Many small and midsize businesses have not done formal planning in setting marketing budgets.
This is often problematic when creating a marketing strategy and plan. Planning allocation of finite resources without a starting point for the budget it is a difficult task and often leads to inappropriate recommendations.
In this article I review existing literature and recommendations for setting marketing budgets for small and mid-sized companies.
All resources that go towards the support of marketing are included in the budget. This includes everything from outsourced creative to employee salaries and media.
The US Small Business Administration’s website, sba.gov, has an article which recommends that, “As a general rule, small businesses with revenues less than $5 million should allocate 7-8 percent of their revenues to marketing.”
This type of formula is common when approaching a marketing budget, because it’s relatively easy. You take the revenues of the previous year and use a percentage of that to make your budget. We can also look to what industry standards for setting these percentages (and we’ll get into those), but first let’s explore several other methodologies for setting budgets.
In the “Principles of Marketing”, Kotler and Armstrong outline three methods:
Many of the small and mid-sized business we work with are applying the ‘Affordable’ strategy when they come to us. Over time, we work with them to move towards defining objectives in a strategic plan and tying data and analytics in to allow for us to measure the ROI and value of various campaign. However, many companies using the ‘Affordable’ methodology do so because they don’t really know how much they should be spending and don’t have the data to allow them to accurately use the ‘Objective and Task’ method. In these cases, it can make sense to use general and industry guidelines for setting your budget as a percentage of revenue as a ‘gut check’ to get a sense if you’re significantly out of step with other similar companies.
Below is combination of recommendations and results from surveys on what businesses are actually spending:
|Marketing Sherpa||Under 100 employees||11%|
|Marketing Sherpa||100-1000 Employees||7%|
|Marketing Sherpa||Over 1000 Employees||5%|
|IDC (via Inc Article)||Under $250m||9.1%|
|CMO surveys - Feb 2015||Under $25m||11.1%|
Overall we can see recommendations for small and mid-sized business lay between 7-11%. In the next section we look at things that might help us zero in on a percentage.
Each company has a unique combination of factors that should be considered when closing in on a percentage to use for a marketing budget. Below, we outline some factors and their typical effect on your budget.
|Factor||Increases Spend||Decreases Spend|
|Market Share||Large share||Smaller share|
|Market Growth||Fast Growing||Established markets|
|Market Sector||Ecommerce, Services, Software, Tech||Restaurant, Construction, Manufacturing|
|Price of product/services||Higher price or Lowest price||Mid-range|
|Profit Margin||Higher margin||Lower margin|
|Sales from new products/services||New products||Established products|
|Product quality||Higher quality||Mid-range quality|
|Breadth of product/service line||More products/services||Less products/services|
As I said at the beginning, setting a goal-based marketing budget is certainly the best way to decide how much you should be spending on marketing initiatives, but isn’t always a practical way to get started. We recommend considering the 7-11% range while adjusting the amount up or down based on some of the factors outlined above.
Co-founder and Creative Partner at Station Four