Understanding Marketing Budgets for Small Business

Posted by Hedley Swann on 04 October, 2017 in Online Marketing , Small Business Strategy

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It’s easy to look at a specific marketing activity, see the cost at the end of the quote, and say “That’s affordable, let’s do it.” But when you get to the next financial year and look at what you’re spending on advertising and marketing, you may think to yourself, “I’m spending a lot on that, where can I cut back?” The next thing you know, you’re taking a red pen to your marketing – like a ghostly axe murderer takes to teenagers in a D-grade horror movie – slashing indiscriminately without rhyme or reason, with thoughts running through your head like, “That’s a big number, it’s got to go.”

The big secret is that you shouldn’t have found yourself in this position in the first place. Just as our group of D-grade horror victims shouldn’t have messed with that mystical artefact they found in that old abandoned shack, unleashing a supernatural killer, you shouldn’t have started your marketing without a plan based on objectives and goals. Hope is not lost though. Just as our group of teenagers eventually and inevitably discover, fire is the one weakness – as it always is - of the creature haunting them, you too will discover the secret weapons of vanquishing uninformed and costly marketing.

In my experience, business owners don’t like the word, “budget.” It seems to conjure images of waste as if the money they set in their budget will flitter away into the ether.

I want to talk about budget because that’s where many business owners begin their journey to better marketing. You know what I’m talking about. You’re getting calls from sales reps from phone books, TV stations, radio stations, newspapers and SEO companies asking you to renew your advertising. That’s when the axe - I mean, red pen - comes out. You begin to question everything.

Now, let me be clear. Many forms of advertising deserve their place in your marketing plan. However, most people rarely consider their role in relation to one another, how they work together, and how they form part of a wider strategy according to data and analysis. That’s the problem. So, let’s talk about budget and how reviewing it can guide us from the darkness of uninformed marketing.

Understanding Your Marketing Budget

Story time: I was meeting with a Darwin business owner who thought they needed to be better at online marketing. That’s why I got the call. Their business was sustainable, but they were beginning to plateau rather than grow. They felt they weren’t getting the same return from their current marketing like they had in the past. They wanted more. “What’s more?” I asked. "More sales," was the answer.

I asked them how many sales they made last year. “About 120,” was the answer. I asked to see their current marketing plan and budget. They stared at me blankly. That’s when the quotes, invoices, and agreements came out. There was a pile of paper for each marketing activity they were currently engaged in. No plan or budget was present - just a collection of costs for individual tactics.

I asked which of these tactics was currently the most effective. “I don’t know,” was the answer. I asked, “How did you decide that these tactics would help you achieve your business objectives?” The answer was, “It seemed like a good idea at the time.” 

Why Budget is a Dirty Word

In my experience, business owners don’t like the word, “budget.” It seems to conjure images of waste as if the money they set in their budget will flitter away into the ether. It’s like the act of putting numbers in a spreadsheet could condemn that money to oblivion. This stigma isn’t confined to micro businesses, either. I’ve seen SMEs with annual revenues over $8 million shy away from the dreaded word, “budget.”

The dirty little secret here is that you have a budget already - you just might not be aware of it. 

Creating a marketing budget is a good thing. It’s a key piece in your business success toolbox. How can you decide what to spend your marketing dollars on if you don’t know how much you can afford to spend? 

Establish a Current Budget, Whether You Think You Have One or Not

Jumping back into our story, I went through the client’s pile of invoices to see where their marketing dollars were currently going. Here’s a general breakdown:

  • TV Advertising: $25,000
  • Radio Advertising: $12,000
  • Newspaper Advertising: $8,000
  • Printing: $6,000
  • Other Production Services: $6,000
  • Google Adwords: $6,000
  • Social Media Advertising: $1,000
  • CRM Software: $5,000
  • Other Software: $1,000
  • Website Running Costs: $1,000
  • Marketing Labour: $17,000

Remember, labour is also a marketing cost, both for in-house and outsourced talent. If you don’t have a dedicated marketing manager and the responsibility is part of a staff member’s duties, include a figure based on an approximate percentage of the time they spend on marketing.

Total Annual Marketing Spend: $88,000

I could see the next question form in the client’s mind as they laid eyes on this number for the first time. They asked, “Is that a lot?” I answered their question with a question, “Well, how much did you make from sales last year?” Their answer was, “Approximately $1.5 million.”

How Much Should You Spend on Marketing?

The answer to this question depends on your business objectives, marketing goals, industry and competition. In the example above, the business spends 5.8% of their annual revenue on marketing. In my experience, that’s a good figure for sustaining a market presence, but not for active growth. Are you trying to grow your business year-on-year? I’d look at a figure closer to 10% of annual revenue.

Your budget is a great catalyst for having the conversation about marketing, because it’s the part that gets down to brass tacks, so everyone pays attention.

