A budget can be an important tool in tracking marketing efforts to determine their effectiveness. It helps partners/shareholders to understand the crucial role of marketing in the business’s overall performance. It acts as a gauge to test the business’s level of commitment to marketing. It also allows the controller/administrator to manage spending on client relations and community involvement. Sounds like a useful tool, right? So how do you develop a marketing budget?
How Should Line Items be Selected?
The selection of marketing budget “line items” (different categories/activities of expenses) depend upon a variety of factors, including:
- Marketing goals and objectives
- Area(s) of practice
- Targeted market
- Marketing personnel capabilities
What Are Your Goals?
Obviously, a business needs to know what its marketing goals and objectives are before it can establish a budget. However, at Exemplar Digital Marketing we find that many clients aren’t sure what their goals should be. They look to the experience of our business to provide direction in what is realistic and achievable, especially given a highly competitive marketplace. You might ask yourself questions such as:
- Do we want to improve client relations and retention?
- What about business opportunities with the new clients?
- Does the business want to establish an image in new markets?
- Are new practice areas being added that require advertising and publicity?
- Should revenue gains be accomplished through increased training, coaching and subsequent referral generation efforts?
The answers to all of these questions, and more, should flow from a business’s strategic marketing planning process, accomplished through a careful analysis and sophisticated selection of marketing tools. Contact a marketing professional to help in developing your Strategic Marketing Plan.
Area(s) of Practice
Different markets, goals and business cultures require different marketing methods. For example, some businesses will focus primarily on digital marketing while others may gain substantial business through referral source marketing. Your budget should reflect the different marketing techniques that are identified in your Strategic Marketing Plan.
Remember Brown’s Marketing Premise: “Marketing Should be Based Upon the Market.” Since marketing is based upon identifying and satisfying the needs and wants of your market, your budget will reflect marketing activities that are best suited for this purpose. This is not a static process, since market needs and buying patterns change. In your Strategic Marketing Plan, it is important to consider how your business’s practice areas should be marketed in different ways for each targeted market, whether business segments or individual demographics.
Your marketing personnel must have the expertise to manage the selected items. It might be a great idea, for example, to develop a targeted campaign for an emerging market but if your marketing staff does not have the skill sets to manage this activity, it could be fruitless.
It should be noted that if client and community relations activities are included in the budget, a larger budget is necessary. Marketing directors may find themselves fighting for sufficient funds when they are committed to fund client entertainment without any control.
How Much Should It Be?
It is very difficult to generalize regarding marketing budget expenditures because every business’s situation is unique in many respects. When I meet with clients to establish a marketing budget, there are always variables that impact the outcome, such as financial goals, level of competitor marketing efforts, financial and personnel limitations, etc.
Should your business use prior year marketing expenditures as a benchmark? Should it select a dollar amount that is acceptable to partners/shareholders? Should it analyze competitor expenditures, as a percent of revenues, and then determine the right amount? Or should it develop a budget based upon the goals and selected tools, back it in as a percent of revenues, and then see if this amount can be afforded? Based on the situation, there are valid reasons for some or all of these approaches. For tracking purposes, which help substantiate the effectiveness of marketing programs, it is often most useful to track expenditures as a percent of revenues.
On a Percentage Basis
Financial analysts use industry standard percentages and ratios to determine whether a business is spending at a level with its competitors on any given income statement line item. If the amount is above or below the norm, it gives them a reason to explore why management is taking a different approach. This process is a proven business and financial management approach that is appropriate for virtually any industry across the country.
In the same manner, it is helpful for your business to have a general understanding of what competitors are spending on their marketing campaigns. This percentage acts as a guide to know whether a business is spending far below or above the norm. However, it should not dictate the amount to be spent.
Given the wide variation in which businesses embrace marketing, a useful approach is to ask “How committed is the business to marketing? Can you afford NOT to market?” and base expenditures as a response to these questions. Based on your business’s level of commitment, here are ranges to consider at the low end (percentage of revenues):
- Low level of commitment = up to 1%
- Average level of commitment = 1 to 3%
- High level of commitment = 3 to 10%
Of course, these percentages vary widely by industry (e.g., yours may be dramatically higher). Customer and community relations activities are not included in these figures. Remember, however, this is only a guideline and only considers a few of the factors previously pinpointed.
This is only one approach; you should select your business’s expenditures after considering all the factors previously noted. These amounts are not from scientific studies (I know of none that have been designed and implemented effectively) but instead are based upon my personal interactions with hundreds of businesses over the years, as well as through research on nationwide practices.
Standard Business Management
Businesses, and other professional services businesses, have been managing their marketing budgets in similar manners for decades. For the best results, a firm would be wise to utilize the services of a qualified marketing professional in implementing the recommendations in this article.