Setting a marketing budget can be one of the most difficult marketing decisions companies have to make. Budgets vary widely by industry and the method for setting budgets differs from company to company. While there is no hard and fast way to set a marketing budget, this post will help you to calculate how much you should spend on marketing and how to allocate your marketing budget for maximum return.
|Objective and Task||The marketing budget is calculated based on the objectives that have been set, the marketing activity needed to achieve those objectives and the associated costs.|
|All You Can Afford||Starting with total revenues, you deduct operating expenses, and capital outlays and allocate some of the remaining funds to the promotional marketing budget.|
|Percentage of Sales||The budget is based on a certain percentage of current or forecast sales.|
|Competitive Parity||The basic principle is that companies anticipate what their competitors are spending on promotional marketing activity and match their budget to that figure.|
Marketing Budget Basics: Why Set A Budget & What’s Included?
Setting a marketing budget is one element in the overall marketing strategy and planning process. Many businesses struggle to set a budget or don’t set a marketing budget at all. The danger of not setting a budget is that you could be over or under spending on marketing which ultimately impacts overall business performance.
Businesses that set a budget tend to perform better because they have a clear idea of what’s working, what’s not and where their money is best spent. Without a budget, marketing decisions are made on the fly, generally leading to unsatisfactory results and loss of confidence in marketing activities.
The marketing budget for most companies is separate from that of the overall organisational budget. The marketing budget specifically includes the promotional costs that are required to accomplish business and marketing objectives. This might consist of costs for digital advertising, traditional advertising, technology and software, PR and website maintenance.
Auditing & Goal Setting For Strategic Budget Planning
Before setting a marketing budget, where possible, you should conduct an audit and review to determine the successes and failures of previous marketing activities. Doing this will highlight to you which activities you should repeat and which should be allocated less budget, or avoided altogether.
An important point to note when conducting a review is that some marketing activities like PPC advertising and email marketing can deliver instant results so are easier to review over a short time period. Activities like SEO and content marketing take longer to deliver results, sometimes between 9-12+ months. Because of this, they shouldn’t be abandoned immediately if you’re not getting a return.
Following a review of previous marketing activity and results, you should think about how the budget aligns with organisational and marketing goals and objectives. Setting quantifiable objectives gives you direction and hard figures to measure against. It will also help you to justify your budget when getting sign-off from other people in the business.
Your goals should follow the SMART objective framework, which stands for specific, measurable, achievable, relevant and time-bound.
For B2B businesses marketing objectives tend to be set around brand awareness and lead generation. Having quantifiable objectives means you can calculate the spending required to reach them and use that as the basis for allocating the marketing budget.
A simple example that shows how to set a marketing budget might use last year’s activity. Let’s say the cost of generating 50 leads from LinkedIn advertising was £1,000. This year your objective is to generate 100 leads from LinkedIn, so you double the budget to £2,000.
How To Set a Marketing Budget – 4 Budgeting Methods
Setting a marketing budget can feel like taking a step into the unknown, especially if you’re a new business or have spent money on marketing previously and saw little return. The process of setting a budget doesn’t need to be complicated. These are four commonly used methods for setting a promotional marketing budget.
Objective and Task
This is the most common approach used by businesses and is often considered to be the most logical. The marketing budget is calculated based on the objectives that have been set, the marketing activity needed to achieve those objectives and the associated costs.
Despite being the most common budgeting method, it can be the most difficult. This is because managers have to set sales and profit targets then work backwards to determine the budget required to achieve them.
The advantage, though, is that it gives visibility on the relationship between marketing spend and expected ROI. For example, if you want to achieve £1m of sales next year, you might anticipate the marketing budget required to make those sales to be £150,000. Last year’s figures can be a useful reference point when using this budgeting method.
All You Can Afford
Most companies will have budget limits, so this method is likely to influence all major budget decisions. The promotional marketing budget is, therefore, based on what the company thinks it can afford to spend.
