understand the sales funnel
A sales funnel is a fundamental component of a business. The sales funnel is the process or journey that a customer goes through from the moment he or she becomes aware of your product to when the person decides to buy. The following KPIs could be useful in helping you understand your sales funnel and how it relates to your budget:
- Site visits per month
- Leads generated per month
- General leads converted to sales-qualified leads
- The cost to create sales-qualified leads
- Number of opportunities closed as new deals
- The average revenue per transaction
Understanding the sales funnel — and how it relates to your product or service — will allow you to better understand which marketing efforts are needed.
Your marketing department needs to be careful when setting a budget. Use line items when planning your marketing budget to help explain the expenses you’re considering.
For instance, if you plan on spending a certain amount on LinkedIn advertising as part of your social media marketing budget and a different amount on Facebook ads, specify between the two. Don’t lump them together under the “social media marketing budget.” Keeping them separate will make it easier to evaluate and adjust your annual marketing budget template.
Budgeting can help your small business grow
According to the Small Business Administration, only about 50% of companies survive more than five years. Problems that commonly cause firms to fail include insufficient capital or lack of revenue. If you wish to build your small business, budgeting is a must.
Marketing in particular is an area where budgeting is critical. With the rise of online marketing, it’s easier than ever for you to dedicate funds to your marketing efforts. But if you’re not careful, you can find your spending quickly spiraling out of control.
Setting a marketing budget allows you to determine how much to spend on everything from Google Ads to social media advertising. When constructed in accordance with your sales strategy, your marketing efforts can go a long way toward helping you grow your new business.