The Scene:
The annual budget deliberations of a small business who has set aggressive market share goals.
Boss.
You spend how much on marketing! Are you kidding. Don’t you read the news? The world is a mess. We have to cut cost. Didn't we already pay an SEO agency to do all of our website SEO work last year? Shouldn't that be enough forever. Seems like marketing is always wanting more money for their marketing budgets! Do they really support that many marketing activities?
Chief Marketing Officer (CMO).
It may seem like a lot, but remember, marketing spend is a cause of sales, not an effect. Maybe we should review the approaches we could take on deciding how much to spend on digital marketing so we get the most ‘bang for the buck from lead generation activities’ and we see the light from all these marketing costs. After all, your sales team is demanding ever more leads to meet your hyper aggressive sales targets. I also think you should keep in mind the ever increasing cost of Google Ads. Never mind the rising production cost of paid advertising content to support our marketing campaigns.
Boss.
Well, how do we decide how much to spend on marketing anyway? For that matter, how do we decide on how much to spend on online advertising or digital advertising?
CMO
Well, a quick review of the methods available is probably in order. I'll try to keep it short and simple.
Affordable Method
Many companies use this method. They take revenues, subtract out CAPEX and operating expenses and then arbitrarily decide on a marketing budget.
- This method can completely ignore the effect of promotions on sales.
- It often ignores the on-going effects of past and currently on-going marketing efforts. For example, your marketing agency may have already setup email marketing drip campaigns that run indefinitely.
- It also makes it virtually impossible to create an annual marketing plan.
Percentage-of-Sales Method
Many companies base their marketing spend based on a percentage of current and forecasted sales. It is simple to use, especially in that the budget is easily derived.
- The budget may be simple to arrive at, but the devil is in the details and high-level budget numbers may completely miss opportunities to boost sales through opportunistic promotions.
- Frequently confuses cause and effect
- Because of yearly budget variability, as it is based on a percentage of sales, very difficult to make long term plans.
- No real way to choose a specific percentage of sales.
Competitive-Parity Method
Many companies simply match their competitors spend. They get the spend numbers by intelligent guessing and from trade publications.
Theoretically, competitor spend represents the wisdom of the crowd, and should represent a valid number. However, experience shows there is no basis to believe the competition has a better idea. It is also easily shown that many of the sources of competitor marketing spend numbers are highly manipulated.
This method does not prevent promotional wars either.
Objective-and-Task Method
This method, though the most difficult, is the most logical method. It involves:
- Deciding what you want to accomplish with your marketing.
- Deciding what marketing tasks you believe are necessary to achieve these tasks.
- Performing a detailed cost estimation of these tasks using the best available calculators.
Advantage
Gets management to work toward spelling out the relationship between marketing spend and promotion results.
Most difficult approach as it requires detailed planning
- Each of these methods have advantages and disadvantages.
- Not all methods are applicable to all business types or sizes
- You will need to have not only in-depth measurement capabilities of your marketing efforts, you will need to be able to tie them back to revenues.
- Regardless of which method you currently use to establish your marketing budget, the marketing landscape means you will constantly have to shift your spend to achieve maximum marketing and sales effectiveness.
- We recommend you take a project based approach to marketing planning and market spend budgeting.
- This means starting with high-level survey of what you have done in the past, and are currently planning to do in the future.
- Decide on the marketing channels, Outbound versus Inbound
- Create a Portfolio of Marketing Projects which you can assign planned cost to.
- This can include projects dedicated to social media, content development, partnering with other small businesses, and advertising.
- Establish Goals for each project.
- Use these Marketing Project Plans to develop a resource plan, including people, processes and technology requirements.
- Establish a marketing steering committee which meets monthly to review and adjust planned marketing spend based on real-time marketing metrics.
- Develop a comprehensive Inbound marketing strategy that covers:
- Social Media
- Web Presence
- E-Mail Drip Marketing
- Content Marketing
- Creative Content Creation
- Channel Marketing.
Be a Data Driven Marketer
Most likely, your approach to marketing spend will involve variations to all these approaches. Our approach is to base it on analytics and if you happen to have a datawarehouse, we can show you some unique approaches to the process.
5 Step Guide to Marketing Measurement
In the meantime, maybe you might want to take a look at our 5 Step Guide to Marketing Measurement, which may enable to get to a better marketing solution.
Thanks
