Blog

At some point, most small business owners inquire about the appropriate amount to allocate for marketing expenses. It can be a challenging task for many of them to determine the exact amount to spend on marketing.

There are five methods for determining an annual marketing budget. It is important to note that these budgets encompass all marketing expenses, not solely advertising costs. Marketing encompasses a wide range of activities that promote brand recognition, including advertising, brochures, contests, product samplings, demonstrations, trade shows, business trips, sales pitches, direct mail, sponsorships, and more.

1. The No Idea At All Method

There are some businesses that do not allocate budgets for advertising. Instead, they only promote their products or services when they notice a decline in sales or when they are lured into advertising by persuasive salespeople (“Get 50% extra for free if you buy now!”). Have you ever wondered why they offer freebies? It’s often because the timing for advertising is unfavorable, causing their usual clients to hold off and the sales representative to become desperate.

During certain times of the year, many businesses are too busy to even consider advertising. Even if they did, it would be futile as they wouldn’t be able to manage the influx of work. However, when sales suddenly decline, the business starts advertising, which may not be effective as they could be advertising at the wrong time or solely for immediate sales, which is unlikely to happen. The issue is that advertising funds are being used during slow periods, which is detrimental to resolving a problem rather than creating new opportunities.

2. The Whatever You Can Afford Method

In this scenario, you only use extra money for advertising. Therefore, the amount of advertising is linked to the availability of funds. In prosperous times, you increase advertising, but in difficult times, you reduce it. The risk is that if business declines and advertising is reduced, the situation may worsen rapidly. It is challenging to recover from this situation if there are no funds for marketing.

3. The percentage of sales method

One common approach is to determine at the beginning of the year the proportion of sales revenue that will be allocated to advertising. To illustrate, if the previous year’s sales amounted to $200,000 and it was decided that 5% of sales would be devoted to advertising, then the budget would be $10,000 ($200,000 x 5%). However, this method may not be suitable if the amount allocated for advertising exceeds what is necessary to achieve the sales target. In such a case, the excess funds would be wasted. Additionally, the appropriate percentage to use varies depending on the industry. According to research conducted in the United States, the average advertising-to-sales percentages range from 3-6%.

• Couriers 2.1%
• Rental car companies 2.9%
• Computers 5.1%
• Games and toys 18.4%
• Cafes 5.6%
• Hotels/motels 3.8%
• Sporting goods 5.0%

So what percentage you use all depends on your activity. If you are a retailer, then you will spend more on advertising than a manufacturer who concentrates on personal selling to suppliers.

4. Following the Crowd: The ‘Whatever the Competition Are Doing’ Method”

This method involves examining the strategies used by competitors and replicating them by allocating a comparable budget for similar marketing activities. However, this method has a significant disadvantage, what if the competitors have been using the ineffective ‘no idea’ approach? A prominent retailer went bankrupt after investing significant resources in TV and radio ads. If you had imitated their tactics, you would have faced the same fate.

Don’t assume that the competition or bigger enterprises have a clue about their actions since they frequently don’t. I can disclose numerous instances when sizable corporations have splurged thousands on fruitless promotions. Simply observe the TV commercials every evening, and you’ll easily identify the ones that are a total waste of money. Moreover, imitating the competition is an unwise tactic. Instead, aim to stay a step ahead of your rivals.

5. Efficient Goal Setting with the Objective and Task Method

Out of all the options, this is the one I suggest – I had to choose one! At the beginning of the year, identify the objectives you intend to pursue in the next 12 months. Determine what you hope to gain from each of these goals (for instance, acquiring 100 new clients, encouraging each current customer to spend an additional $100, increasing the average transaction amount, or something else). Then, articulate precisely what actions you will take to achieve these objectives while estimating the associated expenses (using common sense as a guide – for example, a small business wouldn’t spend $100,000 on TV advertising).

To determine your marketing budget for the year, complete this exercise for each of your targets and add up the costs. It’s important to have a cash reserve for marketing to seize any opportunities that may arise during the year as you cannot predict what may happen, such as actions by competitors. Small businesses need to remain flexible to adapt to market forces. Your objectives should be specific, allowing you to stop marketing expenditure once you’ve achieved them and remove any wastage. Alternatively, you can choose to continue and seek more growth. It’s crucial that you make the conscious decision to spend your entire budget. Conduct a break-even analysis to ensure that the sales generated from your marketing efforts will cover the expenses. If you have used methods that have worked in the past, include them in your plan. Additionally, allocate funds to maintain your existing customers and market share. However, make sure to review the effectiveness of your strategies regularly.

Do not forget to keep track of the outcomes.

It is important to consistently monitor the effectiveness of your marketing efforts to avoid being categorized by the many small business owners who lack direction. Without measuring results, refining and enhancing your marketing spend is not possible.

Reach out to our marking associates at Kedden Business Services for a complimentary review of your marketing strategy