As Tiffany thought about the future of her business, she felt a mix of excitement and overwhelm. Excitement about the possibilities for growth and expansion, mixed with a sense of overwhelm about being able to make it happen. “I know that in order to create the growth I want, I’ll need to spend more money on advertising, but I don’t really know how much I should be spending,” she confessed. “How can I determine what my ideal marketing budget should be?”
Tiffany is not alone. Most entrepreneurs are unsure of how to develop an ideal marketing budget. The typical advice on how to make a marketing budget often involves using a method like one of the ones below.
Popular methods for preparing a marketing budget
- Percentage of revenues – This is one of the most frequently talked budgeting methods. The exact percentages vary from business to business. Often the percentages that are given range anywhere from around 20% for small businesses to 2-5% for very large companies.
- Percentage of net sales – This method of budgeting requires a bit more information, but yields a result that is more affordable because expenses are excluded from the calculations.
- Everything you can afford – This is a favorite of the fast-growth crowd. It usually involves setting aside everything that you need for your business and your staff to survive and then putting everything else into advertising. Unless you factor more information into the decision making process, this is really just a high-stakes gamble.
- Industry specific – Industry trade groups often have information about the industry’s average advertising budget. This will provide you with a quick way to move forward with information that is probably more suited to your specific business situation than the first three methods.
- Free marketing – Everybody likes getting free stuff, but often times you end up getting what you’ve paid for. Those who rely on this as their primary form of advertising are the folks who aren’t growing.
Although these budgeting methods are popular, and may be a good way to get started, don’t confuse them with an ideal budget. You see, since no two businesses are identical in all respects, the ideal marketing budget for Tiffany is different than the ideal budget for you or for me.
Your ideal budget is one that is based upon your information – your cost of getting a new customer and how much each new customer is worth to you.
What is the most amount of money that you can spend to profitably acquire a new customer? Once you know how much your customers are worth to you and how much it costs you to serve them (including both your fixed and variable overhead expenses), then you’ll know how much you can spend to acquire them and still be profitable.
Your ideal marketing budget is not based on a rule of thumb or what someone else in your industry is spending.
Ideal Marketing Budget = (Number of customers needed to achieve your business goal) X (What is the most amount of money that I can spend to profitably acquire a new customer?)
The formula, as you see, is rather simple once you gather the measurements and information about your business process.