Starting with total revenues, you deduct operating expenses, and capital outlays and allocate some of the remaining funds to the promotional marketing budget. One problem with this method is that it can lead to unpredictable budgets that ignore the effect of promotion on sales.
The ‘all you can afford’ method can be combined with the objective and task budget method to avoid this issue. Objectives and tasks that are considered to be ‘high priority’ can be allocated more of the budget.
Any trade-offs should be evaluated thoroughly to understand the potential consequences on sales and other objectives, such as building brand awareness and lead generation.
Percentage of Sales
The percentage of sales method often means using past expenditure as a basis for setting a marketing budget. The budget is based on a certain percentage of current or forecast sales. It’s popular with automotive and FMCG companies.
For a larger business, and those in specific industries, it can be a useful way to set a marketing budget. That’s partly because it’s likely to be used by competitors to set their marketing budgets so creates some degree of competitive stability.
However, one of the downsides is that it wrongly views sales as the cause of promotion. Repeating the same percentage budget from last year could mean that too much, or too little budget is allocated for marketing promotion which can prevent increased spending when sales are falling or reduced spending when sales are high.
There are several flaws associated with the competitive parity method, and so it’s not one that we recommend following. The basic principle is that companies anticipate what their competitors are spending on promotional marketing activity and match their budget to that figure.
One of the critical shortcomings is that there is no guarantee that competitors have a better idea of what a company should be spending on marketing in the first place.
Additionally, every company has different requirements when it comes to profit margins and market opportunities. Therefore, matching other companies’ spending is simply not a sustainable strategy for most businesses.
Matching Your Budget To Your Strategy and Growth Stage
Another common method that can be used to calculate an outline marketing budget for your business uses the percentage of sales method and adds other contributing factors like company size and how well established the business is.
The first step is to calculate gross revenue or estimated gross revenue. These are important because they form the basis for calculating what your marketing budget should be. Once you know this you can add in factors like company size.
Younger companies (1-5 years in business) typically have to work harder to establish themselves in the market so require a higher investment in their marketing. This is also true of companies that are launching new products into new markets where their brand and offer are not yet known.
Because newer companies need to work harder, they should allocate between 12% and 20% of gross revenue to marketing. The reason for this is that they need to establish themselves within the industry using brand awareness activities as well as generating leads and customers.
Established companies may not have to spend as much on marketing but should continue to carry out some form of marketing and advertising activity. The recommendation for established companies (5+ years old) is to allocate 6% to 12% of gross sales to marketing. They will already have some brand awareness, but should still work to retain customers while attracting new ones.
A Gartner report from 2018 found that marketing budgets peaked in 2016 and remained consistent at 11.2% of annual revenue. The 2019 report found that 61% of CMOs plan to increase marketing budgets in 2020.
Allocating Your Budget To Specific Marketing Activity
Now we’ve covered how to set a marketing budget, you must also decide how this will break down between the various marketing channels. These might include email marketing, search advertising, social media, SEO and content marketing.
One way to identify which specific tactics and channels you will spend your budget on is to review past marketing performance. It’s common sense to allocate more budget to areas that are working, but you can only know that with the right measurement in place, so you can identify which delivers the best ROI.
Reviewing your objectives will also help you to allocate a budget to the activities most likely to achieve them. For example, if your objective is to generate more leads, then your budget should be weighted towards the top of the funnel marketing activities like content marketing and social media.
As a guide, 900 marketers were asked how they spend their marketing budget. These are the results although it is important to remember that one size does not fit all.
Budgeting For Additional Expenditure
Although it’s important to set a marketing budget that is allocated to different channels you should leave room for running trials and experiments. This is important because there may be activities you want to try, but not spend too much money on. If they work you can allocate more budget to them in the coming year. If not you haven’t wasted a large proportion of your budget.
Another essential aspect to consider is whether you will outsource any of your marketing activities. It’s often difficult, for smaller businesses especially, to create and implement a full marketing strategy in-house. Having said that enterprise organisations outsource marketing, advertising and PR to agencies too.
