How can we decide how much to invest in business promotion? Should it be a percentage of turnover? A fixed monthly amount? But if we have no sales, what do we do?
Whether you’re an entrepreneur or a marketer, you’ve surely encountered this dilemma. Unfortunately, as you’ll see, there’s no easy answer. There are some general methods we can apply, but there are many factors that influence this decision for each individual business.
We’ll see what they are the main ways to choose a marketing budget and what factors to consider when deciding how much to invest in promoting your business.
Ready? Here we go! There are basically three main ways we can choose a marketing budget:
- Percentage of sales
- A fixed amount
Let’s take them one at a time and see what the pros and cons of each are.
1. Percentage of turnover devoted to business promotion
For some companies, the most convenient method for determining the marketing budget is a percentage of turnover. For growing companies a budget of 12-20% is recommended, and for established companies somewhere between 6-12%.
In general, a minimum of 5% of turnover is needed just to maintain current sales and 10% is needed to increase sales and market share.
Except that this is where the main disadvantage of this method comes in: it is valid for established industries, where we don’t have major changes.
In other words, if we’re in a new, winner-take-all industry, we should invest in marketing as much as we can, even borrow for it. Because the moment we’re market leaders, we’ll be able to extract healthy profit margins and recoup our investment handsomely.
For growing companies, the budget should be calculated at the level of ambitionsand therefore expected sales. This involves more complicated financial calculations, because getting them wrong could seriously affect the company’s cash flow.
As a mini-conclusion, this method is recommended for companies or industries where results are generally as expected.
2. A fixed amount allocated as a marketing budget
Probably the easiest way to decide how much to invest in promoting your business is to allocate a fixed amount for marketing.
We look at our current expenses and see how much we can afford to allocate to attracting new customers. This method is recommended primarily for new companies.
Being in the beginning, it’s hard to know what sales will look like in three months, let alone 1 year. That’s why you should allocate an amount that won’t affect your cash flow. In other words, don’t invest more in marketing than you can afford, because you’ll go bankrupt.
It is quite possible that for new companies, this amount, along with other expenses, will result in expenses > revenues. That is why this amount should be seen as an investment and should be provided for in the initial budget.
Another context in which we have encountered this way of allocating the marketing budget is in companies where marketing is not very important. For example, firms that rely primarily on a sales team or that are more production/outsourcing, with customers coming through other channels, with marketing playing a supporting or recruiting role.
If you’re a solo entrepreneur or just starting out, allocate the amount that even if it doesn’t bring back a penny, allows you to keep going.
This way of calculating the marketing budget is very good for test periods to give us the data on which the following method is based:
3. Choosing a promotion budget based on return on investment
Those who have ever toyed with the idea of getting an investment know that the best way to get it is to prove that you have a money-making machine.
What does that mean? It means being able to show that any amount invested in the business brings a return.
1RON => deal => 1.1RON
Ideally, that 0.1RON should be profit, but it doesn’t have to be. A fast-growing business doesn’t necessarily have to be profitable, because at any time you can take your foot off the gas pedal and the extra revenue be turned into profit, not reinvested. The same is true when we talk about how much to invest in business promotion. Especially for businesses with strong online activity, it’s possible to measure the results of marketing efforts in great detail and see what and how much impact it has.
With well-implemented measurement systems we can see if 1RON invested in marketing = 1.1RON in the end. This is where we really care about that 0.1RON being profit.
If this is the case, then the answer to the question “what marketing budget should I have” is HOW BIG! Seriously, don’t even think about it. Ok, those were the main ways we can determine how much to invest in business promotion.
But how much should the actual marketing budget be? This is where a few criteria come into play, especially if you’re a small business or just starting out.
a) How ambitious are we?
It’s one thing to be a small family business, it’s another to aim to increase your turnover by 100,000EURO in 12 months. If we are to apply method #1 above, the marketing budget should be calculated as a percentage of the turnover we are aiming for. As I said above, according to ambition 🙂
b) What is the momentum of our company?
Again, if we are just starting out, or if we see that we have a great potential for growth in the industry, we will most likely have to invest an amount that in the short term is not profitable or is beyond what we can afford.
c) What resources does the marketing plan or business strategy involve?
Closely related to the above point, a very good way to decide exactly how much we need to spend on marketing is to set a goal, then a marketing strategy.
This or the marketing plan will tell us exactly what resources are needed to achieve our goals.
As you can see, there is no clear answer to the question of what marketing budget I should have. Often, this question is along the lines of “which came first, the chicken or the egg?”. Well, I have to tell you that in order to have a strong brand and a healthy turnover, you will have to break many, many eggs 🙂
Oh and if you’re an entrepreneur, I want to tell you that it’s your responsibility, not a marketing agency’s, to set your marketing budget.
They can help you anticipate your results, or divide it up in the most efficient way possible, but it’s not their responsibility to tell you how much you can afford to invest in promoting your business. Don’t be afraid that you may be paying more than you should.
A good agency knows the minimum budgets they work with. You should pay more attention to the results you get, not how much you invest. Good luck to you!