Three Strategies for Setting a Cost-Effective Marketing Budget

We don’t blush when it comes to talking about money. Figuring out the optimum marketing budget for your business is important — it shouldn’t be a delicate conversation, it should be right out in the open. Clear communication about a budget helps set expectations for you and your marketing team, and is central to building an effective, goal-oriented marketing plan.

At the same time, there’s no simple answer to the question, “How much should we spend on marketing?” You want to see a positive ROI of course, but that doesn’t help you fix a dollar amount — that’s going to be unique to every business, as every business has its own spending capacity, goals, market and competition to consider.

We’ve been at this awhile, and have found three budget-setting strategies that can help deliver the marketing results our clients are looking for. These strategies take into account your company’s current position and where you’d like it to be in the future to help you effectively plan a marketing communications budget.

1. Competition-Driven Budgeting

The “keeping up with the Joneses” mentality might be frowned upon in polite society, but in the business world it’s just good sense. If you can go bigger, better and bolder than the competition, you’ll see the results in your bottom line.

This approach to setting a marketing budget is pretty simple, in theory: figure out what your competition is spending, then outdo them. Spend more, be seen more, have more chances to convert, see more sales. There are a few other variables that come into play (the quality of your creative and the accuracy of your targeting, to name two of the big ones), but all else being equal, the advertiser with the deeper pockets wins.

Actually measuring your competitors’ marketing expenditure is almost impossible, of course, but there are ways to get some pretty close estimates. With the right data, you can also develop a good idea of which marketing channels are delivering the best ROI for your competition, giving you a good idea of how to allocate your spending even more effectively.

2. Finding Wisdom Within

Looking outward to determine your budget is one good way to do it; looking within is another. Instead of checking out your competition’s spending to set your own, look at your marketing budget in relation to your gross sales. A common recommendation among marketing managers and consultants is a marketing spend of 6-10% of gross sales, but that’s a loose guideline at best. Your industry, your profit margin, the competitiveness of your market and most importantly your marketing goals can all influence this number.

A common tactic used to pick what percentage of your revenue to devote to marketing is to first establish a baseline: figure out what percentage you’re spending now, and determine how fast you’re growing (or if you’re growing at all). If you want to see more/faster growth, increase the percentage of your gross revenue that’s going towards marketing and advertising. If you want to increase your margin and really milk the market you’re already established in, you can decrease your marketing budget.

Of course, simply increasing or decreasing your marketing budget won’t necessarily generate the desired effect. Your spending needs to be smart, no matter what percentage of sales it’s tied to. When spent effectively, your marketing creates demand. As you increase or decrease your budget, you’ll also need to track your supply/allocation of product and bandwidth — your marketing budget needs to stay aligned with changes in these areas, too.

3. Goal-Oriented Budgeting

All approaches to setting your marketing budget should be driven by your marketing goals. But if you really want to achieve specific metrics, pick those metrics first and set your budget to match.

You want sales on a special offer to hit a certain target? Want to see a certain amount of traffic to your website? Acquire a predetermined number of customers in a given time period? While you can’t fix an entirely precise dollar amount to these achievements, you can come up with a reliable approximation. Thanks to today’s world of “Big Data,” there are a number of software tools — and some tried and true techniques your marketing team might be able to share with you — to estimate how much you’ll need to spend to achieve specific marketing goals.

With this approach to budget-setting, it’s especially important to remember the maxim of all marketing: it’s better to do a few things really well than a lot of things poorly. Don’t spread your budget too thin trying to achieve all of your goals at once. Pick the top priorities based on a realistic analysis of the investment required and a grounded assessment of your total available budget. Accomplish your first set of goals, and you’ll be in a new position and ready to reassess.

Guiding Principles for Your Marketing Budget

No matter what approach you use to set your marketing budget, there are a few principles that should always be in place. Staying focused on a few specific goals at a time rather than taking a broad approach has already been mentioned, as has the obvious yet often overlooked fact that all marketing dollars aren’t equal. You can pour millions into bad creative and ineffective channels and never see a result, or spend a few thousand in just the right way and see a definite uptick in sales.

You should also keep in mind that newer businesses are generally going to need to spend a larger portion of their revenue (and/or capital) on marketing than more established businesses, especially if looking towards competition or external goals to set a budget. Without existing name recognition and market share, initial marketing efforts will see less of a return over the short term.

Finally, don’t forget to regularly assess your marketing results and reexamine your budget — and maybe even your budgeting process. If what you’re doing isn’t working, simply adjusting the spending amount probably isn’t a comprehensive solution. Work with your marketing and advertising team to develop new approaches, and don’t let your budget dictate your potential.

Lena Liller
Director of Account Leadership