Setting Your Marketing Budget: Sensitivity Analysis

If you want to attract new customers, remind existing customers to come back, and build top-of-mind recognition for your brand to succeed, you need to set a budget that helps you reach your goals. But, knowing how big your marketing budget should be is always a challenge. Today, we’ll help you set your marketing budget by using several common tactics.

Let’s start by exploring information from the experts about marketing budgets based on your industry. In a little while, we’ll also discuss norms for marketing budgets based on anticipated sales by industry.

marketing budget by industry
Image courtesy of Creative ONL

It seems like every day you read about a new marketing strategy and how it enabled a firm to explode its performance. Yet, you don’t have the marketing budget necessary to try every new tactic that comes down the pike. Moreover, you can’t just try a new tactic without investing the time and other resources necessary to achieve meaningful results since most marketing strategies prove their value over time rather than driving an immediate change in revenue. That’s when developing a marketing budget plan fits in.  Crafting a well-thought-out budget allows you to reach your goals with the smallest outlay of cash.

This reality drives our question for today: How do you allocate your marketing budget effectively so you optimize performance without breaking the bank?

Read on to find out!

Crafting a marketing budget

Set goals

Setting actionable goals is an essential step in ensuring that your marketing campaigns succeed. Goals direct the strategies you employ, as well as laying out metrics to assess performance, which allows you to tweak your campaigns to optimize goals.

In addition, the goals you set also help build your marketing budget plan as each goal maps to specific strategies with identifiable costs.

Among the goals you may set as a marketer include retaining a higher percentage of customers or increasing the average order value from customers, increasing conversion rate, or intermediate goals that generate a higher revenue over time, such as enhancing social media engagement, improving lead generation, and attaining an increase in your brand awareness.

Conduct research

After you set the right goals, your next step is to build an understanding of the digital marketing landscape. Focus on trends in your industry with a particular focus on tested campaigns and results. This research identifies marketing campaigns associated with high ROIs (returns on investment) as well as helps with budget setting based on the costs others incurred in crafting a particular campaign. For instance, in the image at the top of this post, we show the results of a survey by Deloitte asking CMOs the percentage of their budget dedicated to marketing across various common industries. Research like this is invaluable in helping you set a realistic marketing budget and form a marketing budget plan.

Some of the significant areas where you should direct your funds include analyzing where and how your competitors invest, keyword research, and understanding your audience. Besides, it would help if you learned about various costs such as how much it costs to hire a social influencer, create and produce content, and do email marketing. To optimize your marketing budget, consider outsourcing, especially as you learn the tactics involved and ramp up your marketing efforts. Here’s a comparison of hiring versus outsourcing your digital marketing to consider as you build your marketing budget plan. The main benefits of outsourcing your tactics to an agency, as you can see, are cost-sharing for talented marketing folks and expensive software.

in-house versus agency costs
Image courtesy of Alfredo Media

Build your preliminary marketing strategy

Create a list of all the channels and tactics you plan to use for your next marketing campaigns. These channels could include:

  • content marketing
  • display, search, and social advertising
  • social media marketing
  • email marketing
  • website optimization
  • traditional advertising, such as radio or TV
  • trade shows
  • marketing materials, such as brochures

Next, estimate the necessary budget for each of these campaigns based on either your prior expenses or research.

Analyze previous campaigns

Have you had marketing campaigns in the past? If yes, such campaigns help optimize your future marketing efforts. They act as sources of information you can use to guide decision-making, optimize the results based on insights, and develop your marketing budget plan.

Analyzing your previous campaigns gives you insights into areas you can change or improve as far as your budget allocation is concerned. Each campaign’s outcomes should help determine if you need to:

  • put more effort into a given tactic based on a higher ROI, for instance, more money into list building if email marketing provides the highest ROI
  • optimize performance by implementing changes suggested by your analysis, such as choosing the best CTA (call to action) or headline based on prior performance
  • improve delivery based on learning which times and days work best for your specific target market

If you don’t have any data from prior advertising, here’s some data from other businesses to help you get started with drafting a marketing budget.

