The simple answer is that not all businesses calculate a budget the same way;
it depends on the industry, product, business model and even life-stage of the company.
To make things a little easier, there are a few ways in which you can assign a budget for your marketing communications, but remember that it should not only include the marketing costs, but also the hard variable costs of any given activity that contribute to the overall program.
There are however a few questions to ask when considering your budget:
1. What are the priorities within your marketing objectives?
2. What will deliver more return on investment?
3. What is a ‘must have’ as opposed to a ‘nice to have’?
Answering these will help sharpen the pencil when it comes to the budget and also determine what resources are required.
Depending on your strategy, budgeting for marketing communications may include costs associated with advertising production, direct marketing including database list rental, or social media content management for example. It could also mean that product for trade shows or stock for your brand ambassadors to use should come under this budget too.
Product or prizes used in sales promotion activity, collateral printing or new brand identity design and execution all need to be allocated. Your budget may also need to include postage, administration or follow-up calls for an acquisition campaign.
If your business does not have the resources to manage or complete these tasks internally, then third party costs such as agencies or other intermediaries should be allocated within the overall marketing communications budget.
Finally, there may be future costs that you have already committed to, even before the planning stage.
3 ways to help set your marketing budget
1. Percentage of revenue
Setting a budget based on percentage of current or forecasted revenue is often used and can be benchmarked across industries. Whilst consumer marketing generally has larger budget allocations than business-to-business, a general rule of thumb for B2B budgeting is a spend between 1 and 10% of your revenue. Forrester Research reported in 2014 an average marketing budget of 4% of revenue for B2B organisations. More recently however, CMO Survey in February 2016 suggests that the average spend on marketing represents 8.4% of company revenue.
This method sets a finite budget with limited flexibility, so a downturn in sales could potentially require a budget reduction. During a sales decline, marketing budgets are often the first to be cut whereas maintaining it and making some strategic changes can certainly be more effective.
2. Competitive parity
A second method is to assess competitors’ marketing communications spend and adjust then your budget accordingly. Whilst this can be difficult to pinpoint, it does provide a benchmark for historical spend on promotion by the competition so you can apply a similar level to your industry’s standard.
3. Objective and task
Setting a budget can be achieved by estimating the cost of the planned initiatives in relation to your marketing objectives. This method requires establishing what communication strategies need to be implemented to reach them and estimate what it will cost. Whilst this budget method can be hard to establish, you can calculate what you are prepared to spend to acquire a lead based on their potential lifetime value.
Over a century ago, John Wanamaker said ‘half the money I spend on advertising is wasted; the trouble is, I don't know which half’. By reviewing your historical data, it can provide a more measurable forecast of what may be required in the following years, so you know what does actually work. When you find something that doesn’t work, you can adjust your strategy accordingly.
Whilst these provide valid budgeting methods, ultimately spend what you can afford. However, as your profitability increases through measurable marketing efforts, it should provide enough data to warrant an increase in budget and provide better return.