Quick question: What’s your marketing budget?
If you’re like many small business owners I’ve talked with, you might not have an answer. I know marketing budgets aren’t super sexy – but they are DIRECTLY CORRELATED to your business growth.
Consider these numbers:
- Companies that grew 1-15% year over year spent an average of 16.5% of their revenue on marketing
- Companies that grew 16-30% year over year spent an average of 22% of their revenue on marketing
- Companies that grew 31-100+% year over year spent an average of 50.2% of their revenue on marketing
I know, I know. I’m not saying YOU should spend 50% of your revenue on marketing! These are HUGE businesses with big-time budgets (companies like Microsoft, Oracle and Twitter).
According to The CMO Survey, companies with annual revenues below $25 million spend an average of 11% on marketing. But still, that’s an AVERAGE of established companies with revenues well into the millions. There’s no one-size-fits all number.
So let’s talk about what kind of marketing budget is right for YOUR business.
First things first: Your marketing budget should be a percentage of your gross revenue.
Here’s an example:
ABC Auto Parts had a gross revenue of $600,000 in 2015. They assign 13% of that to their marketing. 13% of $600,000 is $78,000. So their marketing budget for 2016 is $78,000 (or $6,500 per month).
So your first step is to calculate your gross annual revenue. If you’re a new business or your revenue fluctuates significantly, you should reassess your revenues quarterly or even monthly.
When it comes to deciding on your marketing budget, several factors come into play. I’ll break them up into three main categories.
And remember, these are just starting points. If you set a budget and you’re not seeing the results you need, change it up! It’s a moving target.
Category 1: You are a startup business or launching a new product
First-year businesses need more marketing capital to get off the ground. Money will be tight, but think of your marketing as an investment because that’s exactly what it is! You’re investing in your own business.
Variables: Some industries are more competitive than others. This is the most delicate situation your business can be in, so do your research! If you’re facing lots of competition, you’ll want to invest closer to 35%. If competition is light, 25% may very well be enough.
Tip: Rate your competition level on a scale of 1-10. You’re a 1 if you sell a niche product that virtually no one else in your market sells. You’re a 10 if you’ve got lots and lots of competition, (if you’re a dentist, you most likely are a 9-10). The higher your number, the higher your marketing budget should be.
Once you’re established and bringing in regular, sustainable revenue, you’ll fall into the next category.
Category 2: You are an established, growing business
You’ve got momentum, you’re growing… don’t let up now!
Variables: Two factors really come into play here: your competition and your profit margin. The average profit margin for small businesses is 10-12%. The higher your profit margin, the more you can afford to spend on marketing.
Tip: Set your budget closer to 12% if competition is light, closer to 18% if it’s heavy, then let your profit margin help you decide whether you want to spend more or less.
A couple examples:
- ABC Auto Parts is a growing business with very little competition, so they set their marketing budget at 13%. However, their profit margin is high (50%), so they up their marketing budget to 16%.
- XYZ Toy Store is a growing business with an average amount of competition, so they start off by setting their marketing budget at 15%. But their profit margin is only about 7%, so they bring it down to 13%.
Over time, you’ll see what impact your marketing budget has on your revenue and can adjust it as necessary. Remember, these suggestions are just a starting point.
Another important thing to remember is that HOW you spend that marketing budget is just as important as HOW MUCH you spend. If you’re not getting the results you need, try changing up the way you break up your marketing budget before you change the amount (i.e., try spending more on pay per click advertising and less on radio, or vice versa)!
Category 3: You are a stagnant or declining business
If your revenues are flat (or falling) you need to give your marketing efforts a boost. (That may not be the ONLY thing you need, but it’s definitely one of the things you need!)
Percentage: 3-10% MORE than what you’re currently spending
Whatever your marketing budget is, increase it by 3-10% for six months. (Whether you increase it by 3% or 10% depends on the severity of the situation.)
After a few months, you should see the trend reversing. If after six months you’re prospering again, consider lowering the percentage only if it’s unsustainable at this level. Keep it up if you can, and you’ll continue to grow!
But if after six months you’re still declining or have only returned to just-stable revenues, increase the percentage again until you find a budget that turns things around.
ABC Auto Parts generated $600,000 in gross revenue in 2015, which is $20,000 less than 2014. They had budgeted 13% for marketing in 2016, which is $78,000 ($6,500 per month). They decide to bump up their budget to 16%, which is $96,000 ($8,000 per month) and check in six months later to see what kind of results that has on their revenue.
Tip: When a business owner needs to cut expenses, often the first thing they do is cut the marketing budget. This is ALWAYS the wrong thing to do. You may need to forgo some of the luxuries you enjoyed in more prosperous times, but it’s what you need to do to get your business growing again. Embrace it!
Need help figuring out what your marketing budget should be? You can download a FREE marketing budget calculator here or call our experts at 855-549-1313 for a FREE consultation!
Sources: The CMO Survey, Vital Design
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