When I ask my small business clients if they have a marketing budget, they usually pause and wonder how to answer this question. It seems like they are uncomfortable sharing any financial information. Somehow I believe it’s because they think this is confidential information or they don’t have a marketing budget. Many small business owners confuse a marketing budget with a business budget and under estimate the value of it. In fact, there are valid reasons why a small business owner should have a budget in place. But, before diving into these reasons, let me explain what is a marketing budget.
Definition of a Marketing Budget
Budgeting in marketing means setting up an annual amount of dollars a marketing department would spend to attain measurable goals. These goals correlate to business revenue achieved using acquisition, sales and retention strategies. Each year, I submit a budget request for marketing strategies and campaigns with deliverables including goals like sales and revenue. It’s a standard annual process for all corporate departments. Each department hands in a detailed budget request, backed by goals and strategies, to senior management for approval. Sometimes, budgets are allocated over longer periods of time (5 to 10 years), with opportunities to adjust them periodically.
Knowing how much is available in the marketing budget, marketers allocate a specific amount for each strategy and tactic throughout the year. Each campaign receives a share of the budget with the expectations to hit a specific goal. This is the most effective way to track campaign performance and success. Basically you say “to sell 1000 units, I will spend $5000 to promote the product”.
What is included in a marketing budget?
First, to clarify, a marketing budget is not a business budget. When we say marketing budgets, we’re not referring to business expenditures like office rent, inventory, food, or website costs. These types of costs are part of the business budget. The marketing budget is a separate entity within your business budget that should be utilized diligently and treated independently. It contains a breakdown of all costs relating to your advertising and promotional activities. This includes paid Social Media ads, editorials, blogs, PR gigs, newspaper and magazine ads, event sponsorship and exhibitor costs. As well, it contains costs of running emails, advertising videos and search engine ads. A marketing budget is basically any cost associated with promoting your business (products/services/brand). It’s the cost of your sales related activities, promotional campaigns, branding and it also includes the costs of retaining customers.
Why is it important to create a marketing budget?
There are a number of reasons why a business (small or big) must have a marketing budget. As a business owner, you want to take control of your spendings, and you want these spendings to deliver results. You want to know where the money is going and how it benefits your business. As well, you want to be able to track your business growth year-over-year. And, you want to know how much your sales and promotional efforts contributed to this growth. And not only should you track growth, you also want to identify areas of weaknesses within your marketing efforts. At the end, why would you invest in activities that don’t achieve the results you aim for. Here’s where a marketing budget comes into play and becomes valuable:
Control cash flow
Just like a business budget, a marketing budget allows you to control your spendings on sales tactics and promotional channels. You are not just throwing money at random campaigns and tactics that may or may not produce a positive result (sale). You are working within specific parameters without overspending or worrying about where you can find money for this new idea someone just dropped in your email box! A marketing budget, specifically monthly, gives you the freedom to be creative, limits your concerns with overspending, and helps you with this next point.
Strategize marketing activities
By allocating a specific amount of money per month on marketing spend, you can decide what you want to spend it on. It also allows you to shift the funds within the year and adapt your strategy to any business changes.
Example:
Let’s assume that your sales were soft in February and you may not hit your quarterly goals. What should you do? Well, as a strategist, you want to work harder in March to makeup for the sales gap in February. This means you will spend more money on sales initiatives to meet your quarterly target. If you have an annual marketing budget, you can pull some funds forward to support additional sales initiatives to implement in March. If you didn’t have a marketing budget, you’d probably hesitate to spend more in March. Or you may think you don’t have funds to support incremental sales activities.
Measure the success of marketing strategies and tactic
Once you establish a marketing budget broken down by month, you can track the results of each marketing activity within that time frame. The budget allows you to identify activities and tactics you want to implement each month. As well, allocate a dollar amount for each and track its performance. If a specific tactic (say a paid Facebook ad) didn’t generate responses, you may want to investigate the causes or re-consider this tactic in the future. Once you measure the performance, you can document the results for future reference and planning initiatives. The more insight and documentations you have on your marketing activities, the better you become at planning successful marketing strategies.
Improve marketing results
As a business owner, your main goal is to improve results and grow a business year over year. To achieve this goal: you can either hire a seasoned marketer, or roll up your sleeves and start tracking marketing results. Your marketing budget is the only way you can gain insights and learn to forecast your growth. As a marketer myself, I am trained to create, track and monitor a marketing budget. It’s is a biblical source of valuable information which helps me become a strategist and a confident decision maker. With it, I can track all previous marketing activities and campaigns; find out how much they cost; what sort of results each has achieved and establish a solid SWOT analysis for future planning. If it wasn’t for this process, I would not have been a competent strategy forecaster!
