Vague guidelines for setting marketing budgets

Back in the dark ages (pre-internet) when my husband and I got engaged, there was a ‘rule of thumb’ bandied about regarding the size of the engagement ring that your lovely fiancé ‘should’ be shelling out for.

The guideline, undoubtedly invented by De Beers in order up the average purchase price of engagement rings, was (and still may be for all know) that the ring value should be ‘equal to two months of the buyer’s salary’.

I find this a ridiculous notion. Surely we should all be spending as little or as much on gift items as we see fit?! But, it does give the buyer, if they are genuinely clueless on how much to spend, some sort of idea. Hopefully most ringbuyers hear the rule and then ignore it.

This arbitrary rule is echoed in the world of marketing by a similarly daft guide about marketing budgets.

I have no idea where this rule came from, but the suggested guideline quoted when it comes to marketing budgets is that they should be ‘equal to 5 – 10% of the business’s revenue’.

Of course, this is also garbage.

In reality, a marketing budget should be set according to the circumstances of the individual business. Sometimes it should be way higher than 5-10% and sometimes lower. For example, in the first year of business, there is a heck of a lot of marketing spend to be done, setting up a new brand, website, and investing in marketing collateral do not come cheap. Meanwhile, at this stage of a business’s lifecycle it is probably generating minimal revenue – 5-10% of it would work out as pennies.

Another flaw with this 5 – 10% business is that it doesn’t take into account the range of marketing activities required, which is very variable. The amount of effort needed will fluctuate dramatically, depending on the marketing strategy of the firm:

  • Selling in multiple vertical or geographical markets is way costlier than selling in one location, to one audience.
  • Selling a range of products is more expensive than having just one offering. You have to promote them all and you might be communicating about each one to a different group of people, hence multiple advertising budgets.
  • Selling a more mature product is easier on marketing spend than a brand-new product. If your product is a relatively new idea, such as electric cars or trips to the moon, you’ll need to allow room in the budget for educating the market. Your buyers may not yet be aware that your category of product is an option, so your first job is to convince them that it’s a good idea. That is more expensive than marketing an item where the audience already understands the product and their need for it, and is thinking: ‘I need this thing, which one’s the best one?’

 

How I go about setting a marketing budget

In bigger businesses the process would be that the marketing team would create a marketing plan and then request a budget to fulfil its plan. Usually, this is followed by a fair amount of teeth sucking from the board and a back and forth discussion about scaling back (finance team), why this is not a possibility as the marketing plan will be rendered useless (marketing team), compromise reductions (finance team), and edited marketing plans (marketing team), until all parties are happy. This is why marketing planning starts in October. The typical end result is that the budget is equal to ‘what we spent last year plus a bit’.

For smaller, or new businesses this process is not an option. So, when I’m designing a marketing plan for a client I ask for a rough marketing budget to work with, so that I know which types of marketing activities are possible within the financial constraints of the business.

Then we set a three-tier draft budget to go alongside the marketing plan. This spreadsheet splits all the marketing activities into three categories:

  • ‘bare bones’ (or ‘must have’ items)
  • ‘good to have’
  • ‘wishlist’

You could do this too.

With each of the lists costed up you can either choose which activities you want to focus on – like a menu approach – and stick with those. Or, you can start with the bare bones budget, then gradually add in extra things in from the ‘good to have’ or ‘wishlist’ categories as your revenue increases and more investment cash becomes available. Adding these additional activities will bring in more revenue and it becomes a virtuous circle of investment and growth.

Try this technique when you are setting your marketing budget for the second half of the year, or for 2019 (if you are super organised). You might also enjoy last week’s blog post about reducing the cost of marketing.

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