Using an agency that specialises in a specific area like content marketing and SEO is a great way to ensure you’re covering all bases and that you will generate a positive ROI on your marketing activity. Experienced agencies will be able to help with setting a budget too.
As many as 70% of businesses outsource at least one content marketing activity, with content creation being the activity outsourced the most followed by content distribution.
Measuring Results and Optimizing Marketing Budget Spend
To ensure that you can effectively allocate and optimise your marketing budget you should have a system in place to measure the results of marketing activity. One of the reasons that businesses find it difficult to set a marketing budget is because they don’t know what’s worked due to not having the right measures in place.
Not all marketing activity will translate directly into sales and so it’s important to set different metrics for different channels and activities. For example, social media is a top of the funnel activity that will help to raise brand awareness. Metrics you could measure include reach, engagement on posts and click-throughs to your website.
On the other hand, appropriate metrics for a PPC campaign that advertises an eBook download would be the number of leads generated and the cost per lead. For content marketing, it would be organic website traffic generated, time on site and bounce rate.
Every marketing channel plays a different role in generating sales for your business. Although revenue is a top-line metric each channel should have its own metrics. These should be brought together into a digital marketing dashboard. A dashboard gives management a snapshot view of real-time results and provides insights into where optimisations can be made.
Getting Budget Sign-off – Marketing Is An Investment
Whether you require sign off from an owner, director, CMO or CEO this is often seen by marketers as one of the biggest challenges in the budgeting process. However, if you have followed the right steps for setting a marketing budget it’s much easier to make a strong case that will get your budget approved.
Most importantly, your marketing budget should be aligned with business objectives. If you have been involved in or had sight of, the objective setting process you should already be able to justify how the marketing activity and associated costs will help to achieve those objectives.
If you do not know what the business objectives are you should find out and subsequently set key marketing objectives so you can estimate the costs required to meet those objectives.
Similarly, you should ensure that your budget is fully costed, includes timelines for activity and targets and measures. It’s crucial that you can demonstrate how and when you will deliver ROI. You can’t do that if you haven’t specified which key marketing performance metrics to measure. Setting key metrics will also ensure that when you report on activity results are consistent and comparable.
Another useful tactic that you can use to justify budget spend is to highlight successes from last year’s budget and activity. A data-driven approach to budget setting is likely to go down well if you can clearly prove that previous activity had a direct impact on the top line. Not all marketing activity will lead to direct sales, so having a narrative that tells the whole story is highly important.
Budgeting In Uncertain Times
In response to the Coronavirus, many businesses have cut back their marketing budget. Marketing is often seen as a cost centre rather than as a function that delivers long term ROI. Despite this, investment in marketing right now is a sound strategy for many businesses.
A McKinsey & Co. report found that following a recession, successful companies invested 9% more in marketing than their competitors. Similarly, the Chartered Institute of Marketing found that if a company increases its marketing spend during an economic downturn, it is likely to recover three times faster when the economy recovers.
While some industries and sectors will fare better than others, and some businesses will have no choice but to reduce marketing budgets, leaders should think carefully before making any rash decisions.
Cutting ad spending may well be one short-term way to save money but the consequences can be long term, especially if competitors have continued spending and taken market share that will be tough to win back, even when normality returns.
Setting a marketing budget can often be a challenge but it doesn’t need to be. Companies that set a budget tend to perform better because they know what’s working, what’s not and where to allocate future budgets to improve performance and return on investment.
Being proactive and deciding on a budget figure is just the first step as you also need to allocate budget to specific marketing channels and tactics. Analysing the results of previous marketing activity and reviewing the objectives that have been set will help you to decide which tactics to spend the budget on.
Budgeting is a critical part of the overall marketing planning process and should, therefore, be a top priority. It should also be undertaken before any marketing activity takes place.
Download our marketing budget calculator to calculate what your overall marketing budget should be and how much you should allocate to different marketing channels.