Boost ROI and ROAS
Return On Investment (ROI) is the one thing every corporate executive, financial expert and business owner wants to know when presented with an idea, a strategy or a product. They want to know what’s in it for the company, and how it affects their investment. The same scenario applies to you when someone presents you with a new marketing strategy. ROI metric measures the effectiveness of your overall marketing activities. It measures the ratio between sales and spend, and helps you strategize your marketing activities to drive more sales. After all, you want to know the tangible benefit of any activity and that benefit is what we all want, profit.
ROAS
ROAS means Return On Advertising Spend, and it is an important metric when planning online or digital marketing campaigns. It measures performance of each digital marketing strategy like Social Media and Search Engine marketing. This includes tactics such as Facebook, Instagram, Pinterest and Google Ads, as well as, blogs. Since these tactics are already outlined in the marketing budget, you are able to track their performance individually and decide if you want to continue with a particular tactic, invest more in it, or remove it from your marketing activities.
Plan for the future
Over time, marketing budgets become a source of data and insight on all marketing activities. Each year, you are documenting marketing performance by tactic, month and strategy. The data accumulated year over year is used to develop trending reports that help with business forecasting. A solid and detailed marketing budget is of a significant value to a business that relies on marketing activities to drive revenue and profit.
Tells a story!
A Marketing budget enables you to create sales forecasts for upcoming years based on historical results. Not only that, but it is indicative of the health and growth of marketing strategies. You can start to forecast costs and sales/revenue for each tactic and by month. Then, you measure them against the budget.
The beauty of this is that, a marketing budget can be as simple or as detailed as you want. It makes a great business story to share with future business partners, investors, or even buyers. And should you be looking for a business loan, this would be a solid document to share with the lending institutions.
Creating a small business marketing budget
It’s never too late to start crafting a marketing budget for your small business. In fact, I highly recommend prioritizing it moving forward. Even if you are half the way into the fiscal year, you can start creating simple templates for the remainder of the year. In the corporate world, budgeting exercises begins at the start of Q4 or as early as September (assuming Dec 31 is end of fiscal year). This is something to keep in mind when you want to start budgeting. Let me show you how you can create a simple marketing budget as a start:
Define your goals
When creating a marketing budget, the first thing you want to do is identify your tangible goals. Obviously your main goals is a sales figure set by month over a 12-month period. But there are other goals to include in the budget, such as, number of website visitors, sales leads, and social media followers. Once you have identified these goals in numbers, the next step is to establish a strategy.
Develop a marketing strategy
Some people argue that setting up a marketing strategy should precede goal setting. I personally prefer to start with a goal then define the marketing strategies. A strategy is the process or method that combines all internal and external resources to achieve goals. A Marketing strategy is the heart of a marketing budget but this is a whole new topic I will elaborate on in a separate article. In simple terms, it should include all the campaigns, tactics and channels you will leverage to achieve your goal.
Set-up analytics
The goals you defined in your marketing strategy must be measurable. And to do so, reports and analytics should be created to track performance of your campaigns, tactics and channels. Your marketing budget will also include all the analytics and results that measure performance against spend. For example, Google Analytics is the main source of reports and data for all online activities. You can pull online campaign results from there and plot into your marketing budget spreadsheet. Although it is hard to measure performance of traditional marketing and advertising tactics (i.e. newspaper ads), you can still find ways to track result. Response types like a designated URL, promotional codes, or toll free numbers are created for newspaper ads to measure calls and visits.
Calculate your small business marketing budget
Once you’ve identified your goals and strategy, you can now plot them into a spreadsheet and assign cost for each marketing activity and tally up the costs (marketing budget). The other method of calculating a marketing budget is to set a dollar figure you are willing to spend in a year towards marketing activities. This option might be a good starting point if you are new to budgeting. But I suggest creating 2 separate scenarios: one with a set amount you are willing to invest in, and another based on the costs of marketing tactics. That way you are able to identify gaps or opportunities within the budget and strategy which impact your goals.
Rule of thumb for small business marketing budget
There isn’t particular rule of thumb when it comes to how much you should budget for marketing activities. It all depends on your line of business, your sales goals, and available financial resources. In general, a business may design their marketing budget based on one of the following:
- In your first year of planning a marketing budget, look at the sales projections for your industry, which you can acquire from trade associations and publications. You can use them as a benchmark to help you figure out how much you should set for your business.
- The other option is to allocate a percentage of gross revenue to marketing activities. This means your budget increases as your sales figure increases. But keep in mind that sales are driven by marketing activities and by doing so, your marketing budget will be disproportionate compared to sales.
- In general, a business spends 7% to 8% of its gross revenue on a marketing budget. But if you are a startup, you should consider 20% allocation of the revenue for marketing activities to boost brand awareness and sales.
Summary
Knowing how important a marketing budget is for your business and understanding how to create it, you can start crafting it. I will be sharing templates for a marketing budget in a future blog. Happy budgeting!
