“Out of curiosity, what’s your marketing budget?”
This is a question I often come across and am aware of the “fear” it instills in small business owners I regularly work with. Markeing budgets are directly correlated to one’s business and success and hence are crucial to be approached correctly and be allocated the necessary funds.
Consider these numbers:
- Companies that grew 1-15% year over year spent an average of 16.5% of their revenue on marketing
- Companies that grew 16-30% year over year spent an average of 22% of their revenue on marketing
- Companies that grew 31-100+% year over year spent an average of 50.2% of their revenue on marketing
I know some of these numbers might sound somewhat ludicrous and I am certainly not 1 to advise my clients to spend 50% of their budget on marketing. The above represents big brands (companies like Microsoft, Oracle and Twitter) and consequently those budgets are in line with their market and size.
As a general rule of thumb, companies with a turnover smaller than £15 million will spend no more than 11% – 12% of their budget on marketing and promoting their brand. However, this does not necessarily apply to all businesses as the above tend to be large entities with already established sales channels and brand advocates.
It is hence imperative to look at your business as a separate entity. You should always obviously take practices in your sector into consideration but still you should always try to be unique and identify affordable ways of marketing your business, especally as a Start-Up or SME.
So, as you already probably know, your marketing budget should be a percentage of your gross revenue. So for example:
Smiths Car Parts had a gross revenue of £500,000 in 2016. They assign 13% of that to their marketing. 13% of £500,000 is £65,000. So their marketing budget for 2017 is £65,000 (or £5417,00 per month).
So your first step is to calculate your gross annual revenue. If you’re a new business or your revenue fluctuates significantly, you should reassess your revenues as regularly as you can.
However, when it comes down to defining your marketing budget, there are a number of crucial factors that need to be carefully considered. It is easier to simply segment them into 3 categories, first year businesses, established or growing brands and declining businesses.
I will focus on 1st year businesses, SME’s or Start-Ups as those are my expertise having helped to establish over 50 new businesses in the past 5 years with a total turnover of over £10 million collectively.
First-year businesses need more marketing capital to get off the ground. Money will be tight, but think of your marketing as an investment because that’s exactly what it is! You’re investing in your own business.
Variables: There are a number of variables but undoubtedly the most crucial one is your competition. Perform more than adequate market research prior to entering your market and try and identify your competitors budget and sales channels. If there are already big players in your industry perhaps a budget of even 35% might be required to achieve your goals.
Tip: A good way to be able to ascertain your position in the market is to rate your competition, on a scale of 1-5. You’re a 1 if you sell a niche product that virtually no one else in your market sells. You’re a 5 if you are selling a fairly mainstream product or service or have large numbers of competition out there. The higher your number, the higher your marketing budget should be.
Once you’re established and bringing in regular, sustainable revenue, you will automatically “fall into” the next category which would no more than 10-12% on marketing (for established SME’s)