Budget is a core component of your strategic marketing plan.
As a portion of our strategic planning process, Mediastead helps clients develop their annual marketing budget. We use three methods depending on the client.
The three marketing budget methods are:
- Flat Budget Amount
- Percentage of Revenue
- Percentage of Margin
The method we apply least frequently is the flat budget method. Generally, this is only used in the first year of business when it’s difficult to estimate revenue or margin without any history.
There are two advantages to the flat budget method.
- If your business is seasonal, by spending a flat amount on your marketing you can gauge the impact of seasonality.
- Companies that have a preestablished block of capital earmarked for marketing. This can be useful information where understanding ROI is more important than growth.
These are both rare circumstances.
The most common method is Percentage of Revenue. Examine your history of marketing spending versus total revenue. Calculate the ROI of marketing dollars for each quarter individually. Use this percentage to set your quarterly marketing budget based on target revenue goals.
Comparing the results to the same quarter of last year should indicate whether growth of marketing budget directly correlates to revenue growth. Most businesses have some effect seasonality, therefore benchmarking same quarter numbers is more accurate.
For some companies, we recommend the Percentage of Margin method. This can be particularly useful when costs of goods or services is a relatively stable percentage of total sales. Use the same method as percentage of revenue, except your budget based on profit margin.
Some marketing techniques benefit from efficiency of scale, and as you grow using percentage of margin method will increase this impact.
Budget annually and adjust quarterly.
Create an annual marketing budget, but adjust the budget up or down each quarter depending on your results. If you’re having a better than predicted year, you may want to increase marketing to keep momentum up. Or, you may also want to trim marketing for improved profits on initial sales targets. Conversely, if you aren’t meeting your sales goals, it may be necessary to boost the percentage of marketing money.
Some companies may wish to adjust more frequently if some outside parameter has significant influence. Particularly lucrative holidays, revenue influenced by weather, or industry conferences or events may encourage business owners to adjust their budget to react.
Identifying the amount of your total marketing budget is important, but equally important is your methodology for tracking expenses accurately. In our next issue of Keeping Pace, we will examine how to accurately track the marketing dollars invested.