Setting A Marketing Budget: Back to Marketing Basics

One of the first questions I often ask prospective clients is:

What is your budget for marketing, specifically for digital marketing

Maybe you’re not surprised to find most prospects don’t have a budget in mind. More disturbing is the fact many probably haven’t given serious thought to setting a marketing budget.

Not having a marketing budget is a serious problem. Marketing is really the cornerstone of business success — after all marketing is the ONLY task that actually brings real money into the business. Sure, finance may borrow money or you may generate large sums through investor capital, but that money comes at a high price. You eventually have to pay that money back or share YOUR business with investors, leaving less compensation for your efforts.

Without the RIGHT marketing budget, you won’t reach your goals or you’ll spend too much money doing so.

So, let’s take a look at some tools designed to help with setting a marketing budget.

Setting a marketing budget

All you can afford

The all you can afford method sets a specific marketing budget based on the most an organization can afford to pay. For instance, as a start-up, cold hard cash might be in very limited supply. Setting a marketing budget means allocating some percentage of the cash (or future cash flow) to your marketing budget.

The downfall of the all you can afford method of setting a marketing budget is what you can afford may NOT be enough. If you’re  trying to break into a market like the water market, you’ll need a serious marketing budget because enterprise firms like Coke (Dasani), Fuji, Perrier, and others spend millions of dollars every year marketing their brands.

Options for stretching your budgeted dollars include leveraging  — such as hiring independent contractors to manage your marketing rather than full-time employees or outsourcing to an agency versus having an internal department handle marketing. Leveraging gives you access to the right talent for a lot less than hiring them and is a lot safer than hiring less skilled employees and hope they can handle your marketing needs.

If you marketing budget isn’t high enough to achieve your goals, you might be simply wasting money. A better strategy is to use a different method and come up with the necessary funds to support your marketing budget through re-allocation or finding outside sources of income.

Percentage of sales

This is a common method for setting a marketing budget because it’s very easy to use. Simply allocate a certain percentage — say 10% or 20% of each sale toward marketing.

The advantage of the percentage of sales method is many industries publish figures reflecting the average marketing spend as a percentage of sales so you can easily estimate what percentage of sales might be sufficient for your marketing budget. Of course, using the percentage of sales method is problematic when you don’t achieve the level of sales you expected — in which case you’ve now budgeted more for marketing than the firm can easily cover.

Match the competition

Another popular method for setting a marketing budget is matching what your competition spends on marketing. This method is easy, especially in industries where such figures are readily available.

Matching the competition suffers many of the same problems as the other 2 methods, but at least it’s easy.

 Objective/ task method

The objective/ task method involves setting a marketing budget based on the objective set for the campaign. For instance, if you plan to generate 10,000 sales, you’d set your budget based on how much it takes to make each sale.  While difficult to operationalize with traditional media, the metrics available in digital media make the objective/ task method doable and potentially rewarding.

I might use the objective/ task method by starting with the end of my marketing funnel — conversion. Now, I look back at my analytics to say how many visitors does it take to reach conversion. Then, I look at how much I have to spend to get that many visitors to my site.

Here’s an example:

I need 10,000 sales.

Historically, 80% of visitors who put product in their shopping cart, convert. Hence, I need 12,500 folks to put items into a shopping cart.

If 20% of visitors put product in their shopping cart, I need 62,500 visitors to my site.

If my adwords PPC  has a conversion rate (CTR)of 2% (which sounds low, but it’s actually very good) 3,125,000 clicks.

If my CPC (cost per click) is $.62 then I need a budget of: $1,937,500 to reach my target (objective).

Now, that doesn’t magically make nearly 2 million dollars appear in your checking account, but it does tell you what you need to budget if you want to reach your objective.

Obviously, if you can’t come up with the $2 million or don’t want to spend that much, you’ll need to find a campaign that generates higher CTR for lower CPC (such as social media) or entice a higher percentage of visitors to close. For instance, Amazon significantly increased conversion when they went to the 1-click order option for returning visitors.

You might also consider ways to stimulate higher average sales (getting buyers to purchase multiple items) or getting buyers to return over time.

Setting the marketing budget is really the starting point for planning your marketing campaign.

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