How Much Should I Spend on Marketing?Posted by Richard Dannenberg on Feb 20, 2014 in Small Business Marketing | Comments Off on How Much Should I Spend on Marketing?
54-year old brain freeze. Not the ice cream kind, but the variety that causes the gears to lock. That’s what happened when one of my small business clients asked this question last week. From their perspective, the question was simple. The company is profitable with annual revenues slightly over $1 million. Like most small businesses, their income statement shows marketing expenditures around 4% of their revenues, but that number doesn’t include donations, sponsorships, the cost of managing their website, or the time that the owner and his employees devote to various marketing activities. Also like many small businesses, they don’t have a clear idea of the results of their current expenditures.
The first inclination was to respond with, “pick a number, any number,” but it occurred to me that this flippant comeback wouldn’t do much for my credibility. The question was serious and a more thoughtful response was required. I decided to do a bit of reading and then collect my ideas before assaying the question. What I found was unsurprising. A lot of what is written about small business marketing budgets is conjectural. Using “you have to spend money to make money” logic, the answers to this question are all over the map.
I did encounter one more thoughtful article from Caron Beesley of the Small Business Administration. Here’s an extract:
As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing. This budget should be split between 1) brand development costs (which includes all the channels you use to promote your brand such as your website, blogs, sales collateral, etc.), and 2) the costs of promoting your business (campaigns, advertising, events, etc.).
This percentage also assumes you have margins in the range of 10-12 percent (after you’ve covered your other expenses, including marketing).
It’s a more detailed guideline, but there’s something still missing. Let’s take 7% of last year’s revenue and go spend it. The faster we spend it, the better off we’ll be, right? Hmm . . . perhaps we should ask for more advice. How should we spend the money? Our marketing consultant is tongue-tied, so let’s ask another authority how they make this decision.
Valpak, a publisher of coupon mailers that were once highly valued by many small businesses, did just that. The fascinating graph above is part of an equally fascinating infographic. According to Valpak’s data, the top 3 sources consulted for next year’s budget involve internal analysis. This may or may not provide a good answer to the question for a small business. In my client’s case, the company is profitable and we have some money to spend on marketing, but an analysis of last year’s spend won’t tell us much because there really isn’t much data. We’re back where we started.
Ask the Accountant?
Valpak’s next source for the budget is industry outlooks and trends, followed by “ask the accountant.” It’s good to know about industry outlook and trends, but using them to determine marketing direction only assures that we’ll be doing exactly what our competitors are doing. Now that makes sense . . . about as much sense as asking the accountant for marketing advice. We need a better plan. The SBA agrees. Here’s another extract from their article:
Knowing how much you have to spend on marketing is critical; even more critical is how you spend it. This means having a plan.
Flipping the Focus: A Goals-Oriented Plan
The gray matter is thawing. Let’s dig into the question a little deeper with a counter-intuitive approach. Forget about the money for the time being. What if we look at outcomes first? What are the objectives that we want to accomplish for our $1 million plus business? If we can identify the goals, then we can take a look at strategies, tactics and costs required to accomplish them. We can spend our money wisely, and at the very least move the company towards the objectives in the coming year. Here’s an important point – we’ll create the budget around the plan instead of fitting the plan into the budget. Flipping the focus this way allows us a much better chance of getting the maximum mileage from the money we spend.
Working the budget this way does require some analysis, though. Now, we’re not looking at how much to spend and where to spend it. The questions we consider are value based:
- What tactics will most efficiently move the company toward the goal?
- What resources are in place?
- What resources are needed (including time, money, and people)?
- What are the priorities?
- How many of the priorities can we reasonably expect to accomplish given our resource constraints?
- How do we measure effectiveness?
It’s easy to see that this kind of planning goes much deeper than throwing numbers on a spreadsheet. It forces the consideration of efficiencies and of quality vs. quantity. It also lends itself to measurement, which will make planning for the following years less conjectural and more logical.
Return On Investment
When next year comes around, we’ll have some real data that can be used to re-prioritize. We’ll modify the goals, strategies and tactics with emphasis given to those efforts that worked best, using ROI as the standard of measure. I’ve written about the basic concept in a previous post entitled “I Want Money.” Without reinventing the wheel, the goal is to market efficiently, getting the most profit (not just revenue) from each marketing dollar spent. Spending money to build the brand may ultimately increase profits, but counting profit linked to specific efforts is a better measure.
The brain is thawed, now it’s time to help the client sweat the details. The goal of marketing for your business isn’t just to spend a percentage of the company revenue on nebulous “brand building” exercises. It’s to increase profits. Good marketing should pay for itself and add to the bottom line, but some deep thought and analysis is required to get this to happen. The budget is important, but the plan comes first.
Could Your Business Use Some Help with Planning?
That’s what we’re here for. DP Marketing Services works with small businesses to create and implement practical marketing plans. There’s no risk. The first conversation is absolutely free and usually generates at least a couple of good ideas. Interested? Let’s talk.