Build a detailed marketing budget plan

A budget is an essential element of success in any digital marketing campaign. Building a marketing budget plan often involves a build-up approach where you prioritize strategies and tactics with the highest ROI, although you must also consider intermediate goal performance, as elements that don’t directly contribute to ROI, such as engagement on social media, do contribute indirectly over time. After you have the information necessary to build your marketing budget plan you must make tough decisions about dropping certain campaigns as you don’t have a sufficient budget to implement everything you’d like.

An alternative, especially in the early days of your business, is to borrow the money necessary to implement your marketing strategies or find additional investment funds to ensure success by building a robust marketing plan.

Small businesses, especially new ones, often find financing a challenging but necessary option and must rely on personal sources of funding, such as an HDB loan, to ensure they have the money necessary to implement your marketing budget plan.

Allocate the funds

Thus far, we’ve discussed ways to identify marketing areas that need more funding, quantifying digital marketing strategies that worked in previous campaigns, trends in the industry regarding marketing budgets, and you have actionable goals. Your next step is to allocate funds to the identified marketing plans and channels depending on the urgency and need.

Allocate the marketing budget across the various tactics you plan to use based on your prior analysis, and build detailed action plans, including expenses for each element of the plan.

Monitor and measure the outcome of your campaigns

Allocating the budget isn’t the end of your work. How do you tell that a particular campaign was successful or needs improvement?

Besides the routine evaluations and check-ins, you need to track your marketing campaigns for success. Are they working as expected? Do you think you will achieve the set marketing goals with the campaigns?

By monitoring and measuring each campaign outcome, you get insights into areas that worked and tactics that need improvement. Being active in tracking and evaluating any campaigns launched is necessary as it helps you manage your marketing, but it is also a great way to learn what areas need some improvement. It also allows you to establish strategies that have the highest ROI. This data then feeds into next year’s marketing budget plan.

Budgeting method

scrimp on marketing
Image courtesy of Learn Marketing

Above are the 4 common methods used to determine your marketing budget. Using the image shared in the prior paragraph showing the percentage spent on marketing as a percentage of revenue is an example of the percentage of sales approach. This is probably the most common means used by small businesses to determine their marketing budget.

Competitive parity is another common method used but it relies on getting information about how much your competition is spending on marketing. If you compete with a bunch of other small and mid-sized businesses, this information is hard to come by.

The affordable approach is something often used by new businesses because it often takes a big splash to enter into a new market or start a new business. Spending the same as other companies just won’t work as you’re competing with an empty chest while other brands have built a brand image over the time they’ve been in business. Unfortunately, these businesses often don’t feel like they can afford anything on marketing and that’s a huge mistake. Marketing is the key to success and without marketing, you’re almost doomed to failure.

The final approach, the objective-task method, is the most complex of the methods, but it’s more likely to generate positive results as it’s based on detailed information to help you reach your goals. A specific form of this method, sensitivity analysis, is great because it deals with the lack of concrete data about what will happen in the future by playing what-if games with your data.

Sensitivity analysis

Sensitivity analysis is a tool using the contribution margin to play “what-if” games to optimize market performance. Sure, sensitivity analysis is used for lots of business tasks, but I’m focusing on using sensitivity analysis to predict the marketing tactics likely to generate the highest market performance.

First, let’s take a look at contribution and break-even analysis.

Break-even reflects the point at which your business neither makes a profit nor loses money. Commonly, you look at break-even on a product-by-product basis (or service-by-service).

Break-even has the general formula of:

FC / (SP – VC)

Where:

FC = Fixed Costs like salaries, insurance, rent that don’t change based on how much product you make

SP = the price charged for the product (or the average selling price if the product sells for various prices over the time period of interest.

