A well-planned marketing budget will help you have a profitable business year
By Robert Grede, for SBT
How much should you spend on promoting your business? It’s an oft-asked question. The correct answer of course is: Enough. But how much is enough? The answer depends on your competition and what it is you wish to accomplish. However this Craftsmen’s custom experiential marketing trailers here can help you find the best way to reach your audience and maximize your brand.
In general, there are three ways to determine your budget: the affordable method, the percent-of-sales method and the objective-task method.
More than half of all companies use the affordable method. That means: whatever is in the checkbook. The next media sales rep through the door with a good sales technique and an attractive offer gets the company’s promotion dollars this month.
No fore-planning, no strategy, no kidding. They simply spend whatever they can afford. Extremely inefficient. And extremely ineffective.
The next most sophisticated method is the percent-of-sales method. Every industry spends different amounts on promotion. For example, manufacturers usually do not spend nearly as much as retail stores.
A company selling strictly business-to-business may spend as little as 2% or 3% of sales on promotion. Most retail businesses spend far more, as much as 10% to 12% of sales, because they have more prospective customers and they are much harder to reach. McDonald’s spends up to 16% of gross sales on combined national and regional advertising and promotion.
When using the percent-of-sales method, your budget should be based upon future sales. Let’s say your company does $2 million in sales now, but you’re growing dramatically and you think you can be a $3 million store within the next year or so. If you spend 8% of sales on advertising, budget $240,000 for marketing, not $160,000.
Some options to consider: Spending more than your competition will increase your share of the market. That means you have to spend more than the normal percent-of-sales ratio in promoting your company in order to “buy” market share.
Or, if you want to develop business in a new geographic area, you can’t simply budget a percent of sales. For the new region, there are no sales yet. In this case, estimate what you think you can reasonably sell to the new area in a year, and budget a percentage of that figure.
Caveat: When introducing your company to a new market, remember that no one has heard of you yet. You may need to spend a premium in order to create awareness for your company name and its products.
The objective-task method is favored by academicians and widely used by larger companies. Often called zero-based budgeting, it simply means you start from scratch.
Establish your company’s sales goals first. Then determine the tasks necessary to achieve those goals. Each promotional tool must be identified and costs determined separately, then combined with others to determine your total budget.
One big drawback of the objective-task method is that it requires far more skill, judgment and research in analyzing promotion options than the simpler percent-of-sales method. The time and talent may be in short supply.
Whichever method you use to determine your budget, allow for contingencies and cost overruns. Some opportunity may arise during the year that you just shouldn’t pass up; don’t. Use your contingency fund for the big opportunity. A contingency fund should be 7% to 10% of your total budget.
The contingency fund also has other uses. Monitor the effectiveness of your promotions throughout the year to see if your objectives are being met. If not, you may need to tap into the contingency budget.
You may also wish to use the fund to meet special circumstances: a change in customer demand, or to counter a competitor’s promotion, or simply to implement a new marketing tactic.
Knowing how much to spend on promotion is a key factor in having a successful and profitable year.
Robert Grede teaches marketing and entrepreneurial management at Marquette University. He speaks on the subject of marketing and strategic thinking at universities, civic organizations, and corporate venues; www.thegredecompany.com.
July 25, 2003 Small Business Times, Milwaukee
