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5 WAYS TO CALCULATE A MARKETING BUDGET

Jul 1, 2013 12:00 AM


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By Slava Apel

How much should a company spend on marketing? There are several answers—all of which can be summed up in two words: “It depends.” Here are five options to consider.

1.      PERCENTAGE OF GROSS REVENUES

This is the traditional way to calculate a marketing budget. Both SCORE (“Counselors to America’s Small Business”) and the U.S. Small Business Administration (SBA) cite figures ranging between 2% and 10% of sales. McKinsey & Company is often quoted at 5%. Most franchisors collect between 2% and 3% for advertising but also suggest spending 5% to 10% of anticipated yearly gross revenues during the first year of operation.

On average, businesses should spend 10% of their gross sales for the year to market each new product or service, or 2% of the new service’s sales and revenue target. Consumer products and services companies should always spend a higher percentage than business-to-business companies.

A word of caution: Most business owners tend to reduce their marketing spend as revenues decrease either due to seasonality or economic downturns. But the rule of thumb holds the opposite: When in a recession, increase your marketing efforts.

2.      ABSOLUTELY EVERYTHING…

If you aren’t risk averse, this is your strategy. It’s an aggressive approach—you are essentially putting all of your eggs in one basket. Even a bad product marketed heavily will gain some traction, and overspending is one way you can buy market share. But this method is generally more popular when you are spending other people’s money. Remember the Super Bowl commercials for those early dot com companies? It wasn’t their money to spend, so they over advertised a bad product.

3.      …OR ABSOLUTELY NOTHING

Thanks to the Internet, you actually can get something for nothing. Good old-fashioned word-of-mouth advertising (WOMA) is now called social media. Build your social media networks, or increase your customer database. All these are simple methods that can help boost your sales. Because social media advertising is free, however, you will more than likely end up spending a lot of time managing all these methods, so in essence it isn’t “free.” Nonetheless, it’s still advisable to set a budget for your social media marketing effort—you can roll it into your traditional marketing budget.

4.      A BIT MORE THAN THE COMPETITION

With today’s access to research tools, it’s easy to analyze your competitors’ spending and adjust your own budget accordingly. But as “Blue Ocean” readers will recall, comparing yourself to your competition, rather than setting your own goals, generally results in a bloodbath of one-upmanship. That’s a difficult business path to maintain. Knowing what your competition does, and even better, knowing what works for them, is a good guide, not a plan.

5.      WHAT YOU CAN ACTUALLY AFFORD!

If you have set goals and know your customer acquisition costs, this is a logical approach. This is actually the method I generally practice. After computing my Lifetime Value of Customer (LTV), I know how much I can afford to spend.

The idea is simple. You identify how much profit (on average) you make during the lifetime of that customer relationship and determine how much you are willing to invest per customer acquisition. Most business owners only consider the value of the first transaction when calculating how much to spend on attracting the new client, but with LTV, you must calculate repeat purchases, too.

After you figure out your LTV, subtract the overhead associated with maintenance of the client, i.e., your Cost of Goods (COGs). Finally, subtract your Minimum Desired Profit (MDP) and voilà! Congratulations, you have a marketing budget!

HOW MUCH DOES SEO COST?

I’ve often asked about website and search engine optimization costs. These questions uncover many levels of misunderstanding of different mediums.

A website can be anywhere from 5 to 5,000 pages. It could be static/dynamic, with/without a Content Management System (CMS), with/without blogging abilities or with/without ecommerce and a choice of about 500 more options that would influence the price. What price would you put on content generation for 500 pages or f salesmanship[T1]  that helps you sell more?

SEO is the same way. On-page SEO can be done one time, but you should also be adjusting it based on your targets and results. On-page SEO has hundreds of different components, so the bigger your budget, the more of these can be done. Some of these components are keyword research, density, H-tags, URL structure, robots, outbound links, PageRank, HTML validation, site age, and so on....

What about customers? You can get a huge website and get it optimized for search engines, but if your customers cannot use it, you will have wasted the effort. Optimizing the website for user experience is about running A/B tests, analyzing analytics, and changing content and colors and position until you get the least amount of bounces and more people taking the action you would like them to take on your website.

I personally would not buy a website without optimizing it for search engines and user experience. So, how much is a website? Do not plan to spend less than a few thousand dollars to start with for a small site, and roll the rest of the SEO and on-page optimization into your marketing budget.

Slava Apel is CEO of Amazing Print, a web to print software company.

Talk to Slava: B2Me.me/BC3