An Analysis of Recommendations for Setting Marketing Budgets
By Chris Olberding
Many small and midsize business have not done formal planning in setting marketing budgets. This is often problematic when creating a marketing strategy and plan. Planning allocation of finite resources without a starting point for the budget it is a difficult task and often leads to inappropriate recommendations.
In this article I review existing literature and recommendations for setting marketing budgets for small and mid-sized companies.
All resources that go towards the support of marketing are included in the budget. This includes everything from outsourced creative to employee salaries and media.
TL;DR The best approach is to set your marketing budget based on discrete goals and objectives mirrored with industry and historical performance data. However, doing so can be complex. Therefore, as a starting point, we can look to general guidelines and recommendations on percentage of revenue adjusted for a company’s particular circumstances.
TLTL;DR For companies under $50m in annual revenue, most sources recommend marketing budgets in the range of 7–11% of revenue.
COMMON METHODS FOR SETTING A BUDGET
The US Small Business Administration’s website, sba.gov, has an article which recommends that, “As a general rule, small businesses with revenues less than $5 million should allocate 7–8 percent of their revenues to marketing.”
This type of formula is common when approaching a marketing budget, because it’s relatively easy. You take the revenues of the previous year and use a percentage of that to make your budget. We can also look to what industry standards for setting these percentages (and we’ll get into those), but first let’s explore several other methodologies for setting budgets.
In the “Principles of Marketing”, Kotler and Armstrong outline three methods:
- Affordable: This involves the informal allocation of dollars to marketing based on cash flow or what the business feels that they can afford. Formally this is taking revenues less costs and assigning a portion of the remainder towards marketing.This is often used by small businesses and focuses on what a company can afford to spend on promotion. Unfortunately, this method of setting budgets completely ignores the effects of marketing on sales. It tends to place marketing last among spending priorities. This often leads to an uncertainty in the proper amount of allocation and can the affordable result in overspending, it more often results in under spending.
- Percentage of Sales: Under this method, the marketing budget is set at a certain percentage of current or forecasted sales. This has the advantages of being easy to calculate. Because the budget varies with year-to-year sales, long-range planning is difficult.
- Competitive-parity: Looking at the competition is another way to set a budget. With a competitive-parity approach, they monitor what the competition is doing and match their spending to theirs, believing that the competition reflects the collective wisdom of the industry. However, clear information on competitors isn’t always available and assumes that what competitors are doing is actually working, which may not be the case.
- Objective and Task: This methodology determines the marketing budget based around defining the objectives to accomplish and work backwards from there. The method entails 1) defining specific objectives, 2) determining the tasks needed to achieve these objectives, and 3) estimating the costs of performing those tasks. The advantage of the objective-and-task method is that it forces management to spell out its assumptions about the relationship between dollars spent and promotion results. But it is also the most difficult method to use.
GETTING TO A STARTING POINT
Many of the small and mid-sized business we work with are applying the ‘Affordable’ strategy when they come to us. Over time, we work with them to move towards defining objectives in a strategic plan and tying data and analytics in to allow for us to measure the ROI and value of various campaign. However, many companies using the ‘Affordable’ methodology do so because they don’t really know how much they should be spending and don’t have the data to allow them to accurately use the ‘Objective and Task’ method. In these cases, it can make sense to use general and industry guidelines for setting your budget as a percentage of revenue as a ‘gut check’ to get a sense if you’re significantly out of step with other similar companies.
Below is combination of recommendations and results from surveys on what businesses are actually spending:
Overall we can see recommendations for small and mid-sized business lay between 7–11%. In the next section we look at things that might help us zero in on a percentage.
CONSIDERING ALL THE FACTORS
Each company has a unique combination of factors that should be considered when closing in on a percentage to use for a marketing budget. Below, we outline some factors and their typical effect on your budget.
As I said at the beginning, setting a goal-based marketing budget is certainly the best way to decide how much you should be spending on marketing initiatives, but isn’t always a practical way to get started. We recommend considering the 7–11% range while adjusting the amount up or down based on some of the factors outlined above.
on some of the factors outlined above.Decreases Spend