Businesses’ marketing needs and costs vary significantly and there are no simple rules for determining how much you should spend on marketing your business.
Businesses’ marketing needs and costs vary significantly and there are no simple rules for determining how much you should spend on marketing your business.
But there are some common methods of working out an annual marketing budget.
They are listed in my order of preference for local small-to-medium enterprises in Perth.
Client profit value model
If you can figure out how much profit an average client is worth to your business in a year, this will give you a good idea of the value of each client.
If you have a target number of new customers as a goal, you can calculate how much you can afford to spend to acquire them.
Take the amount of profit you would expect to average from each new customer in a year, multiply that by the number of customers desired and then work out a percentage of that to add to your marketing budget.
For example, if each customer was worth $1,000 in profit to you a year and you had a goal of gaining 100 new clients in the year, then, if that was achieved, you would gain $100,000 in profit.
On this basis, you could allocate about 40 per cent of this, or $40,000, to a marketing budget for the year.
This is a more accurate way to budget how much you have to spend to reach your goals but you will also need to work out the cost of keeping the clients you already have.
Bear in mind it costs between six and seven times as much to get a new customer as to keep one.
Budget as a percentage of revenues
A common way businesses work out marketing budgets is by setting an amount based on a certain percentage of their total revenues or gross sales – normally somewhere between 2 and 10 per cent depending on your industry.
For example, retail and business-to-consumer companies may need to spend more than 10 per cent, at least in the initial years of operation.
As a general guide, you should look to spend between 20 to 30 per cent of expected revenue in your first year when you’re trying to get yourself established.
But if you have an established business, this figure might be more like 5 per cent.
The benefits of this method are that it’s easy to calculate but involves a bit of guesswork, especially if you are starting out or if the year ahead looks turbulent in your industry.
Benchmark your budget against your industry average
Regular surveys, which look at the average marketing dollars as a percentage of revenue in certain industry sectors, could help you to set a benchmark.
A survey by a US-based firm, Schoenfeld & Associates Consultants, found that the TV, radio, electronics sector spent 5.3 per cent on marketing, the computer sector 5.1 per cent and the investment advice industry 8.6 per cent.
Under this method you are basing your decision on data taken from hundreds of marketers but keep in mind these are averages and should be used as a guide.
Your business and local market conditions will affect whether you need to budget to the industry average, or more or less.
Competitor analysis
Working out what your key competitors are spending will enable you to budget to equal or better their outlays.
Drawing up a plan with the help a local media or advertising agency to outspend your competitor, would give you a good idea of how much they were spending.
However, the figures may be less reliable if your competitor does a lot of below-the-line advertising and marketing (niche email marketing, direct mail, personal networking).
Cautionary tips
• No marketing budget is perfect. Whichever method you choose, remember to
build a contingency fund of between 10 and 15 per cent because you can’t predict what challenges and/or opportunities your business may face in the coming year.
• Don’t spend your entire budget on one marketing method.
• Spend across various media. The most cost-effective activities include networking, internet marketing and word-of-mouth referrals.
• Set reasonable expectations – be prepared to wait a while before you see any reasonable return on your investment.
David Price is a director of Price Advertising, a marketing and advertising agency in Subiaco.
9382 8880 or 0417 184 586. www.priceadvertising.com.au
