Every business activity comes with a cost. For most businesses, especially Small and Medium Enterprises, your investment MUST pay-off, and in real-time. Unlike giant firms such as Coca-cola or Apple with endless budgets for their marketing activities, it is such an extreme challenge for business owners to balance the budget between marketing and business. Obviously, nowadays, marketing has become a must for business. So, how much money spent on Marketing is reasonable, and can turn the investment into results?
What are the common budgeting techniques?
On the market, there are five common budgeting techniques that have been used to calculate the expected amount of money spent on marketing activities of a business, which include:
- Affordable method
- Percentage of sales
- Competitive parity model
- Objective and task method
This method can be seen as the most popular technique used in companies. The company owners will decide how much money they can afford for marketing activities. If he or she believes that this year they will earn more money, then the marketing expense should increase.
This technique ignores the importance of marketing and does not use underlying data or specific goals as the reference, resulting in uncertainty in the long- term marketing plan. In the end, companies may spend too much or too little compared to the returns.
Percentage of sales
The budget for the firm’s promotion and advertising activities will be set as a percentage of figures for sales. This percentage can be calculated based on past expenditure patterns. For example, if the advertising spent last year was $50 million and had $200 million in sales, the percentage of sales would be 25 percent. If the company expects to achieve $240 million in sales the following year, then 25 percent of $240 million is $60 million, which would be the budget for marketing this year.
The percentage of sales method can be seen as one of the quickest ways and commonly used by businesses due to its simpleness. Moreover, it satisfies financial management because the method assumes a positive correlation between marketing and sales. The cost of advertising can be offset against profits earned from sales. However, this method is hard to use for the long- term plan because we cannot predict the long- term sales. It also neglects other objectives in advertising, as the purpose of marketing is not sale only.
Competitive parity model
Competition in any market is fierce, especially in industries where there are lots of alternatives. When the company uses the competitive parity method, its advertising budget will be decided on the basis of the advertising activities and costs adopted by its competitors. In other words, the competitive factors weigh more in fixing the marketing budget of that business. For example, in the soft drink industry, if Pepsi spends 5% of net sales on marketing, then, Coca-cola- its competitor, will spend more or less the same percent for the marketing.
Gauging one’s advertising budget on other players’ in the same market can be reasonable as the starting point. However, it is advised that companies should not blindly follow the competitors because your business differs significantly from the other businesses in terms of goals, objectives, financial conditions, management philosophy, reputation, and so on.
Objective and task method
The cost for marketing activities of your company will be defined by evaluating the goals, outlining the tasks to achieve those targets, and proposing the expenditures to perform those tasks. This method can be used for the long-term plan such as increasing market-share or increasing brand name top-of-mind-awareness as it is a scientific method to set the advertising budget. Based on the own environmental conditions and requirements of that company, the marketing expenditures will be decided.
The objective and task method is widely used by large corporates. This allows marketers or managers to see the correlation between the costs of marketing and the whole marketing objectives. Here is a step-by-step instruction to using this method:
- Determine the main business and marketing objectives
- Set the advertising objectives in terms of sales, profits, brand loyalty, competitive stability, etc.
- Decide the tasks related to achieving those specific goals
- Estimate the cost of each marketing activity for the predefined period.
Unit sales method
By adopting this method, the manager will calculate the cost of advertising for one individual item, and multiply it by the total number of items that the business wishes to sell. It is a variation of the “Percentage-of-sales method”. The difference is that, instead of considering the marketing budget in relation to the total sales volume, this method uses the specific marketing cost per unit.
Moreover, this method forgoes the reflection in price changes as does the Percentage- of- sales method. Also, it is only applicable when the cost of producing each unit can be calculated reasonably.
How about in reality?
In practice, the marketing expenditures for every business are different. To get started, the Marketing budget will include all costs for marketing, public relations, advertising, public relations, promotions, and anything else under the scope of “basis marketing” you can define. According to the suggestion from the U.S Small Business Administration:
- The marketing budget for small businesses earned less than $5million should be around 7-8 percent of their revenues.
- This amount of money can be divided into two categories:
+ Brand development (all the channels possibly used to promote the brand, like website, social media, blogs, partnership, etc)
+ Promotional costs (campaigns, advertising, events, etc).
Although for some businesses, marketing is not their priority, it is advisable that the marketing budget should never be based on what’s left over once all other business expenses are decided.
On the market, the experts also categorize the marketing expenditures of businesses into 3 categories, depending on their goals:
- Businesses who want to maintain the current level of business: 5-7 % off gross revenue is recommended for Marketing activities
- Businesses who want to grow: 7-10% of gross revenue is suitable Marketing
- For businesses who want to accelerate the growth: a bigger percent of gross revenue is recommended, around 10- 20%.
Marketing budget varies across industries
Obviously, while calculating the marketing budget for your business, you must consider other external factors besides your own requirements and conditions, including the situation of the market you are operating, the changes of economy, competitors, as well as factors that can affect your business’ performance in the future.
According to the latest report in 2020 of CMO survey, top marketers were asked about the changes in their firms’ marketing budget.
The survey also breaks down the percentage of expenses in marketing activities, which is presented under this table;
The main takeaways from this survey are:
- For B2B firms, marketing budgets can account for 8-11% of revenues
- For B2C firms, marketing budgets can account for 5-12% of revenues.
- During the pandemic, marketing budgets increase to the highest level in the history of CMO surveys, with a focus on brand awareness management and customer management.
In a nutshell
Bringing together all the statistics and budgeting theory methods, we would like to help businesses have both a subjective and objective overview of the current situation, as well as understand how other companies allocate their money for the marketing activities. Obviously, there will be no right or wrong answer to the question “How much money should I spend on Marketing”. However, those statistics will become a benchmark, or the starting point to get the most out of every dollar spent on Marketing.
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