VC = Variable Costs that go into the product such as material, shipping, production labor that change directly with the number of products you make

It’s important to know that the denominator (SP-VC) is also called the contribution and is critical for sensitivity analysis.

Example:

So, let’s say you collect the following monthly expenses for a business that makes shoes. We’re interested in finding the break-even for a particular women’s flat shoe that sells for $125:

leather:  $5.25 / shoe

ornaments: $2.63 / shoe

miscellaneous materials (thread, glue) $.63 / shoe

assembly labor: $9.24 / shoe

Fixed costs:

Licensing: $10,000 (per month)

Marketing budget: $2,000 (per month)

Supervisor salary: $3,685 (per month)

 

Now, let’s calculate break-even:

($10,000 + $2,000 + $3,685)/ ($125 – ($5.25 + $2.63 + $.63 + $9.24))

$15,683/ ($125 – $17.75)

$15, 683 / 107.25 = 146.2 or 147 shoes/ month is the break-even point.

Sensitivity analysis example

We can play all kinds of “what if” games now to test how changes affect our profitability using the contribution (denominator). For instance, we can see what happens if we decide to increase our marketing budget to $3000/ month. We can either calculate a new break-even number or use the contribution of $107.25 as a shortcut. Simply divide the extra marketing budget ($1000) by the contribution ($107.25) to get your new break-even.

The analysis shows we need to sell 10 (9.32) pairs of shoes to cover our additional marketing expenses. If we know, from past experience, that increasing our marketing budget by $1000 results in 12 more pairs of shoes sold, we’re ahead of the game to go ahead and increase our marketing budget. We’ll make 2 (the additional # of shoes sold over break-even) * $107.25 (our contribution) extra or $214.50 more by increasing our marketing budget.

Sensitivity analysis using Excel

Commonly, marketers use Microsoft Excel to conduct more sophisticated sensitivity analyses. Here’s what it might look like if we continued testing different optional strategies for our women’s flat shoes:

Sensitivity Analysis

Strategy Selling price
Leather Ornaments Direct labor Misc Marketing Licensing Supervisor Sales to BE Profit if 200 sold
Increase price 130 5.25 2.63 9.24 0.63 2,000.00 10,000.00 3,685.00 140 6765
Decrease ornamentation 125 5.25 1.63 9.24 0.63 2,000.00 10,000.00 3,685.00 145 5965
Break-even 125 5.25 2.63 9.24 0.63 2,000.00 10,000.00 3,685.00 146 5765
Increase leather price 125 5.75 2.63 9.24 0.63 2,000.00 10,000.00 3,685.00 147 5665
Increase labor expense 125 5.25 2.63 10.24 0.63 2,000.00 10,000.00 3,685.00 148 5565
Add 1000 marketing 125 5.25 2.63 9.24 0.63 3,000.00 10,000.00 3,685.00 156 4765
Decrease price 120 5.25 2.63 9.24 0.63 2,000.00 10,000.00 3,685.00 153 4765

 

You’ll notice, I sorted the spreadsheet based on the highest profits, assuming 200 pairs of shoes are sold. Of course, the assumption of how many shoes you’ll sell is based on your STRATEGY. For instance, increasing the price has the highest profitability, but you might not be able to sell 200 pairs at a higher price. Meanwhile, increasing your marketing budget might result in MORE than 200 pairs being sold. Hence, you’d have to adjust the profit column on a case-by-case basis using an estimate of likely sales under each strategic option.

Setting your marketing budget using sensitivity analysis

Using sensitivity analysis, you can set your marketing budget to correspond to the highest profitability. Now, you might assume profits continue to climb as long as you’re spending more money on marketing products, but that’s likely inaccurate. Likely, what you’ll find is that your profitability begins to level off (and may even decline) as your spending goes up — you’ll have to test this assumption using actual results at different spending points (alternatively, you can create a predictive model) to help calculate the optimal marketing budget.

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