There are right and wrong ways to determine the size of your marketing budget.
To be clear, a marketing budget of zero is impossible. Even if you went out of your way to only utilize free offerings and platforms, the time investment needed to conduct a marketing strategy from scratch is most definitely not free. Further, it could cost you valuable time you could use to make a bigger impact with an actual budget. Your return on investment might be 100%, however percentages mean little in terms of true monetary value of your ROI.
Other wrong answers to marketing budget are...
- My marketing budget is $50.
- I have no idea what my marketing budget is.
- My budget is unlimited. When the customers come, I’ll pay for the marketing.
If any of those sound familiar, we are going to set you on the right track to determining your marketing budget.
Where to Start Planning My Marketing Budget?
If you have an existing budget or are building one from the ground up, here are some standard guides many businesses use to set a marketing budget foundation:
- Profit First author, Mike Michalowicz, suggests your total operational expenses (excluding taxes, owner pay, and 5% profit) remain within 30% of your total revenue. If 30% of your revenue is more than your actual operating expenses, the excess can be allocated to marketing.
- The U.S. Small Business Association recommends spending between 7% and 8% of your gross revenue for marketing.
- Manufacturing Industry Benchmark in 2021 was between 4.52% and 7.65% (NOTE: This is down from about 12% in 2020 due to the effects of the global pandemic).
- Benchmark for businesses built around b2b spend between 6.4% and 6.8% of their total revenue on marketing.
- Benchmark for service centered business spend about 15% on marketing.
On average, businesses allocate 8.7% of total revenue to marketing efforts. Great! What does that mean for YOUR company? We’re so glad you asked.
Building a Mockup Marketing Strategy
Above you have 6 real-life KPIs other companies actively implement to support marketing. With this information, you can reverse engineer a potential marketing strategy based on various budget sizes.
Take the lowest percentage, the highest percentage, and the average and build mockup strategies based on your company’s revenue. It is important to be able to demonstrate how requested dollars will be used before requesting them.
NOTE: Be sure to provide potential ROI for each strategy.
Strategy 1: Playing It Safe With the Lowest Percentage
(Your Company's Total Revenue x .0452 = Marketing Budget)
Rather than throwing your dollars away like a coin in a wishing well, you should do your research and determine what areas of marketing are already converting into sales and creating loyal customers. If your dollars are limited, target your budget on existing areas of high efficiency which have the greatest growth potential.
For example, say your articles have a high read through rate and convert more sales than social media ads. Look at ways to optimize your articles and create similar content to reach more readers.
NOTE: If your current marketing expenses exceed this level, start from your existing budget OR re-evaluate what expenses can be manipulated or removed to fit into this model.
Strategy 2: Research, Test, Examine, and Optimize With the Highest Percentage
(Your Company's Total Revenue x .15 = Marketing Budget)
Develop systems imbedded into current marketing strategies that measure their effectiveness in order to make educated theories around optimization. Then, implement those strategies and evaluate them over time. If the changes work, keep them. If they do not, try out another theory and continue to evolve.
Strategy 3: The Hybrid Strategy With the Average Percentage
(Your Company's Total Revenue x .87 = Marketing Budget - Strategy 1 Budget = Strategy 2 Budget)
Your best bet for pleading your case for an established marketing budget is to demonstrate two extremes, then a compromise. By implementing a hybrid strategy, you are playing it safe by optimizing existing processes while also dipping a toe in exciting aspect of experimental marketing with less risk.
Now you know how to establish a marketing budget, and how to target your strategy at all levels. Next, we will explore where exactly to focus the dollars you’ve allocated to marketing.