Five Ways to Calculate a Marketing Budget

//Five Ways to Calculate a Marketing Budget

How much should a company spend on marketing? Well, there are several answers – all of which can be summed up in two words: “It depends.” Here are five proven options that you should consider.

1. Percentage of gross revenue
This is the traditional way to calculate a marketing budget. Both SCORE (Counselors to America’s Small Business) and the U.S. Small Business Administration (SBA) cite figures ranging between 2% and 10% of sales. McKinsey & Company is often quoted at 5%. Most franchisors collect between 2% and 3% for advertising but also suggest that you spend 5% to 10% of anticipated yearly gross revenues during the first year of operation.
On average, businesses should spend 10% of their gross sales for the year to market each new product or service, or 2% of the new service’s sales and revenue target. Consumer products and services companies should always spend a higher percentage than business-to-business companies. However, here’s a word of caution: most business owners tend to reduce their marketing spend as revenues decrease, either due to seasonality or economic downturns. But the successful rule of thumb holds the opposite: when in a recession, increase your marketing efforts.

2. Absolutely everything
If you aren’t risk averse, this is your strategy. It’s an aggressive approach because you are essentially putting all of your eggs in one basket. Even a bad product marketed heavily will gain some traction and, frankly, overspending is one way you can buy market share. But this method is generally more popular when you are spending other people’s money. Remember the Super Bowl commercials for those early dot com companies? It wasn’t their money to spend, so they over-advertised a bad product.

3. Absolutely nothing
Thanks to the Internet, you actually can get something for nothing. Good old-fashioned word-of-mouth advertising (WOMA) is now called social media. Build your social media networks, or increase your customer database. All these are simple methods that can help boost your sales. Because social media advertising is free, however, you will more than likely end up spending a lot of time managing all these methods. So in essence it really isn’t “free.” Nonetheless, it’s still advisable to set a budget for your social media marketing efforts – you can roll it into your traditional marketing budget.

4. A bit more than the competition
With today’s access to research tools, it’s easy to analyze your competitors’ spending and adjust your own budget accordingly. But as “Blue Ocean” readers will recall, comparing yourself to your competition, rather than setting your own goals, generally results in a ‘bloodbath’ of one-upmanship. That’s a difficult business path to maintain. Knowing what your competition does, and even better, knowing what works for them, is a good guide – but it’s definitely not a plan.

5. What you can actually afford
If you have set goals and know your customer acquisition costs, this is a logical approach. This is actually the method I generally practice. After computing my Lifetime Value of Customer (LTV), I know how much I can afford to spend. The idea is actually quite simple. You identify how much profit (on average) you make during the lifetime of that customer relationship and determine how much you are willing to invest per customer acquisition. Most business owners only consider the value of the first transaction when calculating how much to spend on attracting a new client. But with LTV, you must calculate repeat purchases too.

After you figure out your LTV, subtract the overhead associated with maintenance of the client – i.e., your Cost of Goods (COGs). Finally, subtract your Minimum Desired Profit (MDP) and voilà! Congratulations, you now have a marketing budget!

How much does SEO cost?

I’m often asked about website and search engine optimization (SEO) costs. These questions eventually uncover many levels of misunderstanding of different media.

A website can be anywhere from 5 to 5,000 pages. It could be static or dynamic and with or without a Content Management System (CMS). Additionally, it can be with or without blogging abilities, or with or without e-commerce. In fact, there are about 500 more options that can influence the final price of SEO. As a comparison, what actual price would you put on content generation for 500 pages of salesmanship that help you sell more?
SEO is the same way. On-page SEO can be done one time, but you should also be adjusting it based on your targets and results. On-page SEO has hundreds of different components, so the bigger your budget, the more of these can be done. Some of these components are keyword research, density, H-tags, URL structure, robots, outbound links, PageRank, HTML validation, site age, and so on.

And what about customers? Well, you can get a huge website and get it optimized for search engines, but if your customers can’t use it, you’ll have wasted all your efforts. Optimizing the website for user experience is about running A/B tests, analyzing analytics, and changing content and colours and position until you get the least amount of bounces – along with more people taking the action you would like them to take on your website. I personally would not buy a website without optimizing it for search engines and user experience.

So then, how much is a website? Don’t plan to spend less than a few thousand dollars to start with for a small website. Then roll the rest of the SEO and on-page optimization into your marketing budget.

2018-01-11T13:31:17+00:00

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