Consider How Much You’re Currently Spending

Marketing is one cost of doing business and you should factor it into your overheads. A useful tool is to calculate your current Cost Per Acquisition (CPA), which is the real cost to your business to obtain a customer. The math is simple: Take your marketing budget and divide it by your number of sales. You can go further with this by factoring in costs like time of a sales representative to complete the sale, but the simple method above will put you in the right ballpark.

Back to our story: I helped my client understand that the real cost of marketing in the previous year was approximately $88,000. I also knew they achieved 120 sales in that year. Therefore, their CPA was $733.30. It cost them just over $730 to get a customer. Now things were getting interesting. The client was beginning to see the value in my questions.

As they connected the dots, they asked “Is that too much? Should it be that high? Should it be more?” Clients hate the next answer, but it’s the right one and it’s important. “It depends.” I answered. This is because you need to understand your market clearly before you can evaluate your marketing, including your budget and any associated data. Ask questions like:

  • Industry: Is your industry business-to-business, or business-to-consumer?
  • Customers: Is the customer journey or sales cycle long or short?
  • Competition: Do you have many competitors or just a few?
  • Market: Are you in an established market where the customer is well educated on your product, or are you in an emerging market?

One key aim of any marketing plan is understanding your market and how you can make educated estimates of what your annual marketing budget should be.

Creating a Small Business Marketing Budget

When considering your marketing budget, ask the following questions:

  • What are our business objectives? Are they to sustain our current position and revenue, or actively grow the business?
  • What’s our overall game plan for the next 12 to 24 months?
  • What are our marketing goals? The more specific and measurable your goals, the more targeted your marketing strategy. Is it to increase brand awareness, generate more leads, boost the lifetime value of a customer, reduce efforts to generate a lead, or lower the cost of acquisition or improve the quality of leads?
  • How much risk can we take? Good small business marketing is about testing, and all marketing comes with an inherent risk. The obvious risk is, what if your marketing plan fails? You aimed to generate six new customers per month, but only got two. Can you sustain that while you adjust and test your marketing strategy? There are other risks as well. What if your marketing works better than you expected? Can your business handle an influx of customers and work and maintain quality standards?
  • How can I minimise risk? Do you have the in-house expertise and tools to develop, deploy, execute, measure, test and adapt an effective marketing strategy? Do you have the systems, processes, staff and equipment to handle more customers?
  • What are my competitors doing? Keep an eye on your market and the activities of your competitors. Understanding their goals, how they’re marketing, their strengths and weaknesses, and getting an indicative understanding of what they might be spending can help you assess both your budget and the marketing tactics you employ.

Let’s step back into our story: Together, the client and I figured out the average value of a sale was $12,500 and the current average profit on a sale was approximately $3,500. The client believed this was both competitive in the current market and sustainable for the business. A CPA of $733.30 was acceptable, but it’d be better if we could reduce that. They just needed more sales per annum to grow. “So, we need more market share.” the client announced.

I smiled, “That’s your business objective; to increase market share.” I continued, “Now we’re onto something. You had 120 sales last year, so how many more can you handle in the next 12 months?” The client answered, “I’d like to hit $2 million next year.” That’s 40 more sales in the coming year. I knew the current marketing budget of $88,000 was affordable, but they could improve on how they were currently spending it.

The primary marketing objective was clear: To deliver more sales qualified leads to the sales team. The secondary marketing objective was to reduce their CPA.

Putting It All Together

The client now understood the relationship between their business objectives and their marketing. At the start of our conversation, they expressed the need for more sales, which was their marketing goal because their revenue had plateaued. In addition, they wanted to grow, which was their business objective. They knew something wasn’t right with their marketing, but they jumped to a new tactic - online marketing - as a “quick They realised if they added online marketing to their pile of tactics without understanding why or having a clear goal, they most likely wouldn’t have achieved the return on investment they sought.

“So, what do we do now?” the client asked. I told them, “Now we analyse your business, your customers and competitors. We’ll design an online marketing plan to include the tactics and budget that aims to achieve 40 extra sales this year.”

What Can You Take From This?

The most important thing you can take from all this is that good marketing stems from data and analysis. As a business owner, you need to have a clear understanding of your:

  • Industry and market.
  • Customers and competitors.
  • Business objectives.
  • Marketing goals.
  • Current marketing tactics and whether they align with your goals.
  • Business assets; talent, resources and expertise.

Your budget is a great catalyst for having the conversation about marketing, because it’s the part that gets down to brass tacks, so everyone pays attention. By now you can see that “budget” isn’t a word you should dread and considering your current marketing spend is important to get and stay on the right track. I’ve given you a place to begin, so go through your current budget and ask yourself what are you trying to achieve and if your current marketing fits your goals. The fix isn’t in hacking and slashing it - it’s in establishing clear goals and objectives, designing a marketing plan to match, and setting a budget to execute them.