Recently I was asked by an entrepreneur what the average marketing budget was for his industry. When I asked why, he explained that he wanted to know if he was spending too much or too little on his marketing. Well I didn’t know what the average marketing budget for his industry is and I didn’t think he should concern himself with it either.
In my opinion a marketing budget should based on the industry average is a dangerous thing. Most industries will include a range of business from small, one man bands to large national or multinational companies. The larger businesses will invest a lot of their marketing in brand development, which small businesses usually can not afford to do, as a result the industry average will be skewed.
I also don’t believe that setting a marketing budget in the same way as a big business does is a good idea for an SME. The typical marketing budget for a large company includes a considerable amount for promotion of the brand, something which few SMEs can afford. Furthermore the typical marketing budget for a large company is determined in advance (sometimes years in advance) usually against a set of strategic goals, this makes the company slow to respond to changes in the marketplace – if a small business imitates that it loses it’s main advantage: the ability to rapidly respond to changes in the marketplace.
How to set a marketing budget
When it comes to setting a marketing budget, some marketers will tell you that a good rule of thump is 4-7% of turnover. As I’ve explained I don’t believe that it’s a good idea to set your marketing budget based on a percentage. Sure Coca Cola’s marketing budget might be based on turnover, but then most of their marketing is aimed at reinforcing their brand. In contrast most SMEs need their marketing to drive sales.
On that basis – marketing driving sales – I believe that as the owner/marketing manager of an SME you should determine your marketing budget on the basis of a per unit, per sale or per customer cost (depending on the nature of the business). This works particularly well for online marketing budgets where the cost per unique visitor (click), and per sale can be tracked and adjusted in real time. To see what I mean consider the example below.
A marketing budget example
Lets consider an SME who’s gross profit per item is 40%, the average sale is worth £30 and the average customer buys once per month and stays with them for 10 months.
In this case the average customer provides a gross profit of £30 x 10 x 40% or 40% of £300, which is £120. However the out of the £120 we need to deduct a contribution towards the companies overheads, that share will depend on the level of overheads the company has and the expected number of customers/sales.
If the business has overheads of £75,000 and expects to deal with 1,000 customers then each customer will contribute £75,000 / 1,000, or £75 towards the cost of overheads. On that basis the maximum budget is reduced by £75, from £120 to £55. At £55 however the net profit will be £0, which given the whole point of a business is to create wealth is unacceptable. At this point I would consider the return on investment expected by the companies investors and adjust the marketing budget accordingly.
If the business was founded with £100,000 of investment, has no long term borrowing and the investors require an return on investment of 15% then the business should be aiming to generate a profit of at least £15,000 or £15 per customer. I would therefore suggest that they budget a maximum of £55 – £15, or £40 per customer for marketing (as it’s an example the calculation ignores tax). The marketing manager can then determine if any marketing expenditure is justified by calculating the cost divided by the expected (or better yet proven) number of new customers generated. If the cost per customer is below £40 then the expenditure is within budget.
Marketing on a low budget
When it comes to low budget marketing I think SMEs need to focus on testing the results they achieve and using those results to determine the minimum budget required to achieve their sales targets using the above calculations.
This blog is about business opportunities and ideas that I spot, think of or hear about and think are useful and interesting. It is intended to provide ideas and inspriation for you to help you find the right business idea for you to then grow it into a successful business.
I think a lot of people get hung up on what there marketing budget should be. This is because they are not tracking and monitoring their marketing properly. Once you know that your marketing produces a positive ROI then you would surely do as much as you could.
For example lets take a simple direct mail campaign example. Say you sell a product which gives you £100 profit. You send out 1000 pieces and it cost you £1000 if this returns at east ten sales i.e. £100 x10 and breaks even then surely you would want to repeat it over and over until it produces a negative ROI.
I think a better question would be how can I create marketing campaign that gives me a positive ROI. The way to do this is to test small and measure eveything then make incremental changes unitl you get a great ROI. Then you just need to roll out the campaign on a larger scale.
Matt,
I’m glad you agree. Readers wanting to learn more about how to test their marketing might like to read Tested Advertising Methods by John